Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 5 May 2018

How to spot fraudulent economic arguments: an example from Lexit


When I last talked about Lexit, I said Lexiter arguments had “many structural similarities to right wing arguments for Brexit.” In this post I want to go further and suggest ways you can spot when economic arguments are fraudulent, using an article by Thomas Fazi and William Mitchell advocating Lexit as an example. To show how generic the tactics are, I will demonstrate how exactly the same techniques were used by those who argued for austerity.

The first sign that the wool is being pulled over your eyes is wildly exaggerating your opponents case. It is so much easier to attack a straw man. This particular article talks about the “Left’s anti-Brexit hysteria” i.e anyone who disagrees with us is acting hysterically. They talk about those opposing Brexit predicting “Brexit Armageddon”. The tactic works particularly well if you can find an example of someone who did exaggerate their case, and focus on how their fears have not come to pass.

I am very familiar with this tactic from the UK in 2013. From 2010 to 2012 growth was very low, and the expected recovery from the Great Recession did not materialise. People like myself blamed austerity, and we were quite right to do so. But some in 2012 made the foolish claim that the economy will never start growing again unless austerity came to an end. So when growth returned to trend in 2013, proponents of austerity used those claims to announce the critics were wrong and austerity had been vindicated. The example that Lexiters and Brexiters alike use is of course the Treasury short term post Brexit forecast.

That forecast was not about the longer term impact of Brexit, but uncertainty about the prospect of Brexit. It overestimated the immediate impact of Brexit. But the real question is not whether forecasts were wrong, but whether the Brexit announcement and subsequent uncertainty has damaged the UK economy. The article says the economy is still growing, and quotes some other selected statistics, implying all is fine. They do not mention that we have gone from the top to the bottom of the international growth league. Of course they cannot avoid acknowledging that sterling fell sharply on announcement. However they say but this has not destroyed the British economy: another straw man (who ever seriously said the depreciation would destroy the economy?!), and no mention of what the depreciation did do, which is cut the real incomes of workers. The debate over whether Brexit uncertainty has harmed the economy is over, as no one seriously thinks it has not. 

A second sign of a fraudulent argument is to focus on a single study that supports what you want to say, and ignore all the rest. The Brexiters have Minford of course, but Lexit have the study by Coutts, Gudgin and Buchanan (CGB) published by the Centre for Business Research (CBR) at Cambridge. Those advocating austerity had two well known papers: one suggested there was empirical evidence that high government debt reduced growth, and the other that austerity was expansionary. In all these cases the studies are outliers, so you need some reason why the majority of academic work can be discredited.

This leads to a third tactic: tar academic work that goes against what you say with some broad assertions that have only a grain of truth. If your audience has a political bias, play to it. With austerity it was that those against austerity were old fashioned Keynesians who just wanted a larger state. (Some were, but most were just using a much more modern Keynesian framework and its macroeconomics implications.) The way this paper does the same with the many studies that have suggested Brexit will be harmful in the longer term is so laughable I have to quote it:
“The neoliberal biases built into these models include the assertion that markets are self-regulating and capable of delivering optimal outcomes so long as they are unhindered by government intervention; that “free trade” is unambiguously positive; that governments are financially constrained; that supply-side factors are much more important than demand-side ones; and that individuals base their decision on “rational expectations” about economic variables, among others. Many of the key assumptions used to construct these exercises bear no relation to reality.”

It will be news to most trade economists whose work is the basis of the long term case against Brexit that they are assuming things like governments being financially constrained and rational expectations. A key part of why Brexit is a bad idea is the gravity equation, which says trade is more likely to take place with neighbouring countries. It is a robust empirical relationship that makes no assumptions about governments or markets at all. [1] The article pours scorn on the ‘neoliberal’ idea that openness to trade is good for the economy, and again neglects to say that the relationship linking openness to productivity growth is also empirical, not theoretical.

Another tactic that if you see being employed you should start to worry is to impugn the motives of your opponents. That may be a common enough tactic in political discourse, but not if you are trying to make a serious economic argument. It is notable how academic economists who have criticised the Brexit work of Minford for example do not try and suggest he is ideologically motivated. Being good academics they instead question the model he uses (e.g. no gravity) and how he uses it. That is what should be done. But this article tries to discredit the current government’s analysis of the impact of Brexit by implying the results have been fiddled to produce large numbers for the long term costs of Brexit. They write:
“The models are notoriously unreliable and easily manipulated to achieve whatever outcome one desires. The British government has refused to release the technical aspects of their modeling, which suggests they do not want independent analysts examining their “black box” assumptions.”

Apparently the current UK government do not want us to see their workings because if we did we could see how they had fiddled results to make Brexit look bad. The attempt in this case is again laughable, because this government is pro-Brexit so any fiddling would go the other way.

All these four signs are easy to spot. The fifth is less obvious to the non-expert, which is to inconsistently use lots of broad brush statistics that do not get the heart of the issue, or which are problematic for other reasons. For example in arguing that Brexit has had as yet little impact on the economy they quote unemployment data, just as the government did from 2013 to argue that the economy was strong as a result of austerity. It is problematic because strong employment growth coupled with weak output growth means poor productivity. As I noted here, current productivity growth performance in the UK is worse than it has been for centuries.

In terms of broad brush statistics, they argue that GDP growth has been weaker rather than stronger than post-war trends as a result of EU membership, as if nothing else had been going on in all these years. The reality is that we joined the EU in part because our post-war growth and particularly productivity was worse than most other countries, and from the 1980s onwards it has if anything been better than other major countries. But why look at GDP rather than exports, where you would expect the impact of EU membership to be clearer. In fact the CGB study they quote from extensively does exactly this, and the following chart shows the results.


The benefits for UK exports of being in the single market are clear from this data. (To see how the CGB study erroneously avoids this conclusion, see here.)

There are of course plenty of Brexit specific points as well (the article does not even mention the Irish border), but this post is long enough already. I wrote it because it struck me when reading the Fazi and Mitchell article how similar its rhetorical devices were to those of many who tried to sell austerity. So if you read anything that wildly exaggerates the opposing position, focuses on a single academic study and ignores the rest, particularly if it suggests that there is some generic problem with these other studies which may include the motives of those who did them, and if it uses broad brush statistics when it could have used data that was more relevant, beware that you may be reading a piece of political persuasion rather than serious analysis.

[1] The confusion is compounded when they quote Paul Romer’s criticism of macroeconomics, and then drop the macro bit to pretend that Romer was talking about the whole of economics.

9 comments:

  1. "A key part of why Brexit is a bad idea is the gravity equation, which says trade is more likely to take place with neighbouring countries. It is a robust empirical relationship that makes no assumptions about governments or markets at all."

    No assumptions? Oh do come on. First off, you may be aware of an initiative to unite European economies behind a common tariff wall and promote intra-bloc trade. Is it possible this initiative by many of the world's biggest countries might have affected the data at all? If not, it seems that the EU is not necessary and pretty much the same results could be achieved through mere market size and proximity. Moreover...

    Everybody knows that the biggest economic success stories since the War are clustered in East Asia. Everybody knows that their development model has been based not on exporting to other members of this cluster but on exporting to the other side of the world. Everybody knows that they did this though a vigorous industrial strategy.

    Everybody knows that if Britain goes onto WTO terms its EU exports will go from zero tariff to trivial tariff, and from automatic acceptance to acceptance after mere formalities because they meet the spec. Everybody knows that on WTO rules we would be free to pursue an East Asia style industrial strategy from one of the world's most strategically-placed patches of turf....

    Well, apart from economists of course. They just go 'ooh, trade barriers going up, bad! The only possible way to compensate would be for trade barriers elsewhere to fall. Ooh, insufficient! Insufficient!'

    A word to the wise, Simon: reliance on gravity models in public debates just undermines your case. For a generation the public has been subjected to pundits going 'The world is flat! Containers! Internet! Your boss could just snap his fingers and relocate your job to absolutely anywhere in the world... So suck it up, poor boy!' Now, as soon as the Poor Boys rebelled against this vision, economists go 'we subsist in an iron cage of geographical determinism... You can't just click your fingers and rearrange trading patterns anywhere in the world you know haha... haha. We need to stay in the Single Market. So suck it up, poor boy!' Do you seriously believe anyone thinks this spectacular reverse-ferret is due to some sudden collective realisation about the nature of free will or determinism? Do you Simon? Do you?

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  2. Alexander Harvey5 May 2018 at 05:49

    Outcomes are, at least hopefully, impacted by predictions.

    If things look grim take actions that should compensate.

    A better prediction might have the form of:

    This will happen unless the following events occur and give some estimate of the likely strength of their effectiveness.

    As I recall the negative predictions were taken seriously and the BoE reacted quickly.

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  3. It really would help those new to the word if you defined Lexit!

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  4. Nicely said, the use of such debating tactics are hardly the preserve of right wing commentators, and I'm not surprised to see it being used here.

    As a side note, I wish the gravity equation was more well known by non-economists, indeed, given the abysmal state of criticisms towards economics as a whole, as per your previous posts, it would serve as a great rebuttal to some of the most tiresome and elementary points presented as great insights into economics...

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  5. Excellent work. I was very disappointed in the Mitchell/Fazi piece because while I don't support Lexit it does nothing for our discussion of various tradeoffs when the case for it is made so badly.

    One extra point: Whether or not you consider the evidence for the benefits of an open economy to be compelling, I find it very misleading that the piece says nothing about the short/medium term costs of withdrawal from an open situation.

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  6. Part 1
    .
    The first claim made here is that the Brexit/ Lexit side are wrong to highlight the failures of the expert forecasts of a sharply negative short term economic impact of the Brexit decision. We are told that the leaver’s political motivation has led them to create & dispose of straw men rather than tackling the real economic argument against Brexit. What should matter is not that these expert forecasts of negative short term contraction were so wrong but that the long term forecasts are going to be so right.
    .
    Of course the straw men in question included the Chancellor of the Exchequer, the Governor of the bank of England, the massed ranks of the CBI, the Managing Director of the IMF, the Secretary General of the OECD and the President of the United States - very important and influential people are not straw men. From a Lexit point of view the TUC and the labour party made the same claims.
    .
    These high level interventions were explicitly targeted at influencing British public opinion to support remain in the referendum vote. These were therefore politically motivated interventions masquerading as economic analysis and even at the time the (broadly pro remain) economic commentator Paul Krugman stated that the short term forecasts had no sound academic foundation and described the economic experts who participated in this campaign as engaging in intellectual slumming. He also forecast that these economic experts would bitterly regret squandering their academic credibility to so overtly push a political agenda.
    .
    And what a howler it has been! Tim Congdon points out that the gap between the Treasury forecast of GDP performance in the first two years post the Brexit vote and the actual outturn was nearly 5%! That is an error of enormous magnitude (£100 billion in additional GDP growth above the Treasury forecast – in just two years!). Bear in mind that this Treasury forecast was made by experts whose core function is to make credible economic forecasts of the UK economy.
    .
    So the flattering illusion of a politically disinterested vanguard of economic expert’s dispassionately weighing evidence to assess and to forecast has suffered a brutal encounter with economic and political reality. Of course Brexiters/ Lexiters are going to keep highlighting this conspicuous failure.
    .
    Nor has this very public failure been an anomaly. The same institutions (and many of the same individuals) made similarly inaccurate forecasts of the negative short and long term effects of the UK's decision to stay out of the EU's single currency project. Only a tiny remnant of those same economic institutions/ experts would make the case for joining the euro now. Their forecasted economic certainties of the ‘90’s have long since dissolved in the face of subsequent economic realities.
    .
    So it turns out that expert opinion is more often the product of political motives than the experts would like us to think. Which is why the prof. is right about one thing - Brexiter/ Lexiter opinion has certainly hardened against experts as a class. They are increasingly of the view that on EU issues British academia/ intelligentsia is the victim of politically motivated groupthink. Some even go so far as to claim that the expert class has been bought and its pro EU advocacy is no more than special pleading on behalf of its EU paymasters.
    .
    No doubt experts find it objectionable to be called out in this way but if they think they can describe arguments they disagree with as deliberately dishonest (fraudulent) then only a grievously misplaced sense of entitlement can have persuaded them that they can climb back on their academic high horses when their own motivations and integrity are challenged. "Do you know who I am" is not an argument.

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  7. Part 2
    .
    Finally on the experts issue. The prof often presents the expert “consensus” on Brexit as being both indivisible and absolute – a latter day revival of “the Treasury view”. On the face of it this is unlikely. The occurrence of so regimented a body of economic opinion is simply unheard of. The more so when a single cause (Brexit) is abstracted from a sea of disparate economic conditions and powerful but unrelated economic forces and predicted to have so very precise an effect on UK growth rates from now to 15 years hence (two decimal places!). Of course the totality of heavyweight economic opinion cannot be shoehorned into these narrow partisan claims. Paul Krugman & Lord King repudiated the Treasury’s short term forecast and although they felt that in the long term Brexit would be a drag on UK growth they were very sceptical of the size of the forecasted contraction of GDP growth made in the Treasury’s long term forecast. Patrick Minford, Bernard Connolly, Ashoka Mody, Roger Bootle and Tim Congdon repudiated the Treasury claims entirely and more generally it is difficult to reconcile Jagdish Bhagwat powerful contributions to trade theory as providing any intellectual underpinning to this narrow expert consensus on Brexit.
    .
    So to the Economics. The substantive economic argument is indicated in the prof’s following statement "A key part of why Brexit is a bad idea is the gravity equation, which says trade is more likely to take place with neighbouring countries. It is a robust empirical relationship.."
    .
    The "robustness" of the gravity equation is observably diminishing in a world in which technology and containerisation are (in Jagdish Bhagwati’s words) making geography history.
    .
    Bhagwati also points out that the EU creates conditions in which trade is diverted. UK Trade goes to and from the EU which could be easily replicated and even enlarged with non EU partners if the EU's tariff and non tariff barriers ceased to apply.
    .
    The Minford critique applies the Bhagwati critique to the Treasury model & focuses on the assumption made by the treasury that there would be no increase whatsoever in non EU trade to counterbalance any reductions in EU trade.
    .

    This despite the fact that the UK's non EU trade was already growing faster than its EU trade prior to the referendum. Despite gravity (and pre the Brexit vote) the UK already trades more with the non EU than it does with the EU and that trend is strengthening not weakening. Oxford economics made a forecast that by 2030 and even in the absence of Brexit, the EU's share of UK exports would have fallen to the level predicted by the Treasury as a result of Brexit. Neither gravity nor Brexit are necessarily the drivers of UK trade that the Treasury claimed they are – an analysis implicitly endorsed by Jim O’Neill (former economic advisor to the Treasury) who recently said that the impact of Brexit would be marginal and that the UK’s future economic performance would likely be more profoundly affected by other factors (global & domestic).
    .
    Then there is the problem of the Treasury's gravity model itself. All the Economists who believe that Brexit will inflict serious harm to the UK's GDP do so on the basis of their belief in the validity and rigour of treasury model.
    .
    The Treasury estimate is that GDP would be 7.5% lower in 2030 under WTO rules than if the UK had remained within the EU, and 6.2% lower with a free-trade agreement. As the prof. points out this drop in GDP is the outcome of a forecasted fall off in trade (the gravity formula) and a powerful knock on impact this trade loss is assumed to have on domestic productivity – lower trade = lower productivity = lower growth.

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  8. Part 3
    .
    On the gravity formula:
    .
    The think tank Policy Exchange made a thorough assessment of the Treasury model in 2017 and have produced a gravity model of their own which presents markedly different results.
    .
    Firstly they point out that the Treasury assessed the importance of EU trade to an average EU economy. They did not assess the importance of EU trade to the UK economy which (as demonstrated above) differs markedly from the average EU economy.
    .
    Secondly they point out that the Treasury model included many small emerging markets in their global model with whom the UK's trade levels were effectively non existent but whose presence in the Treasury model served to inflate the gravitational importance of the EU and therefore to distort the Treasury’s gravity formula. The Policy Exchange limited their model to just 60 countries who in combination made up 100% of the UK's total trade (all 27 members of the EU were included in this sample).
    .
    They made the adjustments to the treasury gravity model and ran the numbers and came up with this conclusion:
    .
    " Using our more Keynesian model, based on past trends and relationships, suggests only a minor loss to GDP by 2030 with much of this due to reduced post-Brexit migration flows. Per capita GDP is predicted to be higher by 2030 as a result of Brexit, as lower rates of GDP growth are distributed amongst a population that (because of tighter immigration controls) grows much more slowly than is currently the case. The important factors in reaching this assessment are the lower exchange rate, and the assumption that interest rates will be lower than would otherwise have been the case. Austerity in public spending will also be tempered as a result of Brexit."
    .
    As for productivity:
    .
    Ashoka Mody repudiated the productivity linkage made in the Treasury model. For developing economies it is true that the stimulus to productivity from increased trade is strong but the trade effect on productivity is very weak in advanced open economies with high levels of economic differentiation and sophistication (the UK). Since the forecasted fall in productivity provides the lion’s share of the Treasury’s forecasted fall in GDP this expert critique is substantive.
    .
    The Treasury's gravity model was built on priors designed to supply the political answer that George Osborne needed to fight for remain. We now know that the short term forecasts of GDP falls were wrong and that the long term forecasts are based on flawed gravity models and erroneous applications of the trade/ productivity linkage.
    .
    Project fear has always been, and still continues to be, a long con.
    .
    Footnote: The prof. produced a graph which he claimed demonstrated that the lexiters didn't understand their sources. This gotcha comes in the form of a graph that charts the rising importance to the importing EU partners of the UK's exports. Obviously an increase in the % of the importers GDP taken up by UK imports is not the same thing as saying that UK exports to the EU are contributing more to UK GDP. They are not. The Lexiters are not unreasonably more interested in the share of UK GDP provided by British exports to these EU partners. They will note that if UK imports absorb an increasing share of EU partners GDP despite the EU taking a dimminishing share of total UK exports that a degree of market saturation may well have set in - especially in contrast to the growing opportunities in the non EU markets.

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    Replies
    1. I agree the Treasury forecasts were from the start, highly suspect. But I doubt these alternative forecasts have any claim to being more correct. Also note that both Minford and Bhagwati are highly ideological (Bhagwati was a big pusher of hyper-globalisation, of which we are now seeing the alarming political fall out). These people have an agenda just like Osborne and Carney did.

      The biggest problem for Britain is really on the political side. It will lose influence over decisions made on the Continent. A stronger Franco-German alliance, a two speed Europe built around the Eurozone and a weakening of the NATO alliance could see an independent European foreign and defence policy emerge - of which Britain or the US will not be able to be a part of or shape. That might not seem a problem now, but we do not know what type of political parties will gain power in Europe in the future (who 10 years ago would have predicted Trump). Go to your international relations department at any university; they will tell you that multipolar geopolitical structures are fundamentally unstable. There are good reasons you want to see NATO remain.

      These are the sort of things that cannot be modelled, not to mention any other type of uncertainty.

      NK.

      Delete

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