Undercover Economist

Metropolitan myths that led to Brexit

The Eurosceptic myths that fuelled hostility to the EU are obvious enough. We were told that the NHS was being destroyed by immigration, when more than a third of UK-based doctors qualified overseas. We were told that the EU is a fat bureaucracy, when it employs about as many people as Lancashire County Council. And we were told that the UK was being buried in red tape, when the OECD reckons it is one of the least regulated economies in the developed world.

It is easy (and useless) to sneer. Yet the metropolitan elite that voted so enthusiastically to remain cherishes its own myths, and those myths did plenty to undermine the cause of remaining in the EU.

Here are four tenets of the trendy centre-left of British politics: first, soaring inequality means that ordinary people haven’t shared in the benefits of economic growth; second, rich people and big companies don’t pay taxes; third, gross domestic product (GDP) is a statistic that misses what really counts; and finally, economists are reliably wrong. Flip through The Guardian, browse the popular economics books in your local bookshop, and tell me that these ideas aren’t taken for granted among the chattering classes.

Before the referendum, Anand Menon, director of the “UK in a Changing Europe” project, was speaking at a town hall event in Newcastle. He explained that most economists thought Brexit would depress the UK’s GDP. “That’s your bloody GDP,” yelled a heckler, “not ours”.

Look again at the four articles of centre-left faith. If they are true, then surely the heckler was right. But while there is a little truth in each of these four beliefs, there is less than you might think.

It is true that income inequality in the UK rose very sharply during the 1980s. But by most measures it has been pretty flat since 1990. The top 1 per cent continued to pull away in the 1990s — although not this century — but, counterbalancing that, the gap between people at the 10th percentile and the 90th percentile actually fell between 1990 and 2013-14. Broadly, income inequality is a problem that emerged in the 1980s and has not worsened since. (The Institute for Fiscal Studies report Living Standards, Poverty and Inequality in the UK: 2015 was my source; the 2016 version has been published since this column went to press.)

The pressing issue for the UK has not been rising inequality but weak growth that has affected most people not only during the recession of 2008, but in the five years before and after it. The problem is not that income growth benefits only the rich. The problem is that there’s been little income growth to benefit anyone at all.

The second article of faith is that rich people don’t pay taxes. If true, it would hardly matter to ordinary voters if Brexit hurt the rich or drove them away.

But the richest 1 per cent of taxpayers pay nearly 28 per cent of income tax. And, with about 9 per cent of post-tax income, they presumably also pay about 9 per cent of VAT, which is close to being a flat tax. Of course, some other taxes are grossly regressive — most notoriously the council tax, which the European Commission did urge the UK government to reform — but the rich certainly pay enough tax that the public purse would sag if they disappeared. London, too, generated more than 25 per cent of UK taxes, and that proportion has been rising, according to Centre for Cities, a think-tank. After Brexit, who knows?

What about the idea that GDP itself is flawed? Well, yes. It is flawed. It measures things that do not matter and misses things that do. But a sharp hit to GDP will also be a sharp hit to our everyday wellbeing: people will lose their jobs; schools, hospitals and public services will be squeezed as tax revenue dries up.

Consider an alternative measure: the Social Progress Index, an attempt to measure what matters in global human development with more than 50 different indicators — including access to nutrition, healthcare and schools. The SPI explicitly excludes financial indicators. Yet there is a very high correlation between the SPI and GDP. (For my fellow nerds: Michael Green, director of the SPI, tells me that the correlation is 0.88 when GDP is measured on a log scale. That’s high.) As a measure of human welfare, GDP completely fails in theory. In practice, however, it is not such a bad yardstick.

Finally, there is the low reputation of economists, the result of a global financial crisis that only a few in the profession warned us against. But the institutes that analysed the risks and rewards of Brexit can hardly be blamed for that. The Institute for Fiscal Studies is full of experts on tax and household income; the Centre for Economic Performance studies globalisation, technology and education. Blaming these people for not foreseeing the collapse of Lehman Brothers is like blaming a brain surgeon for the spread of obesity.

Many of the people who rightly scorned the myths put around by Eurosceptics should examine their own fond beliefs. The lesson of the referendum campaign was that emotion trumps rational analysis — and that is not just true of the Leavers.

Written for and first published at FT.com

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