Economists need to start playing catch-up – here’s why
Last week was something of a cathartic one for the economics profession, as the Bank of England’s chief economist, Andy Haldane, conceded that those who engage in forecasting need to adapt to regain the trust of politicians and the public.
Since last summer’s referendum, experts from the OECD, IMF, Bank of England and the Treasury have seen their dire economic predictions thrown back in their faces by triumphant Brexiteers buoyed by a run of economic good news. It’s worth remembering that many of the forecasts predicted not just a weaker UK economy in the long term (which may yet, of course, come to pass) but an immediate and sustained shock from the result of the vote itself.
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The Treasury’s central claim, one presented by former chancellor George Osborne as absolute fact, was that the UK would experience a recession and devastating job losses in the weeks and months after the vote. Last week, academics at the University of Cambridge said the Treasury’s findings (which this paper criticised heavily at the time) were “flawed” and that their method of analysis was “found wanting.” Now, Charlie Elphicke, a Tory MP on the Public Accounts Committee has called for a National Audit Office probe into the Treasury’s pre-referendum warnings, arguing that “the people of Britain need a Treasury with robust processes to ensure that forecasts are accurate, objective and can be trusted”.
In response, the Treasury has said that the UK will be pursuing “a bespoke arrangement” with the EU – adding that such an approach “was not what the Treasury’s pre-referendum analysis was based on”. In other words, Treasury wonks deliberately started with a pessimistic view of life outside the EU.
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Given the Treasury’s central role in policy-making it’s hard to disagree with Elphicke that the department would benefit from a little humility. In the words of JP Morgan’s Stephanie Flanders, who spoke alongside Haldane last week, “economists and indeed the elite, the technocrats, can be wrong in some pretty big areas”. A reliance on old models and out-of-date assumptions has put elements of the economics profession on the wrong side of reality. For their sake, and for the sake of effective policy-making, they’re going to have to start playing catch-up.