A response to Gudgin, Coutts & Gibson

The authors have a post on the Prime website in which they, among other things, respond to two blog posts of mine where I mention their work on Brexit. In the first post they mention [1], I use a graph from their paper to illustrate how important the Single Market was for UK exports. Here is the graph.

I then wrote

“But didn’t the CBR report say that the benefits of the Single Market had been exaggerated by the Treasury? Yes it did. Here is some of its reasoning. That growth in UK export share after the Single Market is not as impressive as it looks, because there is an underlying 6% positive trend in the share, which you can detect before we joined the EU. That looks pretty on a picture, until you realise it is nonsense. A 6% trend rise in an export share will imply that at some point not too far away UK exports to the EU will be as high as total EU GDP. UK exporters are just not that much better than exporters in other countries. There is no underlying trend rise in the UK’s export share.”

By export share, it is obvious that I’m talking about share in destination GDP, as in the chart. In my paragraph there is an error. I used a 6% figure rather than the correct 3.5% figure for their trend in export penetration relative to the non-EU penetration. It was a particularly stupid error, because just below Chart 7 is Chart 8, which contains the correct figure.

But, as the authors must know, this error is not important to my argument. Replace 6 by 3.5 in the relevant paragraph and it still makes perfect sense. What I was criticising was the notion that there was any substantial underlying trend in export penetration, and that the impact of EU membership should be judged relative to that trend. You can see from this chart how ludicrous a 3.5% trend is: it implies that without EU membership the UK exports share would be now above 10% and rising fast. This trend seems to be an important part of their judgement that UK export penetration relative to the EU would fall by substantially less than the Treasury assume in their analysis. The trend makes no sense, unless the aim is to make the impact of EU membership look small.

So what is the authors’ response to my basic criticism in their Prime piece? There is none.

As far a the 6 rather than 3.5 is concerned, it is also odd is that this is the first time they have mentioned the error to me. The post was from mid-January, and I would have happily changed 6 to 3.5 if they had pointed it out to me earlier.

The second post was a discussion of the notion of ‘fake economics’. I said fake economics could be described as “economic analysis or research that is obviously flawed but whose purpose is to support a particular policy.” or “We can equally talk about evidence based policy and its fake version, policy based evidence.” Here is what I wrote in full about their study in that post.

“The CBR analysis is less obviously fake. However Ben Chu has gathered the views of some academics who are experts in trade theory, including Richard Baldwin (who has just written a definitive and widely praised book on the ‘new globalisation’) and Alan Winters, both hugely respected with immense experience, who pour some very cold water over the study.”

How do the authors respond to this second post in the Prime piece. They write

“It is unusual for Wren-Lewis to rely uncritically on mainstream economists, but he was willing to do so in this case. With many of Wren-Lewis’ articles being used by one of us in economics teaching to encourage students to query and to test what is considered ‘mainstream’ it seems more than a little surprising to be discredited for daring to do so.”

This is wrong in many ways. First, I was not relying on others, as I had serious misgivings about their use of trends that I outline above. Second, I made no mention of ‘mainstream’ and heterodox anywhere, so any suggestion that this was behind what I wrote is their invention. Finally, there is no problem with anyone challenging anyone else.

Let me reproduce one of the quotes from Ben’s piece

“The HMT [Treasury] use of gravity model was perfectly in line with best practice. It was classic evidence-based policy analysis”, said Richard Baldwin, Professor of International Economics at The Graduate Institute of Geneva. Professor Baldwin went on to accuse Mr Gudgin himself of engaging in “policy-based evidence making” and “using evidence the way a drunk uses a lamp post – for support, not illumination”.

So Richard Baldwin was accusing the authors of exactly the fake economics that I talked about. Given my suspicions about their treatment of trends discussed above, I felt justified in writing about their piece in this context.

I could have ignored Richard Baldwin’s criticism and my own suspicions, and not included them in this post. But here is another quote from Ben’s piece:

“Dr Graham Gudgin of the CBR criticised the Treasury’s analysis, which predicted a major hit to the UK economy by 2030 if the UK experienced a “hard Brexit”, in unusually strident terms describing it as “very flawed and very partisan”. Dr Gudgin said he “suspected” Treasury civil servants had been leaned on by ministers to produce the results David Cameron and George Osborne wanted.”

Recall that the Centre of Economic Performance argued, based on their own extensive analysis, that the Treasury had underestimated the costs of Brexit, so presumably the accusation of ‘very flawed and very partisan’ applies to their analysis too. If one of the authors was happy to argue that the analysis of others had been designed to produce certain results, I felt it only fair to ask the same question of the authors.

[1] Actually the second post by date: the two post were a day apart.

The Single Market was Mrs Thatcher’s great achievement for the UK

Parliament should be able to vote on whether leaving the EU means destroying this legacy.

The story of how Mrs Thatcher helped in the creation of the Single Market is told by Helene Von Bismarck here. She believed it would be of great benefit to the UK, and she was right. Here is a nice chart from this CBR report I discussed in my last post.

It shows the share of UK exports as a percentage of the GDP of the area exported to, for both the EU and the rest of the world. The rapid increase in the UK export share, doubling between 1990 and the beginning of the financial crisis, has to be largely down to the Single Market. [1]

But didn’t the CBR report say that the benefits of the Single Market had been exaggerated by the Treasury? Yes it did. Here is some of its reasoning. That growth in UK export share after the Single Market is not as impressive as it looks, because there is an underlying 6% 3.5% ** positive trend in the share relative to non-EU penetration, which you can detect before we joined the EU. That looks pretty on a picture, until you realise it is nonsense. A 6% 3.5% trend rise in an export share will imply that at some point not too far away UK exports to the EU will be as high as total EU GDP. UK exporters are just not that much better than exporters in other countries. There is no underlying trend rise in the UK’s export share.

As I say in The Independent, the rationale for going down the route of leaving the Single Market is completely wrongheaded. First, the Brexit vote was close - hardly a ringing endorsement for undoing Thatcher’s legacy. Second, all the evidence we have is that large numbers of Leave voters are not prepared to accept a reduction in their living standards as a price for reducing immigration, a reduction which is in the process of happening right now as a result of the collapse in Sterling. If you say we have no real evidence for this, show me your evidence that the referendum vote was a vote to leave the Single Market. If May really believes it when she says that the recent strength of the economy has convinced her that the costs of Brexit will not be that great, she is a fool. Third, the logic of saying that we cannot accept Single Market rules because we would have no say in what they are makes no sense because we will be worse off not accepting them. Once again, a majority of the country does not want to ‘take back control’ if it costs them money.

I say in The Independent that this is happening because May wants to finally show that she can bring down immigration, after 6 years trying and failing. It is also because she thinks she has to do this to keep her party together. But what Brexit means should not be up to the Prime Minister, particularly one who cannot be objective about immigration and who is a hostage to the Eurosceptic half of her party. The Single Market decision should be up to parliament. Leaving the Single Market was not on the referendum ballot paper, so it is not the ‘will of the people’. It does not follow automatically from the Leave decision, as many Leave campaigners correctly assured us before the vote.

Parliament should decide on whether we leave the Single Market as part of leaving the EU, not Theresa May. That is what living in a parliamentary democracy is all about. If the government denies MPs the chance to vote for leaving the EU but against leaving the Single Market, then that is effectively a coup against our democracy. MPs should block approval of invoking Article 50 until they get the opportunity to vote, in a way that is binding on the Prime Minister, to stay in the Single Market.

** I made a mistake in the original version of this post: corrected figures and clarifying text are in italics. For more details see this post

[1] The chart also casts doubt on the argument that being in the EU has held back UK exports to the rest of the world. This share was falling before we entered the EU, but has stabilised while we were a member.  

Fake Economics and the media

If there is Fake News, is there such a thing as Fake Economics? I thought about this as a result of two studies that have received considerable publicity in the press and broadcast media over the last few weeks. Both, needless to say, involve Brexit. The first are two bits of analysis by ‘Change Britain’, saying Brexit would generate 400,000 new jobs and “boost the UK by £450 million a week”. The second is a more substantial piece of work by economists at the Centre for Business Research (CBR) in Cambridge, which was both very critical of the Treasury’s own analysis of the long term costs of Brexit and came up with much smaller estimates of its own for these costs.

Defining exactly what Fake News is can be difficult, although we can point to examples which undoubtedly are fake, in the sense of reporting things to be true when it is clear they are not. Fake News often constitutes made up facts that are designed for a political purpose. You could define Fake economics in a similar way: economic analysis or research that is obviously flawed but whose purpose is to support a particular policy. (Cue left wing heterodox economists to say the whole of mainstream economics is fake economics.) We can equally talk about evidence based policy and its fake version, policy based evidence.

The study by Change Britain seems to fit into that category. In looking at the impact on jobs of potential new export markets once Brexit has happened, it counts the jobs from any extra exports but ignores the jobs lost from extra imports. It adds the extra value of exports sold to the direct budgetary saving, which is a meaningless thing to do.

The CBR analysis is less obviously fake. However Ben Chu has gathered the views of some academics who are experts in trade theory, including Richard Baldwin (who has just written a definitive and widely praised book on the ‘new globalisation’) and AlanWinters, both hugely respected with immense experience, who pour some very cold water over the study.

My key point is that both of these studies were given considerable exposure in the media, and not just in the part devoted to pro-Brexit propaganda. Here is Larry Elliott in the Guardian on the CBR study. In all the cases I’ve seen the reporting has been uncritical, with no attempt to get the opinion of experts in the field. (The Guardian in their coverage of the ‘Change Britain’ report did note that the organisation was backed by pro-Leave campaigners, but it still published the claims without any criticisms of the analysis.)

It is not difficult to understand why this happens. It is a combination of two problems: lack of journalistic resources and the concept of old news. It is the latter that means a report has to be reported on the day of publication, leaving little time to get critical reactions (particularly from academics). But these factors do mean that the non-partisan mainstream media is wide open to fake economics. (Columnists like Elliott should be able to do better, but he did support Brexit.)

This is how the public, and to be honest, journalists themselves get a distorted view of the economics of Brexit. The impression is given that, as usual, economists are divided over the issue, whereas in reality academics are pretty well united in their view that Brexit will reduce UK living standards. (And of course it already has.as the depreciation leads to inflation and lower real wages.)

Journalist resources and culture are not going to change anytime soon. Which is why economists have to think seriously as a collective about how they can best counter fake economics. This has to involve doing something individual academics are not very good at: giving fast responses if journalists ask whether some new report is serious economics or fake economics. .