Thursday, 4 August 2016

Brexit realism: What economists know about costs and voter motives

David Miles (Imperial College Business School) has a new column up at on Brexit realism: What economists know about costs and voter motives. Miles writes that to some, the Brexit referendum was a failure by economists to persuade UK voters that leaving the EU would entail major economic costs. In his column Miles argues for a more nuanced view by making two points:
  • First, it questions whether there really is a consensus about the costs. While all the mainstream estimates were negative, they ranged from rather small to nearly 10% - a range that hardly sounds like a consensus. Moreover, the key mechanism - Brexit's impact on productivity growth - is not something economists really understand.
  • Second, a rational voter could accept the cost as a tolerable price for having greater independence from EU decisions. Economics does not tell us that a voter who makes such a choice is ignorant, irrational, or economically illiterate.
And independence from EU decisions does seem to have been a big player in the pro-Brexit vote.

Perhaps the most interesting question Miles asks is, Do we know voters ignore economic estimates? He writes,
But suppose we put to one side the rather wide range of central estimates of the long-run effect of Brexit on GDP, and also ignore the enormous uncertainty about any one such central estimate, and stick to the view that there was a consensus amongst economists about the effects and that this was that Brexit is significantly bad for incomes. What is the evidence that such a consensus (to the extent that it existed) was ignored by those that voted to Leave? I think we should be realistic as economists about how little we really know here.

One point is obvious. A rational voter could accept that there would be an economic cost to leaving the EU but think this is an acceptable price to pay for not having to accept some EU decisions over which the UK has limited say. There clearly are decisions of this sort - from judgements by the European Court of Justice, to rules on financial regulations (e.g. the strange decision to make capital requirements on banks maximum harmonisation, or EU rules on bonuses), to accepting the right of entry of people to whom other EU countries have decided to grant citizenship.

Economics has little to say about whether someone who values avoiding being tied by such decisions, and accepts in return the likelihood of a lower income by a few percentage points, is ignorant, irrational, or economically illiterate. For many years the mantra of many from the European Commission has been the desirability, even the necessity, of "ever closer union". What does economics tell you is the right answer to the question, "How much should I pay to avoid that?"

As it happens, I did not think it worth paying the price to avoid the risk that the fuzzy concept of "an ever closer union" could create damage down the road. I do not, however, believe those who took a different view were ignorant or befuddled. It is not right to think that if only they understood the economics of it they would surely have voted differently.
This point is one that has not been acknowledged by most of the anti-Brexit crowd. From my reading of much of this group's material they do seem to think anyone who was pro-Brexit was an economic fool, and this just doesn't have to be true.

No comments: