Brexit

[James Hannam]

Here's a little article I wrote for a UK website on why the Remain side was not a complete shower and did as well as they might expect. They lost because of high turnout, meaning lots of leavers voted who no one expected to.

brexitcentral.com/james-hannam-remain-campaigners-accept-gave-referendum-best-shot-well-run-leave-close/

Leaving Brexit to one side, I'm generally interested in the question of how important the ability to make predictions is. In my view, it is the best test of whether a theory is true. Predictions, in Popperian terms, allow for the falsification of the theory. The history of science contains vast numbers of examples of bad ideas lasting for centuries because no one sought to test them.

Now I don't know whether the Keynesians or the Austrians or unorthodox economists are right or wrong. I'm pretty sure the Marxists are wrong but only because we have so many demonstrable failures of socialism. Even so, surprising numbers of Marxist economists still exist. Here's one who is well-regarded in the UK: stumblingandmumbling.typepad.com/

In my wife's profession of social work, she has to sit through lectures on sub-Freudian claptrap called attachment theory. This is proof, if needed, that an entire profession can still be captured by a completely false theory as long as it is dressed up in scientific clothes, has allies in universities, is politically convenient and avoids falsification. Ethical considerations do provide a useful excuse to dodge the last of these. Is Austrian economics like this? Is Keynesianism? The very fact that we are still arguing about two theories that owe their genesis to the 1930s is deeply worrying. It reminds me of the way medicine in antiquity became an argument between schools of thought, every one one of which was completely wrong. We need predictions and falsification to get us out of these ruts. Attachment theory does not admit falsification or prediction so it lingers.

The point that economics should be asking these hard questions about itself is made well by Philip Tetlock in Superforecasters. The problem is not that the predictions made before, during and after the financial crisis were wrong. The problem is that economists are still arguing about which predictions were predictions, what they meant and only then whether they were correct. And at the end of all this, there is no consensus on anything.

So in my view, if (for whatever reason) we can't make macro-economic predictions, we can't know which theories are wrong (my guess is all of them because correct theories generally only appear after people start testing predictions). That makes macro-economics essentially useless.

Best wishes

James

[jonkon]

Regarding economics, I am not convinced that facts and reason stand up to politics. Marxism was refuted by Eugen von Bohm-Bawerk (1884), while Keynesianism was refuted by Henry Hazlitt (1959). In addition, we have the empirical failures of Marxism in the consistent failure of Marxist societies, and the failures of Keynesianism to alleviate the Great Depression (solved by WWII eliminating surplus labor) and the Great Recession of 2008 (obfuscated by continuously redefining "unemployed" by dropping people out of the work force). Keynesianism was created (1933) to justify the social program of FDR's New Deal, and its continued popularity comes from its pandering to politicians' desire to "do something."

[ignorantianescia]

As much as I gladly offer a non-expert's defence of macroeconomics, I think the exercise is moot. Beside the fact that there are clear limits to my understanding of the field, my more recent reading, such as this LSE paper, strongly suggests to my mind that the estimated effects mostly arise from differences in trade and FDI, which means that the results for the greater part derive from the separate subdiscipline of trade economics. So there isn't all that much for any politics to influence. But I may try to clarify a few small things.

Oct 17, 2016 15:46:13 GMT James Hannam said:

Now I don't know whether the Keynesians or the Austrians or unorthodox economists are right or wrong. I'm pretty sure the Marxists are wrong but only because we have so many demonstrable failures of socialism. Even so, surprising numbers of Marxist economists still exist. Here's one who is well-regarded in the UK: stumblingandmumbling.typepad.com/

In my wife's profession of social work, she has to sit through lectures on sub-Freudian claptrap called attachment theory. This is proof, if needed, that an entire profession can still be captured by a completely false theory as long as it is dressed up in scientific clothes, has allies in universities, is politically convenient and avoids falsification. Ethical considerations do provide a useful excuse to dodge the last of these. Is Austrian economics like this? Is Keynesianism? The very fact that we are still arguing about two theories that owe their genesis to the 1930s is deeply worrying. It reminds me of the way medicine in antiquity became an argument between schools of thought, every one one of which was completely wrong. We need predictions and falsification to get us out of these ruts. Attachment theory does not admit falsification or prediction so it lingers.

I know some of the central claims of attachment theory, but I lack the knowledge to tell whether it really is scientific or not. So I'll accept your description just as a paradigmatic (or 'archetypal', to use a sub-Freudian term) diagnosis for a flawed (sub)discipline, but suspend judgement on whether it applies.

I'd say that 'Keynesianism' isn't really the mainstream any more, but that New Keynesianism is. This tradition arose in the 70s as a synthesis of Keynesianism and New Classicalism and defined the mainstream around 1990. So it combines rational expectation and the long-run neutrality of money with traditional Keynesian ideas like sticky prices and wages. Besides, some of the most prominent New Keynesian economists like Mankiw and (John) Taylor are Republicans, so it doesn't seem like a politically narrow development.

My impression is that the Austrian School is generally hostile to empirical approaches in macroeconomics. But I don't know much about the particulars and whether these prevent them from meaningful participation in the consensus. If so, worse for them, if not, more power to them; if it is basically an element in the mainstream that prefers a smaller state, fine with me. That's not my political direction, but I don't think it's beyond the pale. So I don't have strong opinions on Austrian economics. I am in any case less interested in the specific political preferences of any kind of economist, unless these explain stark divergences from the mainstream, than the implications the consensus view.

Oct 17, 2016 15:46:13 GMT James Hannam said:

Leaving Brexit to one side, I'm generally interested in the question of how important the ability to make predictions is. In my view, it is the best test of whether a theory is true. Predictions, in Popperian terms, allow for the falsification of the theory. The history of science contains vast numbers of examples of bad ideas lasting for centuries because no one sought to test them.

Oct 17, 2016 15:46:13 GMT James Hannam said:

The point that economics should be asking these hard questions about itself is made well by Philip Tetlock in Superforecasters. The problem is not that the predictions made before, during and after the financial crisis were wrong. The problem is that economists are still arguing about which predictions were predictions, what they meant and only then whether they were correct. And at the end of all this, there is no consensus on anything.

So in my view, if (for whatever reason) we can't make macro-economic predictions, we can't know which theories are wrong (my guess is all of them because correct theories generally only appear after people start testing predictions). That makes macro-economics essentially useless.

Well, as I said, I think the ability to predict in science is quite limited in several fields. I don't think I have much to add.

Though I do wonder how you view predictability for history.

Oct 18, 2016 21:36:02 GMT jonkon said:

Regarding economics, I am not convinced that facts and reason stand up to politics. Marxism was refuted by Eugen von Bohm-Bawerk (1884), while Keynesianism was refuted by Henry Hazlitt (1959). In addition, we have the empirical failures of Marxism in the consistent failure of Marxist societies, and the failures of Keynesianism to alleviate the Great Depression (solved by WWII eliminating surplus labor) and the Great Recession of 2008 (obfuscated by continuously redefining "unemployed" by dropping people out of the work force). Keynesianism was created (1933) to justify the social program of FDR's New Deal, and its continued popularity comes from its pandering to politicians' desire to "do something."

Well, 'Keynesianism' isn't really the mainstream any more, but it has never been refuted. It was just ignored/dropped in the mainstream under the influence of neoclassicals in the late seventies and after that simply transformed into New Keynesianism, which became the new mainstream for good reasons. Contrary to your claims, whose justification eludes me, New Keynesianism contributes a lot to the understanding of and any solutions to both the Great Depression and the Great Recession. It was the policy shift to austerity in most countries in 2010 that stalled this recovery. (After all, the world spent its way out of the Great Depression.)

I'm certainly no expert on macroeconomics myself, though I could point to some data to explain why New Keynesianism works on these subjects you raise. However, I don't think a topic about a very specific subject is the best place to get to the meat of this.

[James Hannam]

Alas, I think you have only deepened my scepticism.

One point to pick up, in the UK we did not try austerity, whatever you might read in the papers. We have had a huge budget deficit since the financial crisis. It has just been reduced from astronomical to just very large. You could argue that the EU has enforced austerity, but that was a function of the wrongheaded euro project.

Ultimately, to the first approximation, all macroeconomics is bunkum and it is likely to remain that way for the time being.

Best wishes

James

[ignorantianescia]

James,

Austerity is generally taken to mean fiscal consolidation (lowered spending and/or raised taxes) in the context of an economic downturn. So the presence of a deficit doesn't have to mean that there is/was no austerity - in fact the mere statement that there is a deficit say verys little about a country's finances because what matters is the size of the deficit in relation to inflation (if it's lower than inflation, government debt will decrease). The extreme case of austerity, Greece, in 2013-2015 still had budget deficits but also had insane primary budget surpluses.

[ignorantianescia]

Some of the same basic points have been made by an academic economist roughly a month ago:

theconversation.com/brexit-100-days-on-and-wheres-the-economic-armageddon-66300

[James Hannam]

Oct 28, 2016 14:37:02 GMT ignorantianescia said:

Some of the same basic points have been made by an academic economist roughly a month ago:

theconversation.com/brexit-100-days-on-and-wheres-the-economic-armageddon-66300

The bad thing about this article is that it denies forecasts were made about the immediate aftermath of the vote. They were, as we have discussed, and they were wrong.

However, helpfully, it also makes a forecast itself. It says after Brexit the UK will grow more slowly than Germany, the Netherlands and France. No time frame is given so the forecast provides wiggle room but it is better than nothing. So, down the line, we'll be able to test that prediction against reality year by year. Currently the UK has a 10 year trend rate of 1.4%, higher than France and The Netherlands and equal to Germany.

So shall we make the forecast precise? In the first two years after formal Brexit the U.K. Growth rate will be lower than at least one of France, Germany and the Netherlands as reported by Eurostat here: ec.europa.eu/eurostat/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=tec00115&language=en

Best wishes

James

[ignorantianescia]

Hello James,

There are a few drawbacks to a method like that, but that does sound like the best method for a direct observation. Maybe a range from 2020 until 2030 is better, but a snapshot 2 years after finalisation is fine with me.

[ignorantianescia]

A notable development last week was that May has confirmed the government intends to also leave the Single Market and the European Customs Union. This is the scenario modelled to cause a 6% or 7% loss of GDP c.p. by 2030. Academic economists are overwhelmingly negative about the decision, though none prophesy imminent disaster (counter to some press narratives):

www.independent.co.uk/news/business/news/economic-experts-react-to-theresa-may-brexit-speech-a7531391.html

[ignorantianescia]

Today Article 50 has been invoked by the cabinet, initiating the 2-year negotiation period.

This is a good occasion for reading a blog post discussing a paper that contests the received wisdom, arguing that less economic integration with the EU will on average hurt Leave-voting areas more.

[sandwiches]

ignorantianescia

I tend to agree. One might as well have asked people to vote on the likelihood of dark matter as on EU membership. I think membership was beneficial. At least the regions got some investment from the EU, which they never got from London. Ironically, Wales and the North-East of England, which benefited so much from EU membership, voted most heavily to leave. The referendum was a ridiculous gamble by shallow, wealthy, London politicians who will be insulated from the consequences of their actions. The likely results for most are impoverishment, lack of any say in rules which we will still have to abide by, and the break-up of the UK.
The EU is partly to blame. It is not a democratic institution and lacks accountability and transparency (I say that with regret - I teach EU law). Freedom of movement of labour is one thing. Freedom of movement of anyone for any reason between countries and massive immigration into an overcrowded UK is another thing as is a failure of a budding EU superstate to protect its own borders.
My one hope is that as the realisation sinks in over the coming months of the reality of Brexit, the demand for a second referendum will become irresistible. (Scotland - or at least the SNP - is already demanding a second independence referendum after a 'once in a lifetime vote').

[ignorantianescia]

Yes, I agree about democratic unaccountability (mainly EC and the Councils, as well as the Eurogroup which isn't a formal organ) and nontransparency (EC and Eurogroup). I don't think it will be solved soon because the centre (EPP, S&D and ALDE) are overall too scared for change and further democratisation isn't in the interest of national governments and Eurosceptics (especially East-European ones). On the other hand it must be said that democratic representation in the EP is a lot better than in many member states, even while it's quite degressive in order to benefit small member states. But that doesn't help much if the EP can't dismiss Commissioners.

I disagree about free movement of labour (it would worsen inequality between people with income from labour and people with income from capital, nor does the UK have a disproportional number of foreign EU-born inhabitants) and the lack of border protection (border controls have been mostly effective; border militarisation (e.g. Frontex) is a waste of human lives, money and time and an unnecessary indirect subsidy for people smugglers; making legal routes more attractive and improving repatriation of overstayers is a better policy) being serious problems (see also this). I think that the UK media landscape, in particular the tabloids, explains much of why the British public see these as a major issues, though, despite the fact that the UK had very few Syrian or Eritrean asylum seekers. A huge EU error that did increase internal migration was the enforcement of the most extreme austerity in Europe.

[evangelion]

Apr 2, 2017 9:37:06 GMT ignorantianescia said:

Yes, I agree about democratic unaccountability (mainly EC and the Councils, as well as the Eurogroup which isn't a formal organ)

Surely there's plenty of democratic accountability? Each member state is represented its own elected MEPs; each member state nominates its own Commissioner; each member state can negotiate the appointment of its own Commissioner and the Commissioners of other member states.

[James Hannam]

Luckily for us Brits, all the stuff about the democratic deficit and the rest is now SEP (someone else's problem, as Douglas Adams had it). The main issue for us is whether the EU is capable of a sensible negotiation or has become so dysfunctional that we end up leaving without a deal. The signs from the last few EU summits are not great, admittedly, while Cameron's renegotiation last February was handled very badly by all parties (assuming that the EU was not secretly encouraging us to leave).

The UK has now been very clear about what it wants: a fair deal for existing immigrants in and out; free trade; and sovereignty. The first two are in the EU's interests, and the last one will be bought back with a big enough cash payment to allow the EU to claim victory and encourager les autres.

Leaving without a deal would be bad, but not disastrous. Neither the EU nor the UK will raise tariffs against each other (which is illegal under WTO rules in any case) and we'll probably allow EU firms continued access to the London capital markets. We'd also save a packet of cash. I suspect the last of these is why a deal will happen. The EU needs the money.

Sandwiches, I don't recall if you are from the UK, but the second referendum vibe (on the EU, not Scotland) is strictly a minority interest now. It would require a general election during which the winning party promised such a referendum in their manifesto. Neither main party are proposing to do so and there is unlikely to be an election until 2020 when we will have already lost. It is a problem that some people continue to deny the reality that the UK is leaving since they are focused on fantasies and not trying to make the best of it. But it is hardly an insurmountable problem and hoping it all goes to hell in a handcart is not a good look.

Best wishes

James

[ignorantianescia]

Apr 3, 2017 11:38:38 GMT evangelion said:

Apr 2, 2017 9:37:06 GMT ignorantianescia said:

Yes, I agree about democratic unaccountability (mainly EC and the Councils, as well as the Eurogroup which isn't a formal organ)

Surely there's plenty of democratic accountability? Each member state is represented its own elected MEPs; each member state nominates its own Commissioner; each member state can negotiate the appointment of its own Commissioner and the Commissioners of other member states.

I'd say there is a lot of democratic representation due to the EP, but the Commission is only accountable to the EP as a whole - Parliament cannot reject Commissioners individually. And Commissioners have a lot of leeway in their dealings, with often minimal transparency on what exactly happens on their watch. Furthermore, the EP's votes aren't binding on either the EC or the Council of the European Union, but in fact are just the basis of political horse trading with the EC and the Council.