Monday, April 18, 2016

The Treasury document: BBC Dumbing down, fair and unfair criticisms

The Treasury has put out a document today which argues that Britain might be significantly worse off by 2030 if the country votes to leave the European Union.

You can read it for yourself at

 https://www.gov.uk/government/publications/hm-treasury-analysis-the-long-term-economic-impact-of-eu-membership-and-the-alternatives

There has been a storm of criticism of this document from many quarters, of which in my opinion two are justified, a few more are arguable, some are incompatible with each other, some are rubbish, and the BBC's dumbed down presentation by Robert Peston was an absolute disgrace.

Let's start with what I think are the two justified criticisms of the Treasury paper

1) They should have explained much more clearly and simply what the numbers quoted actually are and what they mean, and

2) There should have been much clearer health warning explaining what the potential error is with this document - and what is NOT subject to error.

The basic point about this document is that the treasury has run their economic model based on assumptions about what sort of trade deal might be available post Brexit given variouis possible strategies and how long those deals would take to negotiate.

They came to the conclusion that growth would be higher in than out, by different amounts depending on which of three exit strategy was followed, and than worked out the difference in national income after fifteen years between the results of the higher and lower growth rates. Then they took the total difference in national income and divided by the number of households to get an estimate of the difference in wealth per household which came out as follows:

The annual difference in GDP per household under the three alternatives after 15 years would be:
  • £2,600 less in the case of EEA membership than full EU membership
  • £4,300 less in the case of a negotiated bilateral agreement
  • £5,200 less in the case of WTO membership
Now I don't think there is anything dishonest about this approach although I think they have significantly overstated the cost under EEA membership and possibly a negotiated bilateral agreement depending on what it said.

But I do think they should have explained more clearly that

1) As Fraser Nelson points out in the Spectator here we are talking about a differential growth rate, and these numbers suggest that Britain would become richer at a faster rate inside the EU than outside, not that Britain will be permanently poorer outside the EU

2) Fraser is also quite correct to point out that these figures show the difference between the country's total income divided by households, which is a figure of some interest but will not translate neatly and directly into the salaries or wages and other incomes of actual real households. It will affect it, but it's not a one for one relationship.

Incidentally, I don't endorse Fraser's accusation that the Treasury was being deliberately dishonest, but I do think the Treasury and the Chancellor should have explained this more clearly.

3) They should also have made clear that there is a huge potential error in these estimates of growth rates under various scenarios. It should have been stated that this is the sort of difference which leaving the EU might make if these growth projections are right, not what will definitely happen.

It is even possible that growth rates might settle at a higher level outside the EU if "Flexcit" works and we get a good trade deal. The treasury were entitled to express an opinion but as their past record shows there is not certainty that they are right.

However, it was a legitimate point to make that if those growth forecasts ARE anywhere near correct, and more precisely if the differentials between them are anywhere near right, then there WILL be a big difference in national wealth fifteen years out.

Those were the fair criticisms. But my word there were also some very silly ones.

I) The first and most obvious point is that the Brexit camp managed to attack the Treasury document on to diametrically opposite and contradictory grounds at once. Within a couple of hours of publication of the document I had the following contradictory attacks on it in my twitter feed from various Brexit supporters

a) it was a "back of an envelope, simplistic approach" as in this image from a usually sensible MP



b) taking the lead from Robert Peston's deplorable dumbed down attack on the BBC, that the calculation was far too complex and only relatives of Einstein could understand it, as indicated by this picture of some of the equations the Treasury had used ..


















Our Leave friends cannot have it both ways - they can accuse the Treasury of doing an overly simplistic analysis on the back of an envelope, or an overly complex analysis which nobody could understand, but making both at once didn't make them look clever.

II) Another invalid criticism was to point out that economic forecasters often have difficulty getting it precisely right a year or two ahead, and ask why is it worth looking out to 2030?

There are two perfectly good answers to that question. The first is that organisations like the Treasury, Bank of England and IMF have better track records in predicting overall trends in growth than individual years - it's much easier in economic forecasting to identify and project forward the medium to long term trends and what is driving them than to know in exactly which year the next recession will hit.

More importantly, IF the treasury is right that leaving the EU is going to alter the growth rate in the medium term and not just cause a short term shock, you have to go a decade out at least to give some idea of the sort of impact this will have.

III) Dumbing Down

I was really disappointed to see Robert Peston on the BBC, a body which is supposed to have a Reithian mission to educate. waving extracts from the Treasury's equations about as if to suggest that because it is complex most people have no chance of understanding it or, worse, that it must somehow be worthy of ridicule.

You could play that sort of trick to ridicule any complex piece of analysis in any discipline. And it would be equally wrong and disgraceful in any.

Complex problems do sometimes demand complex analysis and complex solutions. Ridiculing that analysis or those solutions is most unhelpful. 

No comments: