Brexit and Irish Households – how not to disseminate economic analyses

The well respected Irish think tank, the ESRI, published a report last night on ‘Brexit and Irish Consumers‘ which is all over the media today. Headlines include ‘Grocery bills could rise by more than €100 a month after hard Brexit warns think-tank‘, ‘Hard Brexit could cost Irish households €1,400 a year in higher prices‘ and ‘ESRI: Hard Brexit could push up prices by 2%-3%‘. All of these come straight out of the press release.

None are likely to be true. This is not because the ESRI has suddenly forgotten how to do basic economics, but because the press release, and the person interviewed on the radio this morning, both fail to get across one key point – these are the impacts only if nobody does anything.

To see why, look at their methods. The link together three sets of data, on trade, tariffs, and household expenditure. They ask the reasonable question – what would happen to prices in Ireland if WTO tariffs and non-tariff barriers came in tomorrow morning? This is where the figures come from. Presented with the precision common in the discipline, they suggest the cost would be beween €892 and €1360 per household. I invite you to guess which number the media have mostly used!

They did make the critical caveat, in the press release, – ‘These estimates do not take into account of switching of products or changes in expenditure patterns in response to the cost increases.’ However, this did not make it to the headlines, nor to the radio interviews. Unless you are already fairly familiar with household expenditure patterns, you will not realise what this innocuous phrase means – the estimates almost surely do not reflect reality. Customers are quite price sensitive; supermarkets and store owners are very price sensitive. People will respond, probably very quickly, in ways that mitigate the effect of the tariffs.

There is considerable value in this work, even for a non-economist like me, and I enjoyed reading it. For example :-

  • They emphasise that Brexit will hurt poor households more than rich hosueholds
  • They show a scenario which should alert us to possible future risks;
  • They describe nicely the well known differences between the patterns of expenditure of households with different incomes;
  • They give a good picture of the mind-numbing complexity of trade, and tariffs;

This is a preliminary piece of work, presented in a way which has attracted a lot of publicity, and has led to serious over-interpretation of their findings. I do not think the ESRI should work this way. Brexit is already quite scary enough without adding fuel to the fire.