MMT

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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