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Tuesday, July 12, 2016

Still Confused About Brexit Macroeconomics

Paul Krugman:

Still Confused About Brexit Macroeconomics: OK, I am still finding it hard to understand the near-consensus among my colleagues about the short- and medium-term effects of Brexit. As I’ve tried to point out, while there are clear reasons to believe that Brexit will make Britain somewhat poorer in the long run, it’s not completely obvious why this should lead to a recession in the short run. ...

When we say “uncertainty”, what do we mean? The best answer I’ve gotten is that for a while, until things have shaken out, firms won’t be sure where the good investment opportunities in Britain are, so there will be an option value to waiting.

Let’s be slightly spuriously concrete. Suppose you think Brexit might have seriously adverse effects on service exports from the City of London. This would mean that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in industrial properties in the north of England more attractive. But you don’t know how big either effect might be. So both kinds of investment are put on hold, pending clarification.

OK, that’s a coherent story, and it could lead to a recession next year.

At some point, however, this situation clarifies. Either we see financial business exiting London, and it becomes clear that a weak pound is here to stay, or the charms of Paris and Frankfurt turn out to be overstated, and London goes back to what it was. Either way, the pent-up investment spending that was put on hold should come back. This doesn’t just mean that the hit to growth is temporary: there should also be a bounce-back, a period of above-normal growth as the delayed investment kicks in.

And again, since some people seem unable to read what I’m saying, this should happen even if the negative scenario holds; it’s the resolution that should produce the delayed boom, whichever way that resolution goes. But that’s not what ... almost anyone else ... seems to be saying; they’re projecting lower growth as far as the eye can see. They could be right. But I still don’t see the logic. It seems to me that “uncertainty” is being used as a catchall for “bad stuff”.

Update: See also Brad DeLong: Brexit: I Think Paul Krugman Is Confused Here...

    Posted by on Tuesday, July 12, 2016 at 08:03 AM in Economics | Permalink  Comments (82)


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