‘The only function of
economic forecasting is to make astrology look respectable’
John Kenneth
Galbraith.
I have been shocked and surprised by the wildly pessimistic forecasts
that have been produced predicting economic meltdown were the UK to leave the
European Union. I have been even more shocked and surprised by
the confidence with which these forecasts have been bandied about.
I wonder how many of you remember the Millennium Bug? This was the glitch that, at the stroke of
Midnight on December 31st 1999 was going to send all our computers
into meltdown and, using the inimitable words of Donald Tusk, mean the end of
Western Civilisation as we know it.
I was working as an investment analyst in the City at the
time, and I spent hours phoning companies and trying to assess which were most
vulnerable to meltdown as their computer systems imploded. Armageddon was
expected on a daily basis. The end of
the world was nigh.
Of course it never happened.
One or two companies had a bit of trouble changing their clocks, but on
the whole life went on as normal. The
whole thing was forgotten within weeks.
We are now faced with the same sort of hysteria with regard
to the possible implications of Brexit.
Those of us who spent most of our careers attempting to forecast the economic
future, whether macro or micro, know that almost all predictions, and in particular the extreme warnings of
catastrophe that are emanating, particularly from the Remain side, will almost
certainly turn out to be wrong.
What we also know is that when things change, the world adjusts
to that change more quickly and with less fuss than people expect. Take the concerns that have been expressed by
the Remainers with regard to sterling weakness for example. Yes, it is likely that the pound will
continue to be weak while uncertainty prevails.
Markets don’t much like uncertainty, but once the outcome of the
referendum is known, the currency is likely to stabilise, and if this is at a
relatively low level this should be good both for our manufacturers and
exporters and also for the stock market which is dominated by so called
‘overseas earners’. Both these factors
will contribute to rather than detract from economic growth.
The other thing we know is that economic models produce
results that are only as good as the models themselves. By all accounts the models being used by the
many ‘experts’ who have been terrifying pensioners and others with fables of
economic collapse are not up to much and suffer from inherent bias.
I am not clever enough to illustrate this in any way
scientifically, although I do confess to producing some fairly 'optimistic' financial models myself in my youth. However, those of you who are interested in the subject should read
a report by David Blake, the award winning Professor at the Cass Business
School. His subject is the reliability of the two Treasury forecasts that claimed we would all be £4300 a year
worse off in the event of Brexit.
The report is called
‘Measurement
without Theory: On the extraordinary abuse of economic models in the EU Referendum
debate’ and subtitled: ‘ grossly exaggerated impact of the
economic consequences of Brexit and no analysis of the risks from remaining in
the EU from the Treasury’s two ‘dodgy dossiers’ The report can be found here
Professor Blake comments:
‘There is doom-mongering on every page of the two reports. It’s no different from the way children are
frightened into doing what their parents want. We are all being treated like
children.
Both the Chancellor of
the Exchequer and the Prime Minister have used the reports to ramp up the
scare-mongering.’
You really should take the time to read this very clear and
interesting report for yourselves. The
Professor makes two very important points in the course of the paper.
Firstly, none of the Treasury economists who produced the
report were brave enough to identify themselves, and secondly, no report was produced
that modelled the implications of staying in the EU. The only focus was on coming out.
I would suggest that it is not difficult to guess why this
might be!