Sloppy economic arguments abound after Brexit
Lunes, 11 de julio de 2016
Much of the discussion of Brexit and its impacts bothers me. I believe that Brexit is a tragic development, which will do substantial long-run economic harm. But what we’re hearing overwhelmingly from economists is the claim that it will also have severely adverse short-run impacts. And that claim seems dubious.
Or maybe more to the point, it’s a claim that doesn’t follow from standard macroeconomics – but it’s being presented as if it does. And I worry that what we’re seeing is a case of motivated reasoning, which could end up damaging economists’ credibility.
Let’s start at the beginning: Brexit will almost certainly have an adverse effect on British trade. Even if the country ends up with a Norway-style agreement with the European Union, the loss of guaranteed access to the European market will affect firms’ decisions about investments and inhibit trade flows.
This reduction in trade relative to what would otherwise happen will, in turn, make the British economy less productive and poorer than it would otherwise have been. It takes fairly heroic assumptions to produce a specific number, but 2%-3% lower income in perpetuity seems plausible.
So far, so good, or rather so bad: This is standard economics.
But what about warnings that Brexit will precipitate a British recession, or at least a drastic slowdown in the short term? Where are those warnings coming from?
The trade arguments are about the economy’s supply side: Less trade means lower productivity, and hence lower productive capacity. But the kind of recession we’re talking about here is a demand-side phenomenon – a slump brought on by inadequate spending. And why, exactly, is that supposed to happen?
As best as I can tell, the case for a recession, or at least a slowdown, rests on two not entirely distinct propositions: the idea that uncertainty will deter investment and, possibly, consumption, and the idea that an increase in perceived risks will worsen financial conditions. Let’s take these on in turn.
Regarding the first, Brexit certainly does increase uncertainty, but is this necessarily bad for investment? That’s not at all clear from the theoretical literature: Companies might actually invest more in the face of uncertainty, in effect to cover their bases. So why is the proposition that uncertainty will deter investment so readily accepted in this case?
In part, I suspect that it’s a kind of word game. When businesspeople talk about “increased uncertainty”, they’re really talking about an increased probability that bad things will happen. And maybe that’s what people writing about increased uncertainty in the wake of Brexit mean, too.
But in that case we’re saying that bad things will happen because firms will perceive an increased probability of bad things happening. That’s circular reasoning, assuming one’s conclusion or both.
I’d also note that any major policy change creates uncertainty, because nobody knows how it will work out. So why don’t we hear recession warnings when countries are contemplating major trade liberalization, or privatization schemes, or labor market reforms? The “uncertainty depresses investment” argument seems to be rolled out selectively, only deployed against policies that economists dislike for other reasons.
What about the argument that Brexit will worsen financial conditions, increasing risk spreads? This seems to be another circular argument – it’s claiming that bad things will happen because investors will expect bad things to happen.
In other words, the arguments for big short-term damage from Brexit look quite weak. An economist who tried to make similar arguments for or against most policies would face a lot of criticism. But in this case we have a near consensus accepting these weak arguments. Why?
Well, there is a historical tendency on the part of economists to loosen their intellectual standards whenever trade issues come up – a sense that sloppy thinking in the defense of free trade is no vice. For example, claims that trade liberalization is a great job creator are widespread, even though they aren’t grounded in any standard model. As I’ve written before, some attacks on Trumponomics, which is really terrible, nonetheless cut intellectual corners, making strange new assumptions on the fly (for instance, tariffs will reduce spending on imports, but none of that spending will be diverted to domestic production).
My suspicion is that the same thing is happening in the case of Brexit. Economists have very good reasons to believe that Brexit will do bad things in the long run, and are strongly tempted to sex up their arguments by making very dubious claims about the short run. And the fact that so many respectable people are making these dubious claims makes them seem well reasoned when they aren’t.
Unfortunately, this sort of thing, aside from being inherently a bad practice, can all too easily backfire. Indeed, the rebound in British stocks, which are now above pre-Brexit levels, is already causing some backlash against conventional economists and their Chicken Little warnings.
Sorry, people: Sloppy thinking is always a vice, no matter what cause it’s used for.
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