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Tuesday, November 12, 2013

Mind the counterfactual

As we've argued before, whenever anyone makes a claim about the cost or benefits of the EU, look out for the counterfactual - i.e what would be the case if the UK weren't an EU member.

The classical "3 million jobs would be lost if the UK left the EU" claim is one of the most conspicuous examples of a rogue statistic without any credible counterfactual attached to it.

Of course 3 million jobs wouldn't be lost over night if the UK left the EU, because all trade with Europe wouldn't suddenly disappear (even North Korea trades with the rest of the world). But, as we also have argued, Better Off Outers who believe a world of unilateral trade and pareto optimal regulation would ensue on the day after the UK left the EU are also making huge leaps of faith. 

On that note, UKIP’s Tim Congdon takes issue with something we said in a blog last week in his latest group email. When highlighting problems with the CBI’s recent cost-benefit analysis we were a bit loose in our critique of Congdon's study measuring regulatory costs, pointing out similarities with UKIP’s own analysis (right) in terms of the counterfactual.

We argued that Better Off Outers have:
"Mastered the art of measuring EU costs with no reference to a counterfactual (see [Tim Congdon’s How much does the European Union cost Britain?] – for a fine example). To a large extent, the CBI study falls into the same trap."
To be fair to Congdon he has described a counterfactual in his UKIP paper:
"The UK’s departure from the EU would allow us to adopt unilateral free trade, which economists tend to regard as the best policy."
And in his email:
"In my study I estimated the costs of EU regulation and protectionism assuming that the EU would carry on pretty much as it had been doing for the last 20/30 years, and that the UK outside the EU would be lightly-regulated and pro-free trade."
So, he does provide a counterfactual - apologies for saying otherwise. There is still a problem however: it's a completely unrealistic counterfactual. The UK would not turn into to Hong Kong on Day 2. However much one would like to see all the costs of the EU to evaporate and for the UK to adopt unilateral free trade, with corresponding unilateral liberalisation on the EU's part - covering everything from rules of origin for UK-exported cars to "passports" (if you can trade in one country you can trade in all) for UK-based fund managers. Do you really trust Whitehall and Westminster that much? Also, under article 50, the Mediterranean bloc could stop EU trade liberalisation for a very long time. Call us pessimistic but that’s life.

Bringing the point back round to cost benefit studies in general, contrary to what Congdon suggests in his email, we believe determining the counterfactual for the UK outside the EU is actually pretty difficult (see our report 'Trading Places' for a full discussion of this), and providing a quantitative assessment of it is even harder. As the Channel 4 fact check blog highlights, this difficulty has lead to a very wide range of estimates on the costs and benefits of EU membership.

In any case, our wider point still stands, that studies of this type are full of caveats which hamper their effectiveness, no matter how tempting putting a single number on the costs/benefits of EU membership sounds.


jon livesey said...

Reasonable comments from OE, but I think that most people would say that you are better off in the long run in charge of your own affairs and spending, even if it costs you something in the short run.

If you belong to a free trade area, you can participate to the degree you choose.

In the EU, on the other hand, the UK can be outvoted on issues that affect the spending of UK taxpayer money in the UK, as well as in the EU in general.

If I belong to a club, I may like to share the costs of common facilities, but the trouble start when the other members of the club come to my house and start telling me that the furniture I own isn't up to their high standards, and that the cat is eating the wrong kind of cat-food.

And by the way, club dues just went up because we have to fund these visits of inspection.

Anonymous said...

Excellent Synopsis Jon

Rollo said...

All the costs of the EU membership would not disappear in a day; but they would start reducing in a day, and carry on reducing to nothing. We need to unshackle ourselves from the sinking ship of the EU and trade with the real, expanding, world. Ans as soon as possible

Denis Cooper said...

Just to repeat the point: even if was true that EU membership benefits us by 4% - 5% of GDP, which it definitely is not, that would have to be put in the context of the natural growth of the UK economy by a long term trend rate of about 2.5% a year.

In other words, the mess of pottage for which we have sold our birthright is equivalent to less than the natural growth of our economy over just two average years.


No one is claiming that everything would be wonderful from Day One of our departure, and it is a straw man tactic to say that it wont' be. But what matters in most things, whether economics, engineering or anything else, is at least as much the direction of change as the current position

Make no mistake, whatever the numbers turn out to be, however fasr or slow the changes, our economy WILL improve, starting the day we leave.

In any case Digby Jones makes a point of free trade agreement being inevitable within 24 hours of our leaving, as indeed it is.

Please try to remember too that the "3m jobs" scare story from the launch of Britain in Europe was NOT just a mistake or poor analysis - but a deliberate lie.

Rik said...

End of the day the main issue is if at the moment of a possible exit there is a proper functioning freetrade zone with the EU. And no fall out towards other tradepartners (if EU membership is eg a precondition to favourable Customs treatment).

The advanteges of the EU are simply totally in that issue.
The rest of the stuff the EU does probably costs more than it brings.
Better conditions in free trade agreements with third countries (in an EU set up) are very likely more than compensated by delays, silly French demands and alike. UK is likelyy able to react by itself much faster and bespoke.

And still being 'stand alone' 'trade entity' no 5 or 6 in the world so a very interesting party for anyone.

The issue is how to have a proper freetrade zone in place when there would be an exit.
And communicate this properly to players that already make decisions earlier in that respect. Now simply a large part of the businessector thinks that it would be a full exit (incl freetrade zone). Simply from both sides very unlikley to happen. But as said many times earlier the communication in this rspect simply sucks.

UKip will not bring it up that whatever happens likely a freetrade zone will remain. And a rather extended one to make that work (as the EU is already considerably integrated and you simply have to take that into account to make it work).
Simply way to complicated to sell(explain) to large parts of their electorate.

Jack said...

The problem I have with a lot of the "Better off out" arguments in this context is that they always completely ignore the issue of technical barriers to trade. The primary purpose of the single market is to remove these barriers - which means eliminating regulatory incompatibilities and generally implies some form of Europe-wide decision-making process.

We never seem to get to that level in the discussion and just become preoccupied with tariffs. Saying that we can "leave the EU and replace it with a free trade agreement" doesn't make any sense unless we also outline some mechanism for eliminating barriers to trade. As we already have such a mechanism in the EU (i.e. the EU's legislative process) it stands to reason that the only model on which we can maintain the same level of access as a non-EU member is simply by adopting EU legislation (the fax democracy argument).

Now the main benefit which is always cited in this case is that we free ourselves from a customs union and can have "unrestricted" trade with the rest of the world (again, we're talking about tariffs here, not eliminating barriers to trade). I think that's naive at best, as this article has mentioned, but even if we cite that as the key benefit we have to be clear on the costs as well. We can't simply pretend that all of the benefits of the single market can be achieved by signing a piece of paper, and without adopting any EU legislation.