Economists Can’t Forecast The Future, But They Enjoy Pretending When It Helps Them Trash Opposing Views.
The headline was unambiguous: “Brexit Is Done: The U.K. Has Left the European Union.” As of January 31, the European Union (Withdrawal) Act of 2018 has become law and the United Kingdom has begun the withdrawal process from the European Union. The transition process will continue throughout 2020 as the UK and EU governments negotiate the nature of the future relationship between the UK and the EU.
Now that the British exit from the European Union is a legal reality, the economic situation in the UK has been surprisingly sedate.
This will be a surprise for those who believed the assurances of media pundits and economic experts that the UK’s economy would become every more crippled as Brexit edged closer.
Yet economic turmoil has been sparse. Certainly, markets and companies have moved to adapt to the new coming reality of the UK as largely outside the EU’s common market. But it is hardly clear that the country is poised on the edge of a Brexit-caused economic disaster. This is true even though Brexit has clearly been all but inevitable since December’s general election.
Predictions of Doom
It wasn’t supposed to happen this way.
Opponents of a British exit—and the economists they employed—insisted that not only would the eventual withdrawal be disastrous for the UK economy, but that even the market uncertainty associated with an eventual withdrawal would cripple the British economy.
For example, the UK Treasury released a report in May 2016 stating:
A vote to leave would cause a profound economic shock creating instability and uncertainty which would be compounded by the complex and interdependent negotiations that would follow. The central conclusion of the analysis is that the effect of this profound shock would be to push the UK into recession and lead to a sharp rise in unemployment.
According to the report, this economic disaster didn’t require a completed exit from the EU. The mere act of voting in favor of leaving, Brits were told, would trigger enormous economic problems.
Meanwhile, the Organisation for Economic Co-operation and Development (OECD) in an April 2016 report predicted that Brexit would cost Britain the equivalent of more then three thousand pounds per household and “would be a major negative shock to the UK economy, with economic fallout in the rest of the OECD.”
More nuanced analyses debated the effects of “no-deal Brexit” as opposed to a more “soft” Brexit. But in the lead-up to the election—and in the years following—the message was clear: Brexit is going to make Britain significantly poorer.
Yet investors, entrepreneurs, and consumers, appear unconvinced that the barriers to international trade raised by Brexit will be sufficient to send the UK economy into a tailspin. Investors have not abandoned UK investment opportunities, and entrepreneurs are not anticipating a crushing tariff burden. Even if the EU insists on being petulant, the UK has other important trading partners. Accordingly, by January of this year, The Telegraph reported, “The strength of the British economy is defying predictions of post-Brexit doom,” and Bloomberg reports that in spite of predictions of massive losses in the financial sector, “London has extended its lead in foreign exchange and interest rate derivatives trading since the referendum.” The Telegraph has also noted that as a finalized Brexit edges closer, hiring has increased and economic growth—as measured by economists’ usual methods, has increased.
“Transaction Costs” Include More Than Trade Barriers
The claim that Brexit would make everyone poorer was premised on an obsession with the idea that Brexit would drive up so-called “transaction costs” for British businesses in terms of tariffs and other barriers to the free movement of labor and goods. The assumption was that business with the Continent was streamlined and basically frictionless, while withdrawal from the EU would raise many new barriers.
This is a common argument among economists and politicians who favor greater streamlining of trade and migration through international agreements.
Certainly minimizing transaction costs in this way is always a good thing, all else being equal. It’s good when trade increases, and when countries—and the individuals within them—are able to take advantage of the the division of labor. It’s also good when consumers and entrepreneurs are left to choose for themselves what products they wish to buy and from where.
But the problem with economic integration of the EU sort is that it also tends to come with political integration.
Thus, economic integration comes with a host of strings attached in the form of bureaucratic management from above. That management has been extensive, and the regulatory burdens associated with it are significant.
Ralph Peters at the Hoover Institution refers to the EU as “a bureaucratic monster” that interferes absurdly with “the structures of everyday life.”
Even worse, trying to reduce this bureaucratic burden is extremely difficult for any single member of the EU. Any significant change to Europe-wide bureaucratic edicts requires an enormous amount of effort in marshaling support from other member states and pushing through reforms. The weight imposed on smaller businesses and entrepreneurs is especially damaging. As Peter Chapman noted at Politico, “the EU’s general antipathy towards entrepreneurs remains a huge barrier” to economic improvement. Although the nominal benefits of membership in the EU may be easy to see in terms of reduced trade barriers, the net benefits are far less clear to those who are aware of the true cost of the EU bureaucracy. Not only does EU membership come with high transaction costs in terms of added regulations, but the nature of the EU’s unelected and foreign institutions likely made the bureaucracy less responsive, less flexible, and more permanent. That in itself is an added burden above and beyond the regulations themselves.
Some anti-Brexit commentators have noted the obvious: namely that Brexit does not automatically bring relief from regulatory burdens. This is certainly true, but all this means is that British entrepreneurs and consumers are presently banking on the idea that at least some regulatory relief will come, and that the cost of international trade will not rise to crippling levels. But it also means that if UK policymakers want to change or reduce these bureaucratic burdens, it’s not necessary to go to Brussels to beg for relief. In other words, the private sector appears to be taking a long-term view while the anti-Brexit pundits are obsessing over the immediate future.