Daily Telegraph: Don’t listen to those who shout loudest when it comes to the economics of Brexit

With less than a year to go before the UK formally leaves the EU, rather than dying down, anxiety about the impact on the British economy seems to be hotting up – at least in official circles. Last week the House of Commons committee on exiting the EU published a report on the future UK-EU relationship. It was very gloomy and Hilary Benn, the committee’s chairman, said that we should prepare for “a worst-case scenario” in which the UK leaves without a deal.

As anticipated, the report made much of the cross-Whitehall briefing on the impact of Brexit on the British economy, whose central findings were leaked in January. This study concluded that in all scenarios – or at least in the three that it modelled – Brexit would make us worse off.

In practice, this study established nothing of the sort. It was yet another tendentious exercise in producing a biased answer, following in the footsteps of the “Project Fear” exercise undertaken by HM Treasury, just before the referendum in 2016.

Interestingly, because that Treasury study’s methodology has been so widely criticised, this recent study relied on a different model sourced from a private sector consultancy. Nevertheless, it came to much the same conclusions. So it must be correct? Right?

Wrong. The illusion lingers on in many quarters that because a conclusion emerges from the whirrings of equations interacting with interminable banks of data it is somehow to be taken as gospel truth. Similarly, the reliability of these conclusions is supposedly increased if more and more modellers come to the same conclusions. Yet everything depends upon how the models are structured and what assumptions are fed into them. Thankfully, we do have at least one model that is different from the wodge of group think models so beloved of the economics establishment.

The model developed by Prof Patrick Minford and used in the work of the group called Economists for Free Trade, (EFT), of which I am a member, comes up with positive economic effects from Brexit.

In this latest official forecasting exercise, some rather bizarre assumptions were made. The study includes implausibly small gains from our achieving a trade deal with the US, while assuming implausibly high costs from the imposition of non-tariff barriers by the EU.

Moreover, it assumes that we will continue to impose the EU‘s Common External Tariff on imports from the rest of the world.

Yet some of the greatest gains from leaving the EU are to be gleaned from something that we can ourselves achieve without needing anyone else’s agreement – namely the dropping of tariffs on imports from the rest of the world. Nor does this modelling exercise appear to attribute any value from saving our £10billion per annum net contribution to the EU. Such macro-modelling exercises appear to provide ammunition for those in Parliament who want to delay or stop Brexit. But if this is their ammunition, they are firing blanks.

Nevertheless, such exercises seem to intensify the understandable anxiety of many people in business who worry about the downsides, risks and uncertainties of Brexit. They then make adverse public comments which stir up anxiety among other businesses and the public at large.

It is normal for the anxieties to predominate over the positive aspects that Brexit will unleash. For a start, as with almost every change, the losses from Brexit will be more concentrated than the gains.

Second, the losses are likely to be more immediate, as existing relationships are rendered less valuable and it takes time for the system to adapt to the new situation.

Accordingly, the losers will shout loudest. But this does not mean that there are more losers than gainers nor that, once we have made our adjustments to the new world, our total losses will outweigh our total gains.

To get the right answers on Brexit we should not be listening to those who shout loudest or model most, but rather to the largely unvoiced longterm interests of the British people, including in their role as consumers. When thinking about a major decision about our future, of course we should do the usual static modelling and tot up the prospective gains and losses.

But this is unlikely to produce incontrovertible clear conclusions, as the difference between EFT’s results and those of many other modelling exercises attests.

In the end, our decision must rest on a judgment, including about a series of factors that are both uncertain and in constant flux. In this case, as in so many others, I think it is those difficult-to-model factors that are the most important.

Across the world, countries are now beset by radical technological change which is going to transform their shape, and quite possibly the nature of work itself: robots, AI, nanotechnology, biotechnology, genetic engineering, and big data and “the internet of things”.

Whether we are in or out of the EU, how well our economy does over the next 15 years will be heavily influenced by how we adapt to the changes unleashed by these forces and, in particular, how we set about regulating and taxing them. On the basis of past experience, how do we think the EU is likely to perform on this task? Surely it is likely to do badly. Its leaders are continuously distracted by their obsession with harmonisation and integration as they continue in pursuit of Jean Monnet’s dream of a united Europe, while having to mend the cracks in that dream’s latest embodiment, namely the euro. The EU‘s basic instinct is to interfere, “protect”, tax, regulate and harmonise until the (much subsidised) cows come home. This bodes ill for how it will cope with the radical technological changes now afoot.

Making sure that the UK manages to adapt well to these changes will be the most important determinant of our future prosperity. We are most likely to succeed if we are the masters of our own destiny.

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