As a professional economist of many years’ standing I am used to riding with the punches. At my wedding my wife’s deaf uncle enquired about the profession of the groom. “He’s an economist” was the response. Uncle Max spent the rest of the wedding reception lamenting the fact that his precious niece had married a Communist…………..
But the punches we have taken during and after the EU referendum have been stronger and more frequent. Who will forget Michael Gove’s comment that ‘people in this country have had enough of experts’ and his even more venomous barb, comparing the economists who supported Remain to experts in the pay of the Nazis (though he did apologise for this one)?
Economists focus on the behaviour and interactions of economic agents (eg central banks, households, businesses, governments and foreign residents) and how economies work. By using mathematical models, we can tell you for example the likely impact on GDP of cutting the standard rate of income tax by 1%.
Economists often disagree (‘two economists, three opinions’) but before the referendum, there was a most unusual consensus, agreeing that leaving the EU was a bad idea. 88% of economists surveyed by Ipsos Mori forecast that over the next five years, leaving the EU and the single market would have a negative impact, compared with staying in.
Unsurprisingly this prognosis was unwelcome to the Leave advocates. Almost from 24 June they started to tell us how wrong or ‘doom and gloom’ predictions were. We were accused of being unpatriotic by ‘talking the economy down’. They even covered themselves by saying that if there was a recession, it would be our fault for predicting one, thereby creating a ‘self-fulfilling prophecy’ (Tim Martin of Wetherspoons actually said this). Virtually every day the Express has featured ‘Booming Britain’ articles. Just one example was a front page headline on 2 September ‘Britain’s Economy Booms’. It was based on two data items: a rise in the Manufacturers’ Purchasing Managers Index and a rise of the FTSE 250 to 4% above its pre-referendum level. Never mind that manufacturing is only 10% of the economy, that the PMI is a sentiment index and not a component of GDP – as indeed applies to the stock market (I complained to IPSO about this and other Express articles …….. but got nowhere).
I would like to focus in particular at four ways in which my profession might have cause for complaint at the way it has been treated over the past year or so.
1: The ‘Straw Man’ Economist
The Brexiteers delight in telling us how wrong we were to forecast a recession the day after a ‘No’ vote. (An example was Ryan Bourne in the newspaper City AM, 20 December).
Of course none of us was forecasting this! That would be like judging the result of a marathon race after the first 100 yards. As stated above, 88% of economists were forecasting that over the next five years, leaving the EU and the single market would have a negative impact, compared with staying in.
This is neither ‘short term’, nor is it forecasting a downturn – it is simply saying that for GDP, leaving will be worse than staying, in the medium- to long-term.
2: The ‘God-Like’ Economist
The ‘self-fulfilling prophecy’ argument is easily rebutted. If economists are so powerful that they can realise their forecasts just by voicing them, how come their forecasts are sometimes proved wrong? And how come Mark Carney and the MPC had to cut interest rates and step up QE after the vote, when they could simply have talked the economy up?
3: The Economist Meets The Politician
Because of the importance of the economy to the electorate, politicians have not hesitated to lean on economists employed in government to massage their forecasts. To stop this happening, George Osborne – to his credit – created the Office for Budget Responsibility (OBR). These economists have statutory independence in making forecasts for the UK economy – particularly at Budget time, forecasting the implications of changes in tax rates and public spending.
Before the referendum (in April), the Treasury produced a document comparing the forecast economic performance of the UK if it remained in the EU with that if it left.
Importantly it was the Treasury that published the forecast, not the OBR. Because the OBR’s responsibility is to assess the impact of government policy - which before the referendum was to remain in the EU. The Treasury’s assessment of the consequences of withdrawing from the EU was that by 2030 the economy would be between 3.4 and 9.5 per cent better off In than Out, depending on the assumption about post-Brexit trading arrangements.
Then in May the Treasury produced a forecast of the immediate economic impact of leaving the EU.
The Treasury was careful to obtain the advice of a highly respected academic economist, Professor Sir Charles Bean (former Deputy Governor of the Bank of England). He commented as follows:
“While there are inevitably many uncertainties – including the prospective trading regime with the EU – this comprehensive analysis by HM Treasury, which employs best-practice techniques, provides reasonable estimates of the likely size of the short-term impact of a vote to leave on the UK economy.”
It is this second short-term forecast on which the Brexiteers have focused their criticism. The forecast shows a shallow recession (Table 2.C page 46), with GDP falling by 0.1% in each quarter from 2016 Q3 to 2017 Q2. Obviously that has not happened and has led to a chorus of Brexiteer condemnation of economists in general and Treasury economists in particular.
That criticism is somewhat unfair, although it is true that the forecasts may well have been subject to political ‘overlay’ (despite Professor Bean’s signoff) because they were not produced by the independent OBR.
The truth is that is it perfectly possible that there will be a sharp slowdown or recession in 2017/18.
There are two principal reasons why it has not happened yet.
The first is that the forecast assumed that Article 50 would be triggered immediately. But this did not happen. The Prime Minister has said it will happen by the end of March, but that timetable might well slip, given that it needs legislation (following the judicial ruling) and the House of Lords will probably try to delay it. In addition, there is still uncertainty surrounding the process. For example, it might be that Article 50 can be revoked if for example a second referendum on the terms of the UK’s new relationship with the EU rejects those terms. The fact that the triggering of Article 50 has been delayed is important in explaining why the economy has not slowed yet. It is not - as one pro-Brexit economist, Ryan Bourne, has alleged – “dire sophistry”.
The second reason is that the Treasury forecast assumes that monetary policy is held fixed. However the Bank of England’s MPC eased policy substantially in August, cutting interest rates to 0.25% from 0.5%, expanding Quantitative Easing and declaring its intention for the first time to buy commercial debt as part of the QE programme.
Only when Article 50 is triggered - and the reality of what the EU is prepared to offer versus what the UK demands becomes clear – and only when the backward-looking data are published – will it be fair to judge the Treasury’s forecast of a mild recession. That is, around June 2018, assuming Article 50 is triggered by June 2017.
(Note that some other parts of the Treasury forecast are proving correct. It predicted a sharp fall in the pound and a rise in inflation and government borrowing).
4: The Economist Misrepresented and Misundertood
More often than you might think, the forecasts made by economists are misinterpreted. I lost count of the number of times it was stated during the campaign that the Treasury forecast was for a fall of between 3.4% and 9.5% in GDP by 2030. It wasn’t. That forecast was simply a comparison of 2030 of GDP under two scenarios: staying in the EU and leaving it. No actual fall in GDP could be implied from the ‘leave’ scenario.
And even if our forecasts are interpreted correctly, we economists are frequently misunderstood, most commonly in terms of what we can and cannot achieve. What we can do is to use a systematic framework to forecast an outcome, given a change in a parameter (eg a tax rate) and a set of assumptions about how the economy works. Or at the micro level, an economist can tell you for example whether a planned new rail line – HS2 say – is good value. Indeed (and fortunately!) economists are necessary. Businesses need forecasts to help them plan. Modern economic policy requires forecasts. The Bank of England was given responsibility for predicting inflation before it was given control of monetary policy. Without a forecasting framework, its Monetary Policy Committee would be whistling in the dark. And even when a forecast is wrong, knowing why it is wrong helps us understand a bit more about how the economy works.
Economists do not have perfect foresight. But they can help in planning and optimising the use of scarce resources.
Let Professor Jag Chadha, the Director of NIESR, have the last word:
“It is quite obvious that we cannot know the future. But it is equally obvious that we cannot afford not to think and plan for the future. Our projections about future states of the world depend on a combination of information and models, which are essentially devices for turning that unstructured information into a view. Even if we make the most extreme assumptions and assume that all relevant information is free, we would still not say that this structural view is anything other than a false depiction of the world that will transpire. So they need to be treated with care, particularly when they are used to inform policy. Forecasts can be used or abused but they need to be made.”