Brexit

A belated reply to Fazi and Mitchell on Brexit

Bruno Bonizzi and Jo Michell

In a Jacobin article earlier this year, Thomas Fazi and Bill Mitchell argued in favour of a hard Brexit. We published a reply, also in Jacobin. Fazi and Mitchell (FM) responded with accusations of strawman arguments, false claims, bias and muddled thinking. We intended to write a reply at the time, but other commitments got in the way. However we believe that FM’s reply was sufficiently inaccurate – and in places, dishonest –  that a reply is required, even if belatedly.

Brexit predictions

In our Jacobin article we noted that pre-referendum predictions of immediate recession following a Leave vote were produced for political effect, while economists emphasised the likely longer run costs. FM dispute this interpretation, citing as evidence a letter signed by over 200 economists, warning of the likely economic effects of Brexit. One of us (Jo Michell) has some knowledge of this letter, having not only signed it but also having played a role in coordinating signatories – signatories which include a good cross-section of the UK heterodox economics community.

FM quote the letter as follows:

Focusing entirely on the economics, we consider that it would be a major mistake for the UK to leave the European Union …

The uncertainty over precisely what kind of relationship the UK would find itself in with the EU and the rest of the world would also weigh heavily for many years. In addition, there is a sizeable risk of a short-term shock to confidence if we were to see a Leave vote on June 23rd. The Bank of England has signalled this concern clearly, and we share it.

Compare FM’s edit with the original text of the letter below (our bold text).

Focusing entirely on the economics, we consider that it would be a major mistake for the UK to leave the European Union.

Leaving would entail significant long-term costs. The size of these costs would depend on the amount of control the UK chooses to exercise over such matters as free movement of labour, and the associated penalty it would pay in terms of access to the single market. The numbers calculated by the LSE’s Centre for Economic Performance, the OECD and the Treasury describe a plausible range for the scale of these costs.

The uncertainty over precisely what kind of relationship the UK would find itself in with the EU and the rest of the world would also weigh heavily for many years. In addition, there is a sizeable risk of a short-term shock to confidence if we were to see a Leave vote on June 23rd. The Bank of England has signalled this concern clearly, and we share it.

Can you see what they did there?

The first substantial paragraph of the letter — conveniently deleted by FM – focuses on the long-term costs. Midway through the second paragraph, is the following sentence: “In addition, there is a sizeable risk of a short-term shock to confidence…” (our emphasis). The letter is clearly worded: we believe that Brexit entails long-term costs and, additionally, a risk of negative short-term effects.

FM also comment – referring to the first line of the letter – “And nothing ‘entirely’ economics about that. They were trying to influence the Referendum outcome in favour of Remain.”

Of course we were trying to influence the referendum outcome – that was the point of the letter – because, on the basis of the economics, we believe Brexit to be a mistake.

Finally, FM state, “This letter was published in the Times newspaper and so received widespread coverage.” This is genuinely funny. The (paywalled) letter was almost universally ignored by the UK press – to the point that Tony Yates’ frustration became a running joke on UK economics Twitter.

FM then highlight a report published by NIESR shortly before the vote. Again FM edit their quote carefully, removing the qualifier “albeit not unanimous” from the sentence “there is a degree, albeit not unanimous, of consensus that leaving the EU would depress UK economic activity in both the short term (via uncertainty) and the long term (via trade).” Aside from the quotation, FM devote no attention to the actual contents of the report, which summarises various Brexit macro modelling exercises, include the Treasury’s long term forecasts and both long and “near term” forecasts from the OECD, LSE and NIESR themselves. With the exception of the LSE modelling exercise, all are produced using NIESR’s NiGEM model.

What do the projections show? First note that the “near term” projections run until 2020, while the longer term projections run till 2030. The long-run projections of a hard Brexit do indeed predict a large hit to GDP. The shorter run scenarios suggest a smaller hit to GDP, of between 2.6% and 3.3%, by 2020. Does this prove, as FM argue, that economists “catastrophically failed in relation to the short-run impacts of the Brexit vote”?

At risk of stating the obvious, 2020 is four and half years after the referendum vote and beyond the Article 50 period: Brexit will have happened (this is the assumption in the projections, anyway). A 3% hit to GDP by 2020 seems perfectly plausible. But saying something is plausible is not the same as saying it is certain. In the case of both the economists’ letter to the Times and FM’s next piece of evidence, an Observer poll of economists, FM choose to ignore a crucial word: risk. Stating that there is a risk something will happen is not the same as saying it will happen. Fazi is a journalist. But Mitchell, an economics professor, really should understand the distinction between risk and certainty.

So, what of those statements that a hard Brexit increases the risk of a negative economic shock by 2020? Is the projection of 3% hit to GDP by 2020 in the wake a no-deal Brexit a “catastrophic failure”? How is the UK doing since the referendum?

GDP growth came to a halt in the first quarter of 2018 after declining steadily in the wake of the Brexit vote. Despite a bounce back in the summer, the UK growth rate is currently the lowest of the G7 economies. Of course, we don’t have the counterfactual — and since UK growth is pretty much entirely dependent on household spending, consumer credit and retail, this slowdown could have come at almost any point. But with the household savings rate and net lending now negative — and clearly unsustainable — further reductions in consumer demand seem inevitable.

What of manufacturing – the great hope of the pro-Brexit Left? Corbyn recently made the case that pound devaluation in the wake of Brexit will lead to a revival of manufacturing. But the UK pound has been depreciating for decades — alongside a widening current account deficit and a steady decline in manufacturing. Investment spending in car manufacturing has halved since the Brexit vote. Several major manufacturers including BMW, Siemens and Airbus have warned that they will cease manufacturing in the UK in the event of a hard Brexit. The Society of Motor Manufacturers and Traders (SMMT) issued a warning that 860,000 skilled manufacturing jobs are at risk in the event of a hard brexit. Leaked government reports predict that low-income, Leave-voting ex-manufacturing areas of the UK will be hardest hit by a hard Brexit. This week, the European boss of Ford warned that a no-deal Brexit would be “disastrous” for UK manufacturing. AstraZeneca has announced a freeze in manufacturing investment in the UK. We could go on.

Booming Brexit Britain?

In our original reply to FM, we took issue with their attempt to paint the post-referendum period as a boom. FM claim we have misrepresented them: “to their discredit, Bonizzi and Michell are just making stuff up when they make that claim about us.” Here is the section of FM’s original article we referred to:

UK exports are at their strongest position since 2000. As the Economist recently put it: “Britain’s long-suffering makers are enjoying a once-in-a-generation boom,” as the shifts induced by Brexit engender a much-needed “rebalancing” from boom-and-bust financial services towards manufacturing. This is also spurring a growth in investment. Total investment spending in the UK — which includes both public and private investment — was the highest of any G7 country during 2017: 4 percent compared to the previous year.

The reader can decide if we are “just making stuff up”.

Having attacked us for our interpretation of the above quote, FM even go on, without a hint of irony, to quote the same Economist sentence – arguing that pound devaluation and growing export demand has led to a “virtuous circle” in which manufacturers are experiencing a   “once-in-a-generation boom … manufacturing is seeing its strongest growth since the late 1990s …”

This reinforces a point we made in our Jacobin article: FM seem to have trouble with the distinction between levels and growth rates. Manufacturing may have grown strongly in 2017 – before going into reverse and contracting at the start of 2018 – but this is in large part the result of “base effects”. Because UK manufacturing is now so small – output is still below pre-crisis levels – even small increases register as large percentage growth rates. This is not the same thing as a manufacturing “boom”.

FM made the same error in their original piece when discussing investment, where they incorrectly stated that “Total investment spending in the UK … was the highest of any G7 country during 2017” – actually it was the lowest. Now, we are prepared to accept that FM believed they were claiming that investment growth was highest – it was just a typo – but that isn’t what they wrote. Upon investigation, we discovered that FM’s error was in fact the result of carelessly pasting together two directly quoted half-sentences from the FT. Pointing out this error is not sleight of hand, and discussing base effects isn’t “throwing in some cloud” – whatever that means. (It is also good form to use quotation marks when cutting and pasting someone else’s text.)

Defenders of mainstream macro?

Next up, FM try and paint us as defenders of mainstream economics, arguing that “Bonizzi and Michell’s defense of the economics professions is thus very hard to comprehend.” This comes at the end of a long and incoherent section in which FM conflate DSGE modelling, gravity models of international trade, support for austerity and a number of other things – while, of course, stating that “it was obvious to Modern Monetary Theory (MMT) economists as early as the late 1990s that a crisis was brewing”.

FM appear to think that, because we find negative long term Brexit predictions to be plausible, we are defending every failure of economics modelling and policy over the last three decades. Clearly they haven’t bothered to check our views on this. When they conflate these issues by writing, “same models, same approach, same catastrophic errors”, they demonstrate their ignorance. DSGE macro models and gravity models may both have important flaws – but they are not the same.

Trade graphs, EU utopianism, nativism and the Irish border

There are multiple further sections in FM’s reply – on the interpretation of trade graphs, the importance of racism and the far-right, and whether the EU is a “utopia”. These are as incoherent and inaccurate as the points refuted above. To give just one more example, FM state that “… the contention by Bonizzi and Michell that the EU is the only thing preventing the UK from plunging into a quasi-fascist dystopia is untenable.” – a contention that is nowhere to be found in anything we have written. Elsewhere, FM abandon even the pretence of debate, and resort to throwing in statements like, “Hello! Is anyone there?”

FM claim – inaccurately – that in their articles and book, they have covered all the points we raise. But we raised one issue in our Jacobin article that FM conspicuously ignore in their reply: the Irish border. We wrote:

The UK government’s current position of aiming to leave the customs union without creating a hard border in Ireland is akin to a Venn diagram in which there is no intersection between the circles. For this reason, Theresa May is currently proposing two incompatible approaches, both of which are unacceptable to the EU.

As has since become overwhelmingly apparent, those who want to argue for a hard Brexit need to spell out a solution to the Irish border issue. Perhaps now would be a good time for FM to tell us theirs?

Finally, we note that in their incoherent attempt to conflate mainstream economics and opposition to Brexit, FM quote Ann Pettifor. In response to FM’s attack on us, Ann tweeted the following: “Bill Mitchell & Fazi need reminding that it is rise of nationalism & even fascism in Europe that is the threat. Progressives should lead – not walk away & vacate political space to the Far Right.”

Fazi and Mitchell have not engaged with our arguments in good faith. Their attack is not a serious attempt to engage in debate or respond to the points we raised. In a number of places it is transparently dishonest. Anyone who follows Fazi and Mitchell’s lead on these crucial issues should take a long hard look.

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Economics, Ideology and Trump

So the post-mortem begins. Much electronic ink has already been spilled and predictable fault lines have emerged. Debate rages in particular on the question of whether Trump’s victory was driven by economic factors. Like Duncan Weldon, I think Torsten Bell gets it about right – economics is an essential part of the story even if the complete picture is more complex.

Neoliberalism is a word I usually try to avoid. It’s often used by people on the left as an easy catch-all to avoid engaging with difficult issues. Broadly speaking, however, it provides a short-hand for the policy status quo over the last thirty years or so: free movement of goods, labour and capital, fiscal conservatism, rules-based monetary policy, deregulated finance and a preference for supply-side measures in the labour market.

Some will argue this consensus has nothing to with the rise of far-right populism. I disagree. Both economics and economic policy have brought us here.

But to what extent has academic economics provided the basis for neoliberal policy? The question had been in my mind even before the Trump and Brexit votes. A few months back, Duncan Weldon posed the question, ‘whatever happened to deficit bias?’ In my view, the responses at the time missed the mark. More recently, Ann Pettifor and Simon Wren Lewis have been discussing the relationship between ideology, economics and fiscal austerity.

I have great respect for Simon – especially his efforts to combat the false media narratives around austerity. But I don’t think he gets it right on economics and ideology. His argument is that in a standard model – a sticky-price DSGE system – fiscal policy should be used when nominal rates are at the zero lower bound. Post-2008 austerity policies are therefore at odds with the academic consensus.

This is correct in simple terms, but I think misses the bigger picture of what academic economics has been saying for the last 30 years. To explain, I need to recap some history.

Fiscal policy as a macroeconomic management tool is associated with the ideas of Keynes. Against the academic consensus of his day, he argued that the economy could get stuck in periods of demand deficiency characterised by persistent involuntary unemployment. The monetarist counter-attack was led by Milton Friedman – who denied this possibility. In the long run, he argued, the economy has a ‘natural’ rate of unemployment to which it will gravitate automatically (the mechanism still remains to be explained). Any attempt to use activist fiscal or monetary policy to reduce unemployment below this natural rate will only lead to higher inflation. This led to the bitter disputes of the 1960s and 70s between Keynesians and Monetarists. The Monetarists emerged as victors – at least in the eyes of the orthodoxy – with the inflationary crises of the 1970s. This marks the beginning of the end for fiscal policy in the history of macroeconomics.

In Friedman’s world, short-term macro policy could be justified in a deflationary situation as a way to help the economy back to its ‘natural’ state. But, for Friedman, macro policy means monetary policy. In line with the doctrine that the consumer always knows best, government spending was proscribed as distortionary and inefficient. For Friedman, the correct policy response to deflation is a temporary increase in the rate of growth of the money supply.

It’s hard to view Milton Friedman’s campaign against Keynes as disconnected from ideological influence. Friedman’s role in the Mont Pelerin society is well documented. This group of economic liberals, led by Friedrich von Hayek, formed after World War II with the purpose of opposing the move towards collectivism of which Keynes was a leading figure. For a time at least, the group adopted the term ‘neoliberal’ to describe their political philosophy. This was an international group of economists whose express purpose was to influence politics and politicians – and they were successful.

Hayek’s thesis – which acquires a certain irony in light of Trump’s ascent – was that collectivism inevitably leads to authoritarianism and fascism. Friedman’s Chicago economics department formed one point in a triangular alliance with Lionel Robbins’ LSE in London, and Hayek’s fellow Austrians in Vienna. While in the 1930s, Friedman had expressed support for the New Deal, by the 1950s he had swung sharply in the direction of economic liberalism. As Brad Delong puts it:

by the early 1950s, his respect for even the possibility of government action was gone. His grudging approval of the New Deal was gone, too: Those elements that weren’t positively destructive were ineffective, diverting attention from what Friedman now believed would have cured the Great Depression, a substantial expansion of the money supply. The New Deal, Friedman concluded, had been ‘the wrong cure for the wrong disease.’

While Friedman never produced a complete formal model to describe his macroeconomic vision, his successor at Chicago, Robert Lucas did – the New Classical model. (He also successfully destroyed the Keynesian structural econometric modelling tradition with his ‘Lucas critique’.) Lucas’ New Classical colleagues followed in his footsteps, constructing an even more extreme version of the model: the so-called Real Business Cycle model. This simply assumes a world in which all markets work perfectly all of the time, and the single infinitely lived representative agent, on average, correctly predicts the future.

This is the origin of the ‘policy ineffectiveness hypothesis’ – in such a world, government becomes completely impotent. Any attempt at deficit spending will be exactly matched by a corresponding reduction in private spending – the so-called Ricardian Equivalence hypothesis. Fiscal policy has no effect on output and employment. Even monetary policy becomes totally ineffective: if the central bank chooses to loosen monetary policy, the representative agent instantly and correctly predicts higher inflation and adjusts her behaviour accordingly.

This vision, emerging from a leading centre of conservative thought, is still regarded by the academic economics community as a major scientific step forward. Simon describes it as `a progressive research programme’.

What does all this have to with the current status quo? The answer is that this model – with one single modification – is the ‘standard model’ which Simon and others point to when they argue that economics has no ideological bias. The modification is that prices in the goods market are slow to adjust to changes in demand. As a result, Milton Friedman’s result that policy is effective in the short run is restored. The only substantial difference to Friedman’s model is that the policy tool is the rate of interest, not the money supply. In a deflationary situation, the central bank should cut the nominal interest rate to raise demand and assist the automatic but sluggish transition back to the `natural’ rate of unemployment.

So what of Duncan’s question: what happened to deficit bias? – this refers to the assertion in economics textbooks that there will always be a tendency for governments to allow deficits to increase. The answer is that it was written out of the textbooks decades ago – because it is simply taken as given that fiscal policy is not the correct tool.

To check this, I went to our university library and looked through a selection of macroeconomics textbooks. Mankiw’s ‘Macroeconomics’ is probably the mostly widely used. I examined the 2007 edition – published just before the financial crisis. The chapter on ‘Stabilisation Policy’ dispenses with fiscal policy in half a page – a case study of Romer’s critique of Keynes is presented under the heading ‘Is the Stabilization of the Economy a Figment of the Data?’ The rest of the chapter focuses on monetary policy: time inconsistency, interest rate rules and central bank independence. The only appearance of the liquidity trap and the zero lower bound is in another half-page box, but fiscal policy doesn’t get a mention.

The post-crisis twelfth edition of Robert Gordon’s textbook does include a chapter on fiscal policy – entitled `The Government Budget, the Government Debt and the Limitations of Fiscal Policy’. While Gordon acknowledges that fiscal policy is an option during strongly deflationary periods when interest rates are at the zero lower bound, most of the chapter is concerned with the crowding out of private investment, the dangers of government debt and the conditions under which governments become insolvent. Of the textbooks I examined, only Blanchard’s contained anything resembling a balanced discussion of fiscal policy.

So, in Duncan’s words, governments are ‘flying a two engined plane but choosing to use only one motor’ not just because of media bias, an ill-informed public and misguided politicians – Simon’s explanation – but because they are doing what the macro textbooks tell them to do.

The reason is that the standard New Keynesian model is not a Keynesian model at all – it is a monetarist model. Aside from the mathematical sophistication, it is all but indistinguishable from Milton Friedman’s ideologically-driven description of the macroeconomy. In particular, Milton Friedman’s prohibition of fiscal policy is retained with – in more recent years – a caveat about the zero-lower bound (Simon makes essentially the same point about fiscal policy here).

It’s therefore odd that when Simon discusses the relationship between ideology and economics he chooses to draw a dividing line between those who use a sticky-price New Keynesian DSGE model and those who use a flexible-price New Classical version. The beliefs of the latter group are, Simon suggests, ideological, while those of the former group are based on ideology-free science. This strikes me as arbitrary. Simon’s justification is that, despite the evidence, the RBC model denies the possibility of involuntary unemployment. But the sticky-price version – which denies any role for inequality, finance, money, banking, liquidity, default, long-run unemployment, the use of fiscal policy away from the ZLB, supply-side hysteresis effects and plenty else besides – is acceptable. He even goes so far as to say ‘I have no problem seeing the RBC model as a flex-price NK model’ – even the RBC model is non-ideological so long as the hierarchical framing is right.

Even Simon’s key distinction – the New Keynesian model allows for involuntary unemployment – is open to question. Keynes’ definition of involuntary unemployment is that there exist people willing and able to work at the going wage who are unable to find employment. On this definition the New Keynesian model falls short – in the face of a short-run demand shortage caused by sticky prices the representative agent simply selects a new optimal labour supply. Workers are never off their labour supply curve. In the Smets Wouters model – a very widely used New Keynesian DSGE model – the labour market is described as follows: ‘household j chooses hours worked Lt(j)’. It is hard to reconcile involuntary unemployment with households choosing how much labour they supply.

What of the position taken by the profession in the wake of 2008? Reinhart and Rogoff’s contribution is by now infamous. Ann also draws attention to the 2010 letter signed by 20 top-ranking economists – including Rogoff – demanding austerity in the UK. Simon argues that Ann overlooks the fact that ‘58 equally notable economists signed a response arguing the 20 were wrong’.

It is difficult to agree that the signatories to the response letter, organised by Lord Skidelsky, are ‘equally notable’. Many are heterodox economists – critics of standard macroeconomics. Those mainstream economists on the list hold positions at lower-ranking institutions than the 20. I know many of the 58 personally – I know none of the 20. Simon notes:

Of course those that signed the first letter, and in particular Ken Rogoff, turned out to be a more prominent voice in the subsequent debate, but that is because he supported what policymakers were doing. He was mostly useful rather than influential.

For Simon, causality is unidirectional: policy-makers cherry-pick academic economics to fit their purpose but economists have no influence on policy. This seems implausible. It is undoubtedly true that pro-austerity economists provided useful cover for small-state ideologues like George Osborne. But the parallels between policy and academia are too strong for the causality to be unidirectional.

Osborne’s small state ideology is a descendent of Thatcherism – the point when neoliberalism first replaced Keynesianism. Is it purely coincidence that the 1980s was also the high-point for extreme free market Chicago economics such as Real Business Cycle models?

The parallel between policy and academia continues with the emergence of the sticky-price New Keynesian version as the ‘standard’ model in the 90s alongside the shift to the third way of Blair and Clinton. Blairism represents a modified, less extreme, version of Thatcherism. The all-out assault on workers and the social safety net was replaced with ‘workfare’ and ‘flexicurity’.

A similar story can be told for international trade, as laid out in this excellent piece by Martin Sandbu. In the 1990s, just as the ‘heyday of global trade integration was getting underway’, economists were busy making the case that globalisation had no negative implications for employment or inequality in rich nations. To do this, they came up with the ‘skill-biased technological change’ (SBTC) hypothesis. This states that as technology advances and the potential for automation grows, the demand for high-skilled labour increases. This introduces the hitch that higher educational standards are required before the gains from automation can be felt by those outside the top income percentiles. This leads to a `race between education and technology’ – a race which technology was winning, leading to weaker demand for middle and low-skill workers and rising ‘skill premiums’ for high skilled workers as a result.

Writing in the Financial Times shortly before the financial crisis, Jagdish Bagwati argued that those who looked to globalisation as an explanation for increasing inequality were misguided:

The culprit is not globalization but labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour. Much empirical argumentation and evidence exists on this. (FT, January 4, 2007, p. 11)

As Krugman put it:

The hypothesis that technological change, by raising the demand for skill, has led to growing inequality is so widespread that at conferences economists often use the abbreviation SBTC – skill-biased technical change – without explanation, assuming that their listeners know what they are talking about (p. 132)

Over the course of his 2007 book, Krugman sets out on a voyage of discovery – ‘That, more or less, is the story I believed when I began working on this book’ (p. 6). He arrives at the astonishing conclusion – ‘[i]t sounds like economic heresy’ (p. 7) – that politics can influence inequality:

[I]nstitutions, norms and the political environment matter a lot more for the distribution of income – and … impersonal market forces matter less – than Economics 101 might lead you to believe (p. 8)

The idea that rising pay at the top of the scale mainly reflect social and political change, … strikes some people as … too much at odds with Economics 101.

If a left-leaning Nobel prize-winning economist has trouble escaping from the confines of Economics 101, what hope for the less sophisticated mind?

As deindustrialisation rolled through the advanced economies, wiping out jobs and communities, economists continued to deny any role for globalisation. As Martin Sandbu argues,

The blithe unconcern displayed by the economics profession and the political elites about whether trade was causing deindustrialisation, social exclusion and rising inequality has begun to seem Pollyannish at best, malicious at worst. Kevin O’Rourke, the Irish economist, and before him Lawrence Summers, former US Treasury Secretary, have called this “the Davos lie.”

For mainstream macroeconomists, inequality was not a subject of any real interest. While the explanation for inequality lay in the microeconomics – the technical forms of production functions – and would be solved by increasing educational attainment, in macroeconomic terms, the use of a representative agent and an aggregate production function simply assumed the problem away. As Stiglitz puts it:

[I]f the distribution of income (say between labor and capital) matters, for example, for aggregate demand and therefore for employment and output, then using an aggregate Cobb-Douglas production function which, with competition, implies that the share of labor is fixed, is not going to be helpful. (p.596)

Robert Lucas summed up his position as follows: ‘Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.’ It is hard to view this statement as informed more strongly by science than ideology.

But while economists were busy assuming away inequality in their models, incomes continued to diverge in most advanced economies. It was only with the publication of Piketty’s book that the economics profession belatedly began to turn its back on Lucas.

The extent to which economic insecurity in the US and the UK is driven by globalisation versus policy is still under discussion – my answer would be that it is a combination of both – but the skill-biased technical change hypothesis looks to be a dead end – and a costly one at that.

Similar stories can be told about the role of household debt, finance, monetary theory and labour bargaining power and monopoly – why so much academic focus on ‘structural reform’ in the labour market but none on anti-trust policy?  Heterodox economists were warning about the connections between finance, globalisation, current account imbalances, inequality, household debt and economic insecurity in the decades before the crisis. These warnings were dismissed as unscientific – in favour of a model which excluded all of these things by design.

Are economic factors – and economic policy – partly to blame for the Brexit and Trump votes? And are academic economists, at least in part, to blame for these polices? The answer to both questions is yes. To argue otherwise is to deny Keynes’ dictum that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood.’

This quote, ‘mounted and framed, takes pride of place in the entrance hall of the Institute for Economic Affairs’ – the think-tank founded, with Hayek’s encouragement, by Anthony Fisher, as a way to promote and promulgate the ideas of the Mont Pelerin Society. The Institute was a success. Fisher was, in the words of Milton Friedman, ‘the single most important person in the development of Thatcherism’.

The rest, it seems, is history.

What do immigration numbers tell us about the Brexit vote?

A couple of weeks ago I tweeted a chart from The Economist which plotted the percentage increase in the foreign-born population in UK local authority areas against the number of Leave votes in that area. I also quoted the accompanying article: ‘Where foreign-born populations increased by more than 200%, a Leave vote followed in 94% of cases.’

00-economist

This generated lots of responses, many of which rightly pointed out the problems with the causality implied in the quote. These included the following:

  • Using the percentage change in foreign-born population is problematic because this will be highly sensitive to the initial size of population.
  • Majority leave votes also occurred in many areas where the number of migrants had fallen.
  • Much of the result is driven by a relatively small number of outliers while the systemic relationship looks to be flat.
  • The number of points where foreign-born populations had increased by more than 200% were small relative to the total sample: around twenty points out of several hundred.

Al these criticisms are valid. With hindsight, the Economist probably shouldn’t have published the chart and article – and I shouldn’t have tweeted it. But the discussion on Twitter got me interested in whether the geographical data can tell us anything interesting about the Leave vote.

I started by trying to reproduce the Economist’s chart. The time period they use for the change in foreign-born population is 2001-2014. This presumably means they used census data for the 2001 numbers and ONS population estimates for 2014. My attempt to reproduce the graph using these datasets is shown below. The data points are colour-coded by geographical region and the size of the data point represents the size of the foreign-born population in 2014 as a percentage of the total. (The chart is slightly different to the one I previously tweeted, which had some data problems.)

01-chart-f-inc-hybrid-trans

Despite the problems described above, the significance of geography in the vote is clear – this is emphasised in the excellent analysis published recently by the Resolution Foundation and by Geoff Tily at the TUC (see also this in the FT and this in the Guadian).

Of the English and Welsh regions, it is clear that the Remain vote was overwhelmingly driven by London (The chart above excludes Scotland and Northern Ireland, both of which voted to Remain). Other areas which have seen substantial growth in foreign-born populations and also voted to Remain are cities such as Oxford, Cambridge, Bristol, Manchester and Liverpool.

A better way to look at this data is to plot the percentage point change in foreign population instead of the percentage increase. This will prevent small initial foreign-born populations producing large percentage increases. The result is shown below. For this, and rest of the analysis that follows, I’ve used the ONS estimates of the foreign-born population. This reduces the number of years to 2004-2014, but excludes possible errors due to incompatibility between the census data and ONS estimates. It also allows for inclusion of Scottish data (but not data from Northern Ireland). I’ve also flipped the X and Y axes: if we are thinking of the Leave vote as the thing we wish to explain, it makes more sense to follow convention and put it on the Y axis.

02-chart-f-pp-ons

There is no statistically significant relationship between the two variables in the chart above. The divergence between London, Scotland and the rest of the UK is clear, however. There also looks to be a positive relationship between the increase in foreign-born population and the Leave vote within London. This can be seen more clearly if the regions are plotted separately.

03-chart-f-region-pp-ons

The only region in which there is statistically significant relationship in a simple regression between the two variables is London. A one percent increase in the foreign-born population is associated with a 1.5 percent increase in the Leave vote (with an R-squared of about 0.4). The chart below shows the London data in isolation.

04-chart-f-pp-ons-london

The net inflow of migrants appears to have been greatest in the outer boroughs of London – and these regions also returned highest Leave votes. There are a number of possible explanations for this. One is that new migrants go to where housing is affordable – which means the outer regions of London. These are also the areas where incomes are likely to be lower. There is some evidence for this, as shown in the chart below: there is a negative relationship – albeit a weak one – between the increase in the foreign-born population and the median wage in the area.

05-chart-london-wage-pp-inc

Returning to the UK as a whole (excluding Northern Ireland), the Resolution foundation finds that there is a statistically significant relationship between the percentage point increase in foreign-born population and Leave vote when the size of the foreign-born population is controlled for. This is confirmed in the following simple regression, where FB.PP.Incr is the percentage point increase in the foreign-born population and FB.Pop.Pct is the foreign-born population as a percent of the total.

Coefficients:
 Estimate Std. Error t value Pr(>|t|) 
(Intercept) 57.19258 0.71282 80.235 < 2e-16 ***
FB.PP.Incr 0.90665 0.17060 5.314 1.87e-07 ***
FB.Pop.Pct -0.64344 0.05984 -10.752 < 2e-16 ***
---
Signif. codes: 0 ~***~ 0.001 ~**~ 0.01 ~*~ 0.05 ~.~ 0.1 ~ ~ 1

Residual standard error: 9.002 on 363 degrees of freedom
Multiple R-squared: 0.2475, Adjusted R-squared: 0.2433 
F-statistic: 59.69 on 2 and 363 DF, p-value: < 2.2e-16

It is clear that controlling for the foreign-born population is, in large part, controlling for London. This is illustrated in the chart below which shows the foreign-born population as a percentage of the total for each local authority in 2014, grouped by broad geographical region. The boxplots in the background show the mean and interquartile ranges of foreign-born population share by region. The size of the data points represents the size of the electorate in that local authority.

06-chart-f-ons-fp-electorate-boxes

This highlights a problem with the analysis so far – and for others doing regional analysis on the basis of local authority data. By taking each region as a single data point, statistical analysis misses the significance of differences in the size of electorates. This is important because it means, for example, that the Leave vote of 57% from Richmondshire, North Yorksire with around 27,000 votes cast is given the same weight as the Leave vote of 57% in County Durham, with around 270,000 votes cast.

This can be overcome by constructing an index of referendum voting weighted by the size of the electorate in each area. This index is constructed so that it is equal to zero where the Leave vote was 50%, negative for areas voting Remain, and positive for areas voting Leave. The magnitude of the index represents the strength of the contribution to the overall result. Plotting this index against the percentage point change in the foreign population produces the following chart. Data point sizes represent the number of votes in each area.

07-chart-leave-weighted

Again, there is no statistically significant relationship between the two variables, but as with the unweighted data, when controlling for the foreign population,  a positive relationship does exist between the increase in foreign-born and Leave votes.

The outliers are different to those seen in the unweighted voting data, however – particularly in areas with a strong leave vote. This can be seen more clearly by removing the two areas with the strongest Remain votes: London and Scotland. The data for the rest of England and Wales only are shown below.08-chart-leave-weighted-nss

There is a clear split between the strong Leave outliers and the strong Remain outliers. The latter are Bristol, Brighton, Manchester, Liverpool and Cardiff. When weighted by size of vote, The previous outliers for Leave – Eastern areas such as Boston and South Holland – are replaced by towns and cities in the West Midlands and Yorkshire and with the counties of Cornwall and County Durham.

Overall, while there is a relationship between net migration inflows and Leave votes – at least when controlling for the size of the foreign-born population – it is only a small part of the story. The most compelling discussions I’ve seen of the underlying causes of the Leave vote are those which emphasise the rise in precarity and the loss of social cohesion and identity in the lives of working people, such as John Lanchester’s piece in the London Review of Books (despite the errors), the excellent follow-up piece by blogger Flip-Chart Rick, and this piece by Tony Hockley. As Geoff Tily argues, the geographical distribution of votes strongly suggests economic dissatisfaction was a key driver of the Leave vote, which pitted ‘cosmopolitan cities’ against the rest of the country. This is compatible with the pattern shown above, where the strongest Leave votes are concentrated in ex-industrial areas and the strongest Remain votes in the ‘cosmopolitan cities’.

The chart below shows the weighted Leave vote plotted against median gross weekly pay.09-wages

Scotland as a whole is once again the outlier, while much of the relationship appears to be driven by London, where wages are higher and the majority voted Remain. Removing these two regions gives the following graph.

10-wages

Aside from the outlier Remain cities, there is a negative relationship between median pay and weighted Leave votes. The statistical strength of this relationship is relatively weak, however.

Putting all the variables together produces the following regression result:

Coefficients:
 Estimate Std. Error t value Pr(>|t|) 
(Intercept) 80.98722 12.18838 6.645 1.12e-10 ***
FB.PP.Incr 2.46269 0.57072 4.315 2.06e-05 ***
FB.Pop.Pct -1.61904 0.21781 -7.433 7.72e-13 ***
Median.Wage -0.12539 0.02404 -5.216 3.08e-07 ***
---
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 29 on 362 degrees of freedom
Multiple R-squared: 0.2977, Adjusted R-squared: 0.2919 
F-statistic: 51.15 on 3 and 362 DF, p-value: < 2.2e-16

Leave votes are negatively associated with the size of the foreign-born population and with the median wage, and positively associated with increases in the foreign-born. The R^2 value of 0.3 suggests this model has some predictive power, but could certainly be improved.

Coefficients:
 Estimate Std. Error t value Pr(>|t|) 
(Intercept) 107.61139 13.30665 8.087 9.97e-15 ***
FB.PP.Incr 2.92817 0.49930 5.865 1.04e-08 ***
FB.Pop.Pct -2.34394 0.27140 -8.636 < 2e-16 ***
Median.Wage -0.14360 0.02313 -6.210 1.50e-09 ***
RegionEast Midlands -9.07601 5.44978 -1.665 0.09672 . 
RegionLondon 9.44698 8.34896 1.132 0.25861 
RegionNorth East -4.11112 8.02869 -0.512 0.60893 
RegionNorth West -16.69448 5.51048 -3.030 0.00263 ** 
RegionScotland -61.65217 5.76312 -10.698 < 2e-16 ***
RegionSouth East -4.60717 4.64123 -0.993 0.32156 
RegionSouth West -18.73821 5.55187 -3.375 0.00082 ***
RegionWales -27.65673 6.53577 -4.232 2.96e-05 ***
RegionWest Midlands 4.06613 5.83469 0.697 0.48633 
RegionYorkshire and The Humber 4.72398 6.61676 0.714 0.47574 
---
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 24 on 352 degrees of freedom
Multiple R-squared: 0.5323, Adjusted R-squared: 0.515 
F-statistic: 30.82 on 13 and 352 DF, p-value: < 2.2e-16


Adding regional dummy variables improves the fit of the model substantially – increasing the value of R^2 to around 0.5. This suggests – unsurprisingly – there are differences between regions which are not captured in the three variables included here.