How Mark Carney tricked us with his ‘Brexit will cost you £900’ figure
Economists have a habit of getting things wrong. Making long term forecasts, (even short term forecasts), is a necessary part of money-management, but it’s not necessarily reliable.
Last week Mark Carney, the chief at the Bank of England, claimed that each household id £900 worse off due to Brexit.
Here’s where he got the (incorrect) figures:
1. Verbal alchemy: the “relative fall” trick. If X has risen, and it suits your political purpose to say that X is in decline, what to do? Compare whatever it is that’s rising against something that is rising even faster. You can then say that X is in ‘decline, relative to Y’. Or why not use a ratio? ‘X is falling, as a percentage of Y’. For example, if the national debt is rising you can disguise this by saying it is “debt is falling as a percentage of GDP’ then wait for the media to shorten this to ‘debt is falling’ (see point 6 below). So when Carney starts referring to “a relative fall in real incomes” and it’s shortened to “incomes”, then – presto! – the rise has been turned into a fall.
2. Use estimates as a counter-factual. In Carney’s case, his problem is that UK disposable household income has risen to an all-time high. So how to claim there has been a fall?” When Balls and Osborne tried the “relative fall” trick they would always something real as a competitor (usually GDP); Brown used manifesto pledges. But Carney shows you don’t even need that. You can just use forecasts!
For example, if your annoying neighbour gets a £2,000 pay rise and boasts about it in the pub, you can say: “Well I expected you to get a £4,000 rise! So in fact your wages have suffered a ‘relative fall’ of £2,000! Loser!’ In this real-life example, it sounds nonsense. But in an economic context, you’d be amazed at what you can get away with.
3. Express percentage rises in cash terms. It’s highly irregular to talk about wage forecasts as £900 gain, or any cash sum. Economists express wage forecasts in terms of percentage rise, and even they have a hefty error margin. For example, the OBR expects earnings to rise by 2.4 per cent next year. Sounds a bit abstract? That’s because it is. But by expressing this in cash, you can give spurious specificity to what is a rough guesstimate. This is what Carney did with his Brexit forecast.
The actual BoE 2016 forecast said wages would rise by 3 per cent that year and 3.75 per cent then next year; they rose by 2.5 per cent and 2.6 per cent. But by converting this into cash, he makes this into a media-friendly £900 cash figure. (George Osborne used this technique with his much-mocked claim that Brexit would make households £4,300 worse off.)