Thursday, 23 June 2016

Lies, damned lies, and EU statistics

According to virtually every major economics organisation (IMF, OECD, IFS, BoE, The Treasury) the EU is such an enormous benefit to the UK economy that leaving would amount to economic suicide. Yet despite 95% of mainstream economists supporting the Remain campaign the public is unimpressed. Why? Well perhaps the reason is this: there is no definitive data to support their claim.

One of the arguments against Brexit from economists such as Simon Wren-Lewis is that it would make it more difficult for us to trade with countries next to us and that would hurt our economy. It is the classic neoliberal free-trade argument even though Wren-Lewis claims to be a New Keynesian. But no-one who supports Brexit is arguing that leaving the EU is for the purpose of reducing trade with Europe. Nor can any rational and informed thinker possibly believe that a reduction trade with the EU would be the end result. The lobbying power of the multinationals would ensure that. This then is a spurious argument. The fact that it relies on a contentious, unproven and ideological belief in the universal benefit of free trade makes it even worse.

Another argument put forward is that because 40% of our overseas trade is with the EU then our future economic growth will be greater inside the EU than outside. This is the argument put forward by George Osborne. In addition he and David Cameron have claimed that leaving the EU would result in a massive recession and a third world war (or both), while our membership of the EU has delivered greater economic growth than would otherwise have happened. The problem is that claim is untestable because the alternative scenario is counterfactual. That said, we can attempt to test it simply by going back in time.

If we assume that leaving the EU represents the converse process to joining, then leaving should deliver the converse results of joining. So the question then becomes: what was the economic consequence of joining the EU? Well the graph below shows the growth rate in real GDP in the UK over the last sixty years.


If joining the EEC was the economic boon that the Pro-Europeans claim then there should have been a significant increase in the growth rate after 1973, yet according to the graph above there was none. Moreover, after the signing of the Maastricht Treaty in 1992 there should have been a second boost. Again none is detectable. What there is instead is a clear decrease in the amplitude of the fluctuations in growth rate, possibly in part due to a decrease in the inflation rate over the period in question. To analyse the above data more clearly it is perhaps better to present it as a plot of real GDP per capita versus time (rather than growth rate versus time) and calculate the compound growth rate. This is shown below for the period 1960-1973 covering the period immediately prior to the UK joining the EEC.


The above data shows that real GDP per capita rose by a factor of 53% over this period. This equates to an average growth rate of 3.3% per annum. Now if we look at the period immediately after joining the EEC we see a different behaviour.


Over the period 1973 to 1992 real GDP per capita rose by 38%. This equates to only 1.7% per annum.


Finally, if we look at the period after the Maastricht Treaty was signed real GDP per capita grew by 42% equating to an annual growth rate of only 1.6% per annum.

What all this clearly demonstrates is that there was no spurt in economic growth after joining the EEC, or after signing the Maastricht Treaty. In fact in both cases the growth rate went down. So this appears to torpedo the principal claim of the Remain camp that EU membership boosts growth. The reasons of course are easy to understand.

Firstly, over much of the last thirty years the EU has been obsessed with enlargement, and most of the new member states have been economically underdeveloped. It therefore follows that any process of economic convergence must have involved a transfer of economic growth from the old member states to the new ones. This will inevitably have had a negative impact on growth rates in the developed countries. In effect at each level of increasing EU integration the developed countries have effectively exported an increased amount of their economic growth to other countries in the EU.

Secondly, migration has had negative impacts on wages, tax receipts and investment. According to Simon Wren-Lewis:

"Migrants tend to be young, healthy and working. They provide more in terms of resources than they take out by using public services."

Well the first part of this may be true but the second is most definitely not. What Professor Wren-Lewis has conveniently omitted from his thesis is that most migrants pay little or no tax because most of them are seasonal workers, and under EU rules, if you work in a country for less than 6 months you are exempt from income taxes. In addition, most migrants are net savers and they spend those savings in their country of origin, not here, so there is no multiplier effect. The result is that they do not create as many new jobs as they take away. The best migration is permanent migration because it is more likely to involve people with tradable skills, in high income professions who invest all their earnings in this country thereby creating as many, if not more, jobs than they take away. On top of this, migration also has a negative impact on investment because employers don't need to train or retrain their existing workers if they can source the necessary skills from elsewhere at zero cost. 

The analysis above all seems to have passed by the economics establishment. The big question is why?

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