This week a group called Economists for Free Trade published a press release which stated that the UK economy would see a £136 billion boost as a result of Brexit. the report was based on the Liverpool model of Professor Patrick Minford.
We are at the end of what most political journalists call the ‘Silly Season’; the period where parliament is in recess and therefore there are fewer political stories emanating from Westminster (Although given the events of the last eighteen months, we seem to be in a permanent political silly season). As a result the Economists for Free Trade publicity got a lot of column inches including being the lead article on the BBC website.
There was only one problem with this. The press release gave few details of how the £136bn boost was calculated and it was soon rubbished by virtually every economics institute in the UK including the London School of Economics.
Economists for Free Trade is a group of 16 individuals i.e. Professor Minford’s pals, and they have previous.
The group pretty much matches Economists for Brexit which was active during the EU referendum of 2016. It was that group, and Professor Minford particularly, who proposed that the UK economy should abandon manufacturing post-Brexit and stick to financial and other services. So in Professor Minford’s world, there is no such thing as a British car industry.
But there is a lot wrong with Professor Minford’s model. He is clearly altering the inputs to give the answers he wants. He suggests a boost to UK GDP of nearly seven percent when virtually every other economist in the UK sees, at best, a fall of GDP of over 2.5%. The 2.5% figure is based on the achievement of a free trade agreement with the EU. The damage to UK GDP with trade based on WTO rules is far worse (Roughly 6% of GDP).
A common joke is that if you asked three economists the same question, you would get three different answers but when it comes to Brexit, the unanimity amongst economics academics is surprisingly uniform. It isn’t a question of whether Brexit will cause damage to the UK economy, it’s a question of how much.
So how does Minford get his 7% economic boost. Well, he proposes that the UK unilaterally abolishes all trade tariffs. This is the economic equivalent of unilateral nuclear disarmament. We’ll get rid of our nuclear weapons and others will follow suit because of our example. Unfortunately the world does not work that way. Unilateral abolition of tariffs will leave UK industries and agriculture defenceless against the dumping of excess production by other nations.
Take as an example steel. China has been over-producing steel for years and dumping it on other nations. Tata in the UK shut two steelworks as a result and all UK steel production was put at risk. The EU took action to stop the Chinese dumping steel by raising tariffs and non-tariff measures. President Trump is following a policy that the USA does the same.
Most economic models show unilateral tariff abolition having a small effect on GDP, around 0.3%: Nowhere near the 9% needed to close the gap between Minford’s model and the consensus.
So where does the rest of Minford’s boost come from?
The answer is to turn back time and return to the employment and industrial law of the Victorians. Minford wants to abolish the minimum wage; to get rid of health and safety law; to get rid of consumer protection and product safety law; to abolish maternity pay and statutory sick pay; and to get rid of employment protections such as unfair dismissal. Such proposals may work in an experimental model but they don’t work in the real world. Many of Minford’s proposals would be seen as politically unacceptable by all but the most zealous right-wing free marketeer.
There is another problem with Professor Minford’s model. It uses economic assumptions which were discredited in the mid-1970s. Chief amongst these assumptions is the idea that when people buy, they always go for the cheapest option. That price is the sole determinant of contract selection. As a marketing professional, I know this to be nonsense.
For decades the science of marketing assumed that when deciding to buy people went through a structured process of decision-making. They used the acronym AIDA which stands for Awareness, Interest, Desire, Action, to describe the decision to purchase. First consumers become aware of a company’s products, then they become interested in them, then they desire them and finally, they act to make the purchase.
So consumers recognise they have a need, then they search for information, then they evaluate alternatives, then they purchase and finally, they review their purchase. Ask yourself, do you carry out such a process every time you buy something? I know I don’t, for good or bad, I make snap purchases on the spur of the moment. A lot of work has been done to investigate the psychology of such purchases and to get a better understanding of the psychology of such consumer activity.
However, it is fair to say that when consumers make complicated purchase decisions they do use a structured buying process e.g. buying a house or a new car.
For organisations, including governments, there clearly is a structured buying process. It is also that organisational buying and trade decisions are made by a group of individuals not a single person. This means there are a range of factors on which the group will decide beyond price:
- Technical – Reliability, Durability, Performance, Style/looks, ergonomics, delivery, convenience, etc.
- Economic – Price, value for money, running costs, residual value, life-cycle costs, decommissioning costs, etc.
- Social – Status, Convention, Fashion, etc
- Personal – Self-image, Convention, Fashion, Ethics, Emotions.
As consumers we don’t always buy the cheapest option. Organisations and governments certainly don’t.
There is an example of this currently sailing around the coast of the UK. HMS Queen Elizabeth is currently on sea trials. The UK could of decided to have its new aircraft carrier built abroad at a lower cost but it didn’t. Our government decided to stick with its policy of building all Royal Navy ships in the UK.
Price was a consideration but this was superseded by other factors such as job creation, national reputation and national security. This purchase decision completely destroys the ‘always cheapest’ mantra of Professor Minford.
Minford’s model also ignores non-tariff barriers such as customs and import restrictions through things like permits and paperwork. Much of Japan’s electronics industry was developed on a domestic level by having 100% inspection of all electronic product imports. This meant that US and British goods sat in customs warehouses whilst equivalent Japanese products were in the shops.
On another Brexit issue, the Office of Budget responsibility has estimated that leaving the EU will cost the UK government around £15bn a year in revenues. This comes from reduced tax income and increased service costs (e.g. beefing up the border force and HMRC or replicating government services currently undertaken by EU institutions).
Our membership of the EU taking into account the rebate negotiated by Mrs Thatcher is around £14bn. From that, we get about £5 billion back in development and support grants.
So rather than saving the UK money, Brexit will cost the UK between £1bn and £7bn a year. There will definitely be no £350 million a week for the NHS. In fact, government spending may have to fall by about that amount if we do not want to add to the national debt.