Still waiting for the turmoil

I’ve received several thoughtful responses from economists I respect, all making a particular argument about the effects of Brexit-induced uncertainty. It goes like this: Right now, firms don’t know how closely Britain will be tied to Europe, so it makes sense for them to postpone investments until the situation clarifies.

This is an interesting and defensible argument - basically, that the unclear shape of Brexit creates an option value to waiting. But I have three questions about it.

First, is this really the argument underlying all of these dire post-Brexit forecasts? My guess is that very few people reading news reports, or even briefing papers, about Brexit are hearing this. What they’re getting is much closer to the notion that uncertainty equals an increased probability of bad things. That is, this argument is a lot more nuanced and subtle than anything I’ve previously heard in this discussion.

Second, doesn’t this argument imply a later investment boom once the uncertainty is resolved in either direction? That is, once Prime Minster Nigel Farage in Britain and President Marine Le Pen in France have engineered the demise of the European Union, there’s no reason to wait, and all that pent-up investment will come roaring back, right? But I haven’t heard anyone arguing that the contractionary effect of Brexit will be followed by a compensating boom once things settle down.

Third, doesn’t this argument suggest essentially the same effects from any policy negotiation whose end result is unknown? Why don’t we say that the possibilities of the Trans-Pacific Partnership or the Transatlantic Trade and Investment Partnership are contractionary, because firms have an incentive to postpone investment decisions until they know whether these agreements will actually happen? Somehow, though, I’ve never heard anyone argue for the depressing effects of pending trade liberalization.

Again, I’m not trying to defend Brexit. But I worry that the urge to condemn it has led to a lowering of intellectual standards.

Let me also say that the narrative of disaster is coloring some (not all) financial reporting. On the whole, the market reaction looks pretty muted to me. It’s not just stocks: European bond spreads are about where they were a month ago. True, globally, rates are considerably lower; but we aren’t seeing the kind of financial disruption that was so widely predicted. Yet headlines about turmoil are everywhere.

Could I be wrong about all of this? Of course. But everyone really should ask where the consensus about Brexit macroeconomics is coming from.