Saturday, 8 April 2017

Things we would need to know to estimate the long-run impact of Brexit on incomes

The view that Brexit would reduce average incomes was no more of an opinion than man made climate change is an opinion. They are both almost certain facts.
Simon Wren-Lewis
This is unconvincing. To see why, here is a non-exhaustive list of things we would need to know in order to estimate the effect of Brexit upon incomes, along with the relevant knowledge, social science or otherwise, that might be relevant.
  • Is the European Union politically stable in face of the long run challenges such as rising populism, a resurgent Russia, and economic tensions engendered by the Euro? What is the chance of the EU's break-up (a) if Britain stays in (b) if Britain leaves? What would EU break up do to members' incomes? Political science. Theories of institutional change.
  • Innovation is a key driver of long run growth. How innovative will EU economies be over the long run - say, the next century - with Britain either in or out? Conversely, how innovative will Britain be outside the EU? Economics of innovation. Relationship between innovation and (a) institutional environment (b) policy (c) market size.
  • More generally, what is the current effect of EU policy on growth? Are EU policies   social democratic, or liberalizing and market-oriented? And how do such policies affect the economy? Macroeconomics, plus knowledge of EU law.
  • And given that, what will EU policy be in future? Will it stay as it is, or will drastic changes come via an altered intellectual climate, or via political change in member states? Political economy. Intellectual history. 
  • On the other hand, how will Brexit affect domestic politics? Will it lead to a disastrous, inefficient populism? Or a renewed, outward-looking, global approach? Will the UKIP die away, its mission complete, or be strengthened and even take the place of Labour? Political science: voting behaviour, party systems theory. Knowledge of the internal state of the UK parties.
  •  What attitude will EU leaders take to negotiating with Britain if we leave? Will they be principled, insisting that the EU's four freedoms go together? Vengeful and punitive? Or pragmatic, giving us a "special deal" so as to protect the interests of exporters? International relations. Bargaining theory. Knowledge of the attitudes and psychology of key players - Merkel, Hollande et al. - and the domestic pressures faced by each.
  • Conversely, will we be able to strike good trade deals with players outside the EU? Can we negotiate better or worse with India, China and the US? As above, plus knowledge of the domestic politics of each potential trading partner.

I have only a little familiarity with any of these areas, but am pretty sure that in all of them, we have nothing even approaching solid, validated causal theories from which predictions might be drawn. 

Notice that we cannot even start using the tools of economics until we answer some of these questions. Economics makes conditional predictions - how much will trade be under a given set of rules? But then we need to know what the rules will be.

By contrast, to believe that human CO2 emissions affect the climate, all you need do is accept the theory of the greenhouse effect, which is more than a century old, and is as thoroughly validated as the theory of evolution.

For what it's worth, I think that the answers to all the above questions probably favour the Remainers, and did even during the referendum campaign (when we knew less about, e.g. the EU's negotiation attitudes). But pretending to be white-coated scientists who have all the answers is silly posturing which reduces the profession's credibility. Social science is uncertain, because social life is intrinsically uncertain.