Exploring implications of Krugman’s eyewatering cost of Brexit

Nobel prize winning economist, Paul Krugman, in his NYT op-blog, claimed that the financial impact of Brexit would be 2% of GDP to perpetuity. What does that really mean?

Let’s do the maths.

The UK’s GDP is USD2,678 Trillion.

So how much is the 2% reduction identified by Krugman?

USD2,678 Trillion * 0.02 =  USD54 Trillion annually to perpetuity.

What’s the value of USD1 to perpetuity, i.e. for ever?

In today’s value USD1 received every year to perpetuity would be worth USD33.33, assuming a 3% return.

Open this link for an explanation of perpetuity. Simply, ‘perpetuity’ is a stream of equal payments that does not end. Given an annual rate of interest, we can calculate the present value of the perpetuity. For simplicity, we can use a published model.

As the UK Treasury assumes a 3% long-run cost of capital, we can calculate the present value of the USD54 Trillion annually to perpetuity. This amounts to USD 1,800 Trillion.

So let’s recap, if we assume a permanent erosion of GDP of 2% to perpetuity and our starting GDP is USD2,678 Trillion, then the present value of the loss of 2% (USD54 Trillion annually to perpetuity) is USD 1,800 Trillion.

The numbers are so large that I cannot simply apply a reasonableness test.

So if there are any quantitative types out there, would you please double check my maths?

Of course, the calculation are based on the assumptions deployed by Paul Krugman and the UK Treasury.

The implications are staggering.

As for my own views, I’m passionate about remaining in the EU. See my earlier blog.

What really scares me about the #Brexiteers is that there are no detailed costings of alternative scenarios nor risk assessments. Does the #Brexit campaign have any substance other than promoting false fear of immigration?

Thoughts?

2 responses

  1. I wouldn’t doubt Dr Alf’s or Paul Krugman’s figures in terms of accuracy. Where I have difficulty with the analysis is with the assumptions and with items not included.

    The Paul Krugman analysis assumes that if Brexit is chosen rather than Remain that there will be a 2% erosion of GDP “In perpetuity”.

    I defy anyone to give an example of a 2% erosion of anything in “perpetuity” because the practical effect of that GDP reduction would be to reduce the UK to the Stone Age and then to death and extinction if it remained uncorrected.

    The reality is that the UK has, as I’ve mentioned in other posts, other sources of income, including unofficial sales of arms via BAE Defence Systems, the sale of force packages by front companies providing mercenary forces, money from overseas tax havens made by leveraging the funds whilst on deposit plus fees for offshore incorporation, nominee services and licencing shared with offshore tax specialists. These other, off the books, sources of income and payments in commodities like oil at times of rising prices have kept our AAA credit rating intact until 2012 when the City of London was overtaken by New York, despite the fact that our official balance of trade deficit has been running at £3 billion GBP a month since 1981 when these figures were no longer published.

    This deficit, without factoring in inflation, is £1.26 trillion GBP and that is on top of the deficit which George Osborne is struggling with following the Banking crisis.

    EU policies on food and fisheries keep prices high by driving our farmers out of business at the rate of 5,100 a year (5000 via bankruptcy and 100 via suicide) and our fishing industry is but a cipher of its former self thanks to fishing quotas and the desire of Spaniards to eat fish in greater quantities than almost anyone else.

    We import about 70% of our food and are therefore vulnerable to exporters of food putting up their prices and to potential enemies who might choose to blockade us in the event of a future war.

    No-one can say that we are going to be immune from such events in perpetuity or even for the next 30 years.

    The UK has an ageing population, most of whom spend more than 10% of their incomes on food, so this needs to be costed in.

    Secondly, we only have 1.1% spare generating capacity over peak demand and no sensible means of bridging the energy gap until Hinckley Point in Somerset and Bradwell in Essex come on stream in a minimum of 15 years and a more likely 20 years. In reality, it will be bridged by the French Government, which owns 85% of the shares of EDF, and who will sell us electricity via the undersea cable from one of their nuclear power stations.

    Thirdly, we have to factor in the costs of EU regulation before Whitehall “gold plating” in terms of extra people hired by councils and non productive work by businesses to comply with the regulations.

    There are other costs in terms of people who are already here but should not be.

    With an Australian style points system, plus a scrapping of the present fraud ridden NI system and its replacement with one number per authorised member of the population, plus a biometric identifier, we could reduce the population by 7 million at a stroke and be much more discerning about who we let in. The savings made by these measures would have to be balanced against the costs of making the changes but we would free up a great many houses for people to live in and reduce the need for so much new infrastructure so quickly.

    With these adjustments one could then recalibrate Paul Krugman’s figures and arrive at something more meaningful.

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