It is high time that we relegated economic forecasting to the ‘known unknowns’ category when considering our personal position on TTIP. Only then can we start focusing on things that really matter to citizens.
A comment by Stephen Patrick
“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know.” (Donald Rumsfeld, February 2002)
When looking for examples of successful transatlantic cooperation there are few commentators who would start with the Iraq War. Nevertheless, in his somewhat ineloquent answer to a journalist’s question about Iraq’s WMDs, the former American Secretary of Defense Donald Rumsfeld stumbled upon an expression which has surprising relevance to today’s debate between the USA and the EU.
The current dialogue is dominated by TTIP. Like any trade deal, much of the focus thus far has been on the economic aspects and so far the high-level economic debate has been punchy. Respected economists on both sides have traded blows over growth predictions and employment forecasts. It is here where the discussion of known knowns and known unknowns becomes relevant to the public discourse.
In the blue corner we have the Centre for European Policy Research’s (CEPR) 2013 paper, commissioned by DG Trade. With a comprehensive treaty, this report rosily predicts significant economic gains for both parties – around €119bn euros for the EU and €95bn euros for the US. The negative impact on employment, they say, will be negligible. Joining this study is the equally heavyweight 2013 report by the German ifo Institute. In the comprehensive liberalisation model they present, they predict an average GDP per capita growth across the EU of 4.95%.
In the red corner stand our contenders. Firstly, the Austrian Foundation for Development Research report (backed by the left-wing GUE/NGL group in the European Parliament) primarily points to the methodological shortcomings of the pro-TTIP reports. Secondly, a widely referenced independent paper by Capaldo (2014), which again measures TTIP’s potential effects using an altogether different economic model. This scenario predicts a loss of GDP of up to 0.5% and over 600,000 net job losses in the EU.
So far, the bout seems mightily unfair: Two big sluggers versus some featherweight challengers. Certainly, when the debate descends into economic theory and a dry discussion of abstract models, it is only natural for the average human without a PhD in long-range economic forecasting to back the bigger guy. Thus far, if we refer to the Rumsfeld-o-meter the confident assertions of the two pro-TTIP reports give the impression that the data within them are definitely ‘known knowns’.
However, this particular fight looks like it will go the distance: the Commission recently had to backtrack on the growth figures in the CEPR report. Also, the historical evidence does not weigh heavily in the forecasters’ favour. One only has to look to the experience with North American Free Trade Agreement (NAFTA) for an example of this.
In 1993 Hufbauer and Schott wrote a glowing report on the potential effects of NAFTA which was then referred to extensively by President Clinton. According to them the agreement would increase America’s trade surplus with both Mexico and Canada, whilst creating 170,000 new jobs. In the event, the negative effect on their trade deficit, especially with Mexico, was huge. The overall loss in manufacturing jobs was perhaps up to one million. Years later Hufbauer himself recognised his own failures, stating that “the best figure for the jobs effect of NAFTA is approximately zero…the lesson for me is to stay away from job forecasting.”
Predicting what will happen when giant complex economies reduce barriers to trade, is unsurprisingly fraught with potential pitfalls. What was true for NAFTA in this case, is also true for TTIP.
NAFTA and TTIP show us that if we really want to get to the bottom of how it will affect our lives, we all should ignore the figures produced by abstract models based on one or the other economic theory. Not only are the margins of error so large, but they also appear to be clearly influenced by the pro- or anti-TTIP stance of those commissioning the report. As the respected trade economist Dani Rodrik suggests, the best that these models can provide is a baseline figure. A starting point with which to kick off the debate – to be judged as critically as we would judge the claims of politicians and activists.
Economic Forecasting: a ‘Known Unknown’
Which is how we get back to Rumsfeld. It is high time that we relegated long-range economic forecasting to the ‘known unknowns’ category when considering our personal position on TTIP. Much more useful would be economic modelling into the effects on specific sectors, and debate on other issues – such as the proposed investor state dispute mechanism.
Only when we come to terms with the essential unknowability of the continent-wide effects of such vast trade agreements, can we start focusing on the things that really matter to citizens on both shores of the Atlantic.
Im Rahmen einer Artikelreihe zum transatlantischen Freihandelsabkommen TTIP widmen sich von nun an verschiedene AutorInnen auf dem Polis Blog jede Woche einem anderen Aspekt der Debatte. Nächsten Freitag, den 30. Oktober: „TTIP in Polen. Ein Erklärungsversuch in fünf Akten“ von Kassandra Becker.
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