by Andrew White | December 7, 2018 | Comments Off on Book Review: The Economics of Brexit
Book Review: The Economics of Brexit – A cost-benefit analysis of the UKs economic relationship with the EU, Philip B Whyman and Alina I Petrescu, Palgrave Macmillan, 2017.
You may remember that in the run up to the Brexit vote, multiple organizations forecasted either a UK recession or severely curtailed economic growth. Such organizations included the Bank of England and the IMF; two reputable organizations you associate with fair and neutral analysis. After the vote, and for almost a year, UK growth actually improved and out performed most of Europe’s. It did of course start to dip a year after the vote. How could such reputable, reliable forecasts have been wrong? This book explains why.
In fact this book does the best job I have seen in looking at the economic impacts of Brexit from both sides of the coin, or if you will, a real neutral perspective. You see, the Bank of England and IMF’s forecasts of dire consequences are all built on assumptions. If you read those assumptions (the very small print or footnotes) you will find that they tend not to take account of various and possible actions by that either the UK or EU authorities might take post-Brexit. In other words their forecasts about how trade will decline due to increased tariffs are fine as they go, but they are not a forecast at all.
Such “forecasts” are really simplistic models – a model that does not actually take account of what might happen in terms of response by the UK authorities. Such models do not take account of how firms might react with price changes, or how the exchange rate may change to compensate for costs differences. More interestingly is the analysis of Britain’s economic growth just before and during its membership of the EU. It turns out that it’s long-term economic growth (declining before it joined the EU) has been declining ever since! The EU tends to be a low growth club. Check out the data.
The authors do a really nice job picking apart the small print noted by the IMF, the OECD, and others. I do think that after reading this book, at best, our economic understanding for what really causes growth, inflation, trade imbalances, is still quite lacking and immature. We just don’t know for sure. Why can’t we let the markets’ hand do a good, honest days work? I’d love to read a rebuttal of this books’ findings by an economist with strong ‘stay’ belief. That would be equally a good read. Thoroughly recommended 9 out of 10.
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