Rather a labour of Sisyphus trying to stem this tide of bullshit about the costs of Brexit. All of which is leading us to the punishment of Tantalus of course, not being able to have nice things.
This is one of those things which will be bandied about for months:
Last week an LSE economics professor, Thomas Sampson, said no deal could cost more than the economic shock of Covid, causing a £3.3tn decline in the value of the UK’s output.
Yes, of course it’s bullshit but the necessity is to explain why it’s bullshit. That it comes from the Alma Mater is a useful guide but not quite enough.
The basic logic is reasonable enough. The costs of Covid 19 are largely one off. Those who died were unlikely to have been part of the economy, being too old or ill already. The crash in production and GDP is pretty much a one off. We don’t expect there to be significant scarring of the economy and its productive capacity off into the future. A shitty year and we’re done.
On the other hand the claim is that Brexit is going to scar the economy forever more. So, all that future damage has to be accounted for at its net present value – discount it back to now at market interest rates say – and there’s our number. Brexit is worse than covid.
So, where’s the bullshit?
In present value terms, COVID-19 reduces UK GDP by 2.1%. However, Brexit reduces the present value of GDP by 3.7% under an FTA scenario and 5.7% if there is no deal.
So, what is the no deal model? Their source is:
A modelled no deal scenario is considered as an approximation of the UK’s relationship with
the EU in absence of an agreement. In these conditions, it is assumed that the UK and EU
would trade on non-preferential WTO terms with tariffs set at EU applied Most Favoured Nation
(MFN) rates.30 The Government has analysed how countries trade on non-preferential WTO
terms (both with each other, and the EU), and then has used global trade data on these trading
relationships to estimate potential UK-EU trade costs.
This is a modelling assumption only. The Government would be free to set its own tariff schedule post-EU exit.
Their model of the damages includes the idea that we will charge EU tariffs on all imports into the UK. We’d keep the same tariffs we’ve got on trade with the rest of the world an then also impose those – high – EU tariffs on our imports from the remnant European Union.
Note that they don’t even think we’ll move to WTO maximum allowed tariffs. Instead we’ll have the much higher EU tariffs that protect the zollverein.
Which is a bullshit assumption leading to the bullshit result.
It’s possible to think that Patrick Minford is a little optimistic – I don’t, I think he’s a pessimist – but to give an example of how strongly this LSE result depends upon just this the one assumption. If we leave, with no deal, then go to unilateral free trade. That is, don’t charge WTO tariffs on our own imports, certainly not EU ones, and other people can charge whatever the buggery they like to our exports, this leads to a 3% increase in the size of UK GDP.
The reason being, of course, that it is imports which provide the extra competition to domestic producers which makes them buck up their ideas and processes and become more productive.
So, the LSE result depends upon the idea that post-Brexit the country will choose entirely the worst possible trade option. All the pain, grief and poverty of EU tariffs without actually having the no tariff part of the EU itself. And yes, OK, no one’s particularly covered themselves with glory in recent instances of governance, not by anyone, anywhere, but seriously, they’re not actually insane.
We’re just not going to have a tariff barrier, including to the EU, as high as the current external EU tariff barrier. Which is the assumption being used in the LSE model. Which is also where the bullshit is.