Generally, a good sign that an economic argument is coherent is a reasonable degree of consensus about the consequences of following a particular action.
It isn’t always true – witness the consensus that the world financial system was stable before the financial crisis.
The converse – that incoherence about consequences is a good sign that a proposed action will have adverse results – is much truer.
That turns out to be the case for the economists supporting Brexit.
Nine of them including some very respectable names such as Roger Bootle, chairman of Capital Economics, and Tim Congdon, a Treasury “wise man” adviser 1992-97, have published a paper arguing, in summary, that Britain would, after an initial adverse shock, be growing faster, at 3.4 per cent annually by 2020 compared to 2.8 per cent inside the EU.
I read this with great interest. A base assumption is that post-Brexit, Britain strikes no Norway-style or any other kind of trade deal with the EU, but simply operates under World Trade Organisation free trade rules.
That’s clear, and has the virtue of simplicity. Unfortunately, it means the rest of the world is wrong. If just being a free trade country is good, why is the USA spending so much time and effort trying to construct a trade deal – the Transatlantic Trade and Investment Partnership (TTIP) with the EU?
Don’t they realise that this will reduce growth in wealth and jobs rather than increase it?
Never mind. A key argument put by Patrick Minford is that the tariff wall around the EU raises food and manufactured goods prices for British consumers by about 20 per cent.
Without these tariffs on imports, he reckons that consumer prices would fall by about 8 per cent, resulting in a welfare gain to GDP of about 4 per cent.
This is where the initial adverse shock comes in. British manufacturers would have to adjust to a lower cost rest of the world causing some job and GDP loss. Minford argues this would be more than counter-balanced by the stimulus from additional consumer spending power.
What he doesn’t mention is that British exports to the EU, some 44 per cent of all our exports, would have to pay tariffs, making these exports up to 8 per cent more expensive?
But this potentially damaging effect can be reduced by assuming a fall in the value of sterling. Ahem, but wouldn’t this make the newly cheapened rest of the world imports more expensive again?
Well, never mind that. Some cushioning is available because Britain would no longer be paying EU subs which, post-rebate, are about £15 billion a year. Minford admits that about £5 billion of this would have to be spent on replacing EU subsidies that farmers currently get.
Elsewhere, Ryan Bourne, head of policy at the Institute of Economic Affairs, acknowledges that more might have to be spent on easing the transition pain for “disadvantaged” industries, one of which is vehicle manufacturing.
How much, he doesn’t say. But since a House of Commons Library paper says the sector has 142,000 jobs, the bill may be large, perhaps another £5 billion, as nearly four-fifths of all UK-produced vehicles are exported, half of them to the EU.
But wait a minute. The model that these economists use to generate a 4 per cent gain to GDP assumes that all of the £15 billion is used to cut income tax by 2p in the pound and that there is no extra spending from elsewhere on farming and industry aid.
Oh dear, it doesn’t add up.
The “Economists for Brexit” paper is a classic study of how an apparently simple idea can rapidly become complex and incoherent. It just doesn’t work.
Peter Jones is a freelance journalist, based in Edinburgh, specialising in economics, business, and politics, writing mainly for The Economist and The Times.