Saturday, 20 December 2014

HMT says it has has no intention of allowing a workable system of real autonomy for Scotland

The IFS's David Phillips has a post at the Future of the UK and Scotland site, which like the post by my colleagues David Bell and David Eiser at Scottish Fiscal & Economic Sudies, describes the Byzantine, labyrinthine, systems needed to implement a system that maintains the Barnett Formula whilst implementing significant devolution of revenue powers.

There is a simpler way to do things: declare some expenditure items as UK responsibilities, with the others as devolved; declare a set of UK taxes to pay for these UK expenditures, and allow the devolved administrations to raise taxes to meet their responsibilities. The UK expenditure responsibilities would include UK debt repayments, any equalisation payments that were agreed, and fiscal transfers in response to business cycle fluctuations and asymmetric shocks.

The first step to implementing such a system (which might have a chance of being stable in the long term) is for the UK Government to recognise that it wears (at least) two hats: as the sole level of government responsible for UK functions; and as the government of England (and also the government of Wales & Northern Ireland for those areas in which Scotland has devolution but they don't). It needs to know what hat it is wearing at any one time, and what policy levers are associated with that hat.

In David Phillips' post he notes: "But what if the UK government wanted to spend more money on defence or state pensions, or wanted to increase taxes to reduce borrowing. ... One interpretation of the Smith proposals would be that the UK government could not use an increase in income tax – one of the main taxes it levies – to fund these policies. This would be absurd and the Treasury has informed us that it was not the intention of the Smith Commission to constrain the UK government in this way."

Contrary to David Phillips, I don't think that a recognition that some taxes are for funding devolved services, whilst others fund UK services, is absurd. On the contrary, it seems like a pre-requisite for a functioning system. Note also that such a recognition would not preclude the use of income tax for the funding of UK services: for example in my submission to the Smith Commission [*], I recommended that the UK Government have as one of its revenue streams the top rate of income tax (because such a tax base is likely highly mobile in response to differences in the rate). But there would have to be two income taxes: one levied by the UK government for UK expenditure, and one levied by devolved government (which in England may well be just the UK government wearing its English government hat) for devolved expenditure.

But in any case, the first step towards a workable system is for some self-awareness on the part of HMT.

[*] Shorter, and better written version is Chapter 8 of 'Beyond Smith' ebook 

Sunday, 30 November 2014

End November Links

# Chris Dillow makes good points in The Heritability Red Herring, on how cross country evidence shows that the success of the children of rich and bright parents cannot just be due to heritability. In particular the point that "The correlation between parental education and children's education is higher in more unequal countries. This is consistent with income inequality buying unequal access to education - for example, because rich parents in unequal countries buy private tuition."
This is not just private tuition or private education though. I suspect that there will be greater variance in property values in unequal countries as rich seek to cluster and so buy access to higher than average quality public education. If I'm correct about this, then it will be a multiple equilibrium effect:

   1.  house prices are highly unequal reflecting a large amenity values from good local schools, and so rich will be willing to pay (thus supporting high prices in such areas); or
   2. house prices are much more equal as are schools, and so no-one is willing to pay any house price premium for access to a specific school.

I further suspect that equilibrium 2 is more fragile, in that the dynamics around it have a much narrower or shallower basin of attraction. But not so shallow that it cannot be stable, given a relatively narrow spread of incomes: as Lesley Riddoch and others have commented, the segregation by income is much less strong in more equal countries, which I suspect means that these countries are even more equal relative to the UK than their lower GINI coefficient would suggest.

Nick Rowe is also thinking about this area, in Reverse Regression and the Great Gatsby Curve

# My Smith Commission submission is reported in the Modern Scotsman and my article in the Conversation

# Some interesting posts on English devolution:
   - The Greater Manchester Agreement is only a small step towards greater devolution in England
   - The ‘Devo Manc’ proposals represent centralisation on steroids

# Krugman resurrects a fantastic post of his from 1998 on Networks and Economic History. Basically Zipf's Law offsets Metcalf's Law meaning that increasing returns are limited. I suspect that this is relevant in domains other than the profitability of communication networks.

# On oil prices and prosperity is a generally good article. But I'm more pessimistic than the following paragraph since the rate of innovation must be related in some way to the price of fossil fuels. "The only real concern ... is in regard to the viability of alternative energy. Renewables have become significantly more competitive ... in a world of expensive fossil fuels. ... But the falling price of solar energy is ultimately a long-term trend driven by technology. ... cheaper oil prices could push adoption back to some degree, especially in regard to electric vehicles. But it can't hold back the broad strokes of history, either." I think it is possible that these broad strokes of history could either feature or not feature the adoption of alternative energies. It is possible that, as a species, we may make catastrophic choices, and the current state of incentives for the development of alternative energy technologies is in no way helpful.

Thursday, 30 October 2014

Is regional policy inefficient?

The basic argument for centralising decisions over public investment, for example the UK's £300bn plus National Infrastructure Plan, is that projects across the country can be assessed, and scarce funds then directed, on the basis of which are most valuable compared across the whole portfolio of potential projects.

A further advantage for centralised decision making is that interregional spillovers can be consider. For example, a project that should be high on Scottish priorities list is upgrading the A1 trunk road in Northumberland north of Newcastle, but it would be hard for Scotland to act on this preference if it only controlled spending in Scotland.

Centralised spending decisions are current practice in the UK. But what are the arguments against this centralisation, and instead having both a regionally balanced portfolio of public investment (which must, at the margin, lead to lower expected return projects being invested in at the expense of higher expected return projects), and local decision makers?

# Congestion:

If factors are complementarity but there are costs of congestion, then a project can easily have the highest expected return (measured by willingness of the beneficiaries to pay for this improvement divided by its cost) but not be the efficient choice. Congestion (of fixed non-reproducible factors, typically land; and also of hard-to-adjust-in-the-short-term factors like space on a road, or bandwidth on a network) causes real losses in economic output, and a project that in the absence of congestion would be highly valuable (because it is complementary with all the other factors located in the congested region) may not yield greater real output than a similar cost project in a less congested region which is less valuable in terms of the willingness of the beneficiaries to pay.

A recent article in the FT, 'London’s $8.5bn traffic jam slows down growth' viewed further investment in the South as the solution to congestion in the South. It cites Edmund King, president of the AA, claiming support for this from those furth of the region: "“Anyone who regularly commutes on the M25 ..., knows it’s an absolute nightmare, ... But it’s a key link to airports and ports – and not just for drivers in the south. If you ask Scottish hauliers what’s the most important road in the UK it’s the M25.”" And obviously, once the airports and the ports are in the South, the value of the road network in the South is increased. But instead of constantly increasing capacity in the South to deal with the use of this network by those not from the South (and to deal with the population growth in the South induced by everyone crowding round these assets), it may be more efficient to invest in capacity elsewhere. Project evaluation should not always take demand as given, but instead should countenance that supply lead demand. And project evaluation should not always be conducted on a marginal basis: investing in infrastructure in the North may lead to increased values on future investment in the North, and perhaps some of this additional value should be recognised when evaluating the first project.

If congestion's economic impact is high enough then this could strengthen the case for targeting public infrastructure investments in highly productive and congested areas, precisely to limit congestion problems. However - this simply may not be possible in the medium and long run. If you alleviate the congestion through public investment London then, given the income differentials across the UK, London's population will grow until the congestion is recreated. If the costs of fighting congestion at a given location are convex (this may or may not be true, but it's certainly true that the level of congestion given fixed infrastructure is convex in the number of users), then this is, eventually, an inefficient use of public capital.

# Network effects and lock in:

This complementarity between factors of production can lead to "lock-in" when the situation changes (technological changes, changes in the terms of trade, etc). A great example is Michaels & Rauch (2013) (described in VoxEU) which discusses the positions of medieval towns in England and France.  Three facts underpin their analysis: (1) Both England and France had urban networks created by the Romans, based on complementarity with the Roman road network; (2) Roman civilisation collapsed much more strongly in England than in France; (3) The dominant transportation technology of the middle ages was by boat. They find that medieval urban locations in England were sited much more appropriately with the prevailing technology than those in France were. This suggests that France suffered from lock-in: it was never worth it to rebuild all their infrastructure at a more appropriate site because every new investment must be optimal conditional on the locations of all existing assets with which they are complementary. England benefited, in the sense that it could re-optimise, from having its slate wiped clean.

Perhaps a diversity of locations should be maintained, and their varying idiosyncratic characteristics can provide insurance against secular changes. By having multiple centres that each have a full suite of infrastructures and assets, the costs of switching focus from one to another as external changes occur are minimised and so we do not become locked in to using a location that is eventually sub-optimal.

# Information

The power of markets to aggregate widely dispersed knowledge is justifiably lauded. Given this ideal however, we should not want the projects assessed by a single body with monopoly power to decide which get funded or not. This single decision making body will have a particular set of preferences, a particular information set, a particular expertise, and a particular method of analysis. As Chris Dillow says "Let's suppose that we want to find the best possible policy, according to some objective criteria ... Suppose too that there is bounded rationality and limited knowledge and that each individual selects the best option using his own information set and decision rule. In these conditions, each individual, if s/he is moderately competent, will find a local maxmimum - the best option, given his/her information and decision rule. But local maxima aren't necessarily global maxima. ... experts might well not find that global maximum because their decision rules and information sets might not be wide enough to encompass the best option: this might be because of deformation professionnelle, or groupthink or simply because their Bayesian priors limit the number of options they search for. Instead, widening the population of searchers increases our chances of finding that global maximum, because doing so brings more decision rules and information sets to bear on the problem. Cognitive diversity - in the sense of different ways of thinking - can therefore beat experts. It increases our chances of finding the best option."

In this context, multiple decision making bodies, each finding their own constrained local maxima, may bring us closer to the global maximum than a single decision maker (who does admittedly operate with fewer constraints).

# Fiscal transfers and stability

Presumably public investment opportunities in the highest yielding projects are lumpy over time. This could represent a big swing in fiscal transfers, and there is always a balance of payments (even if no-one is measuring it regionally). Any sudden positive (negative) impact on fiscal transfers would need compensating outflows (inflows) of private capital, increases in net imports (exports), appreciation (depreciation) of land values & other fixed assets, or labour in(out)-migration - all of which can be destabilising with associated losses. Conversely, if public investment were stable regionally then it would contribute to the automatic stabiliser effect of public spending and countercyclical policy.

# Distribution of gains

Even ignoring all the points above and assuming that a single decision maker can accurately select the highest yielding projects, everyone agrees on these, and there are no negative effects from congestion, then it is still not the case that we should automatically use public funds, raised from general taxation, to invest in a regionally unbalanced portfolio of projects. This is because the returns are not necessarily equitably shared. The obvious case is that of land-owners: those situated around the newly created public capital likely capture some of the value; but this is also true of workers. It is clearly the case that public funds can be used to systematically and predictably favour citizens in one part of the country over another. That public funds should be so used must be a matter for democratic debate, not necessarily the outcome of a spreadsheet calculation.

And the sums involved are not small: Wings Over Scotland estimates that investment in Scotland under the NIP will be £1bn from a publicly funded total of £136bn, to which Scotland will have contributed approximately 1/11th from tax revenues. If the populace as a whole agrees with these priorities and recognises these regional transfers, then fine. However, dressing this decision in the language of cost-benefit analysis overestimates how sure we can be that the selected projects are the optimal choice, and obscures the important distributional decisions that have to be more democratic than technocratic.


Given these points, there is clearly a case to be made in favour of some local decision making, and for reasonably regionally balanced public investment, on efficiency grounds. I believe that the balance in the UK at the moment is far too far away from regional balance, and towards centralised decision making. There is scope for benefits from a presumption in favour of a regionally balanced public investment portfolio. A centralised decision making body which has such a regionally balanced portfolio objective, would deal with all the headings other than "Information". Given this information point, there is definitely space to enhance local control over some public capital spending. Regional balance should not be perfect, since there is some value to picking high marginal value projects, and local control of investment budgets should not reach 100% since there is value to considering interregional spillovers.

End October Links

# Another in Vox´s series of maps: 38 maps that explain Europe

# Fracking's not a bridging fuel: Fracking May Be Worse Than Burning Coal; and true low carbon investment may be best for the economy:  Want to grow the UK economy? Invest in green energy

# Interfluidity on The political economy of a universal basic income

# The IMF has produced a couple of politically charged research reports, showing:
    - public investment really is a free lunch: a dollar of spending increases output by nearly $3
    - lower inequality is robustly correlated with faster and more durable growth, and redistribution appears generally benign in terms of its impact on growth

# The BBC reports that
"Chancellor George Osborne says the figures [UK inflation fell to a five-year low of 1.2% in September from 1.5% the month before] are a "dose of good economic news""
In what way is this good news? The BoE has a symmetric target - below target is as bad a policy failure as above target. And low inflation is only good news for individuals to the extent that their incomes are unaffected. If low inflation is accompanied by a lack of wage growth, which it is, then this is in no way good news. Given high debt levels, lower than expected inflation and income growth is unambiguously bad economic news.  

"[To t]hose dismayed by Britain’s wide disparity of individual wealth ... The overriding reason is the gulf between the prosperity of London and the provinces. This must in part result from a shift in power from local to national government, a perverse consequence of a “single state” constitution. Every year 30,000 graduates flow from provincial universities to jobs in London. Barely 11,000 go the other way. This crippling drain of talent and earning power is one reason why cities in Germany and elsewhere in Europe are richer and more robust than in Britain. Inequality starts with power."

# Henry Overman of the LSE's Spatial Economics Research Centre in his post, Why are the poorest regions in the UK the poorest regions in Northern Europe?, comments on data similar to my post, A conversation, between economists, on the economics of independence. He looks at the NUTS2 regions of Northern Europe and points out the problem of splitting inner and outer London, but his main critique of the claim that there's something unusual about all the poorest regions of Northern Europe being in the UK, is that this is to be expected given that the UK is the poorest country in Northern Europe. My chart was based on NUTS1 regions, and still the UK has the highest region inequality. But also we have to ask why the UK is the poorest country in Northern Europe, when London and the South East manage to be compare well with this group. It's not soil fertility, remoteness, or population density, or else the rest of the UK would not be getting beat by Ireland and Scandinavia. My conjecture is that it's about power, and Henry Overman's piece does not change my view.

Thursday, 23 October 2014

Economic journalism cop-out extraordinaire

BBC Scotland today reports on developments at Grangemouth. I have no quibble with the content of their piece. However it states "Grangemouth is already said to be responsible for about 10% of Scotland's gross domestic product (GDP)" - note the weasel-words "is said to be"; translation: "I overheard someone say this, it may or may not be true, but sounds impressive and I can't be bothered investigating". This is unacceptable journalism.

Let me help the BBC out: I have no idea about the profit and loss accounts that could be attributed to the Grangemouth plant; but I can at least do back of the envelope calculations.

# Scotland's GDP is approximately £150bn so 10% is around £15bn

# Country GDP, as a concept, is analogous to Company operating profit (before depreciation). Wikipedia makes this clear in 2nd paragraph on GDP.

# Grangemouth has 800 employees and so its wage bill is highly likely to be substantially less than £100m. Simply the payments to capital would then have to be approaching £15bn for this plant to be "responsible" for 10% of Scotland's GDP.

So whilst Grangemouth may be "said to be responsible" for 10% of Scotland's GDP, this is only "said" by people who don't know what they are talking about. Business and economics journalists do not (or should not) have this excuse.

Now perhaps the value of Grangemouth's sales approaches £15bn (this may or may not be true). So what? It will have paid £14bn-odds for the raw materials and its value added (operating profit before depreciation) will be much lower. Even if it is true that Grangemouth's revenues are 10% of Scotland's GDP, comparing these figures is meaningless. This is like saying there are roughly the same number of nano-meters in 10cm as there are miles in the Earth-Sun distance: it's a true statement, but comparing these numbers without noting that they measure different things adds no information.

Monday, 22 September 2014

Post Referendum Policy for the SNP

Scotland will never be independent until currency is not an issue that concerns people over the transition. People were too scared, and will be too scared. The Scottish Government's proposal of a currency union was clearly sub-optimal economically and was rightly attacked by many economists. But alternative proposals of joining the Euro or creating a separate Scottish currency were never going to fly given voter psychology.

I think there are two routes for currency becoming a non-issue at a future putative referendum: the first is for the UK to join the Euro. This I don't see happening any time soon.

The second route is via the creation of a confederal UK. Gordon Brown, in his seizing of the political initiative two weeks ago, has created a clear mandate from Scotland for the UK as a transfer union in which risks and resources are "pooled and shared". But given 45% of a very high turnout voting for independence with many of the remaining 55% favouring further powers under the competence of the Scottish Government, I don't think Jack Straw has any mandate for his proposal that a No vote is made permanent and that the UK becomes like Spain in its claims of constitutional integrity. Rather, the 1.6 million votes for independence, plus many more for enhanced powers, is a strong vote for confederation.

Confederation is the opposite of devolution. Currently Westminster devolves power to Holyrood. Under confederation, the Scottish Parliament would cede powers to the UK parliament. The referendum has made clear that those powers should be defence, foreign affairs, monetary policy and, thanks to Gordon Brown's intervention, fiscal policy. Confederation initially would cede exactly those powers that are currently "reserved" under devolution. This is what I feel the SNP should switch to campaigning on (perhaps they could draft the addendum that the UK Government would have to add to a forthcoming Scotland Bill on further powers) rather than any crazy suggestions like changing the mechanism of achieving a mandate from referenda to simply winning elections.

The advantage of confederation for the independence movement is that it would be clear that sovereignty ultimately rested in Scotland, and because of the current democratic will, powers were currently passed upwards to share within a supranational union. If the democratic will changed, the detail of which powers were ceded could change (even all of them, contra Jack Straw). In particular, if the democratic will at some point in the future no longer favoured a fiscal union, or representation by the UK internationally (i.e. in EU or in NATO) but still favoured a monetary union (*) then Scotland could cease to cede these powers to the UK level. This is effectively the independence of the Scotland's Future White Paper - but it wouldn't feel like it to a risk averse electorate, or to an electorate that valued a British national identity, since British institutions would always remain. It would also avoid any traumatic transition periods, eliminating the risks of capital flight and market collapse, and lowering start-up costs since the creation of institutions could be gradual.

(*) This would incorporate fiscal sharing arrangements as outlined by BoE governor Mark Carney, and crucially the laws and the detail of this fiscal sharing arrangement would be decided by UK institutions. This would be a monetary union that prescribes (G-T)/Y and specifies, ex-ante, transfers in response to asymmetric shocks; it would not prescribe G/Y and T/Y separately, or the detail of tax and welfare policy, which are prescribed in any immediate post-referendum arrangement.

Wednesday, 17 September 2014

The Economic Choice on Thursday

Over the last couple of days I've tried to lay out a series of mechanisms whereby independence - perfectly conceivably - leads to better outcomes. Mechanisms for economic gains from independence #1, #2. #3, #4 & #5.

This is partly in response to articles like this in the Daily Record in which some economists claim that the evidence all points one way. It clearly does not. This is not to say that Yes has all the evidence on its side: in particular, a currency union is bad idea; and I would hope that an independent Scotland adopts a Scottish currency. Such a currency should be pegged to Sterling initially to allow existing Sterling denominated liabilities (mortgages etc) to be paid without currency risk. New liabilities that are taken on should be denominated in the Scots currency, and when exposure to Sterling is minimal, the peg can be broken if appropriate.

I think the economic choice on Thursday can be summarised in the following way:

The Scottish economy is performing as well as the UK economy at the moment, and the Barnett Formula roughly compensates Scotland for North Sea oil tax revenues. But on the horizon are two major challenges: an ageing population, and the decline of the North Sea. The campaign pitches are both, fundamentally, about how these challenges are faced.

# The No position is to not do anything about these issues at all. What it proposes instead is that Scots can be reassured that they will start to receive transfers from the rest of the UK that allow public services, pensions, etc to continue to be paid even as economic output in Scotland falls.

# The Yes position is that we don't want these transfers and that we need to do something to make sure that economic output does not fall. This something is not exactly defined: "a government with the best interests of Scotland" is a sentiment consistent with this aspiration, but what exactly will differ policywise is not completely clear. A policy of increased immigration is clear and consistent, but other than this, little has been spelled out (which is of no surprise given that it is a matter for 2016 election).

Both these pitches have logic behind them. One is not necessarily more reprehensible or laudable than the other. An individual should vote on how appealing these pitches are (what are your preferences over them), and whether they trust them to be deliverable (how credible do you believe them to be).

Mechanisms for economic gains from independence #5

# Timing

Some people seem to think that the aftermath of a financial crisis, when public debt levels, and the risk of hitting the zero lower bound for interest rates, are high, is a bad time for declaring independence. I'm not denying their mechanisms, but they are ignoring the headline lessons of Keynesian economics: times when labour is un/under-employed, and when capital is cheap (risk free interest rates are low), are the best times to incur the transition costs of independence.

In times of full employment, with "normal" interest rates, the need to spend resources setting up the institutions of a new state would crowd-out resources from the private sector. However, in these depressed times, this additional spending could pay for itself by drawing upon otherwise unemployed resources.

Notwithstanding today's good news on jobs (which certainly doesn't go as far as getting us back into the realms of full-employment or away from the zero lower bound on interest rates) the additional demand from the need to cover the transition costs of independence could be just the kick-start the Scottish, and rUK, economies need.

Mechanisms for economic gains from independence #4

#4 Mean Reversion

This mechanism's perhaps a bit unfair since, if it's true, then it applies to both independence and union. If it's not true though, then conclusion must be that we expect gains from independence. In either case, the economic outlook is brighter than often painted.

In A conversation on the economics of independence, I suggested that there must be an institutional reason for the regions of the UK excluding London and its environs occupying all of the poorest places in the ranking of northern European regions which had never been communist. This contention was made because I could think of no structural or fundamental reason for these UK regions to be so disadvantaged. If this contention is correct then we should expect institutional change, such as independence, to be accompanied by economic gains.

However, there is another possibility: luck. Perhaps the regions of the UK excluding London and its environs have experienced an unfortunate series of bad outcomes. If this is the case, then we should not expect this run of bad luck to continue, and these UK regions should "revert to the mean".

Certainly Scotland's experience over the past century has been particularly poor in a European context. This can be most clearly seen from population statistics. As I discuss in Population Records, "whether economic success determines relative demographics or vice versa, these statistics clearly co-vary and looking at the outcome of relative migration can tell us about the outcome of relative economic performance. Over the 20th century, Scotland did terribly on net migration and population growth."

If this was bad luck, then we should expect to do better over 21st century because of simple mean reversion. If this was due to institutional features, then we should expect to do better by changing institutions.

Mechanisms for economic gains from independence #3

#3 Spillovers from statehood and location of central government

My own favourite mechanism for possible economic benefits from independence (relative to being a peripheral region of a larger country) is the positive externalities that may accompany the very fact of statehood.

As soon as a region is a country, international companies treat it differently. Many need to base at least a small office, with at least some local autonomy, to ensure legal compliance and appropriate marketing. The direct economic effects of this are that these international companies incur extra costs, and the new small country experiences extra private demand and public revenues from this local employment. These direct effects are likely negative in the aggregate (the company has incurred extra costs), but are likely positive within the new small country.

As soon as a region is a country, it both sends out and receives diplomatic staff. On the assumption that it sends out as many as it receives, the direct economic effects of this are zero: the government is paying salaries to the diplomatic staff that it sends out into the world, and roughly this amount extra of private demand is added to the local economy from the diplomatic staff that it receives from the rest of the world.

As soon as a region is a country, the status and responsibility of government officials and civil servants is enhanced. The Institute for Government's Robyn Munro reports in the LSE's British Politics and Policy blog that "In the event of independence the Scottish civil service would ... require ... a rebalancing of the grades and experience levels of its employees. ... UK department staff based in Scotland are drawn disproportionately from the lower grades (AA, AO and EO), with few senior civil servants." Under the assumption that fixed costs in public good provision are neglible (*), and the further assumption that the current bill paid by Scottish taxpayers funds current civil servant employment in Scotland, then on independence with the same level of public good provision, Scotland would need fewer civil servants overall, but more at senior grades. The direct economic effect of this is zero: the same government expenditures and the same private spending power.

These three changes provide no great direct overall economic boost or cost to the new small independent country. However, they are associated with indirect economic effects which should be beneficial:

# Firstly, the local offices of international companies are a source of informational feedback: local demand is more fully understood, and the company is more likely to have the capacity to respond to this information.

# Secondly, as a junior civil servant, interaction with senior colleagues within the same building rather than them being 600 miles away in London is likely to boost human capital accumulation.

# Thirdly, growing companies need to discuss their business with government - particularly with senior people who have the authority to effect any changes needed. Being able to have these discussions in Scotland means that these companies, as they grow, are more likely to stay in Scotland. If they have to go to London every time they need to have a meeting, they might as well base themselves in London. Further, growing companies need the full range of business support services. Government procurement by an independent state on advertising, legal services, research and analysis etc mean that these services are much more likely to be available locally. Gordon Young, the publisher of The Drum, describes this business ecology effect well in relation to the marketing industry.

# Fourthly, these three changes, as well as the increased propensity for growing companies to stay in Scotland, provides visible job opportunities at senior and high status grades. This is likely to mean that school levers and graduates in Scotland are less likely to automatically assume that London is the place to go for a high status career, and it is likely to provide the pull for increased high ability immigration. Many high status roles, leads to many high ability candidates applying for roles, which increases the chances, for a firm to find an appropriate hire, which lowers the costs of doing business. This is the beneficial effect of "thick markets". In peripheral regions with no autonomy, we find truncated talent distributions (because the talent leaves) which makes them unproductive and therefore unattractive to talent. To break this cycle you need to provide opportunities for talent.

(*) Deaner & Phillips (2013) [Section 5.1 ‘Spending by service area – how might it change?’ on page 62 and 63] do not find any evidence of scale economies when looking across Europe at the costs of providing public services in countries of different sizes.

Tuesday, 16 September 2014

Mechanisms for economic gains from independence #2

#2 Smaller is less risky and more robust, with lower costs from complexity:

From Nassim Taleb

Small is beautiful and more robust.

Most journalists are trapped in verbalistic concepts devoid of logical/empirical clarity, & are to be taken in reverse. A New York Times article claims: "big countries tend to be more resilient to shocks.", which is pure BS. 

Just look around: Singapore, Denmark, Norway, Switzerland, Dubai, compared to their neighbors. Focus on otherwise same ethnicity (Cyprus vs Greece, Lebanon vs Syria). Things are a bit more complex: it is the decision-making unit which would put federations like Germany and the US in the same group).

Articles, by people affilitated with the Extreme Risk Institute, on SIZE (by yours truly): mathematical derivation of the statement that small is MORE resilient of SILENT RISK:

Note that for small state to do well, all we need is a "pax" of an Empire, "pax Romana", "pax Ottomana", etc. Which we have with EU, US, Nato, etc.

Mechanisms for economic gains from independence #1

#1 Animal spirits:

Quoting Andrew Wilson in conversation with Derek Bateman

Scotland changes with independence. We become more focused on getting the economy motoring so that we can create the society we want. I think as responsibility increases, the economic imperative grows.

All of the fundamentals are great for Scotland. We vote with more money, more resource, more information,and more of  a platform of existing government institutions [than the other 142 countries since WWII that have become independent]. There is no country taking this choice with more going for it. People need fear nothing. Are we up to it as individuals? Do we want to lie down and sleepwalk through life or are we willing to get out of bed and give it a go? And we know in life that if you let life happen to you then you don't succeed and you don't reach your full potential. If you just set a goal for yourself and go for it, all things are possible. It's called belief.

Thursday, 11 September 2014

A conversation, between economists, on the economics of independence

Surely there are solid arguments for negative effects from being a small country relative to being a large country? Economies of scale, the existence of border effects, liquidity premia, and so on?

Yes. Economic theory has proposed many plausible mechanisms that mean that large size should be associated with greater productivity and greater wealth. Further, when attempts are made to estimate the size of these effects, they turn out to be not insignificant. For example, see my own work which suggests that if the only change on Scottish independence were that it traded with the rest of the UK in the way that Ireland seems to trade with the UK, then this should be associated with a 5.5% fall in Scottish GDP.

However, these effects apply to all countries, not just Scotland, and if this were all that was going on then we should expect to see larger countries richer than smaller countries. As shown by Rose (2006), the economic literature on this generally finds no effect of size on growth or level of income (some papers even find a negative correlation e.g. Alouini & Hubert (2010)). This null result can be explained by supposing that there are non-GDP benefits of independence and richer and more productive regions, which can afford the trade-off, choose independence. This selection effect would mask the true relationship between size and GDP.

This selection effect however does not convince me. Given the persistence of national borders, then the randomising effect of technological change on productivity of different regions over time should mean that a small productive region which made the choice to be independent several hundred years ago is expected to be no more or less productive than another region that was poor several hundred years ago and made the choice to remain as part of a large country. Given random productivities, the benefits of size should be visible. They are not.

This either means that the benefits of size are wrong (I don't believe this) or that there are countervailing effects. Perhaps small countries are better run or function at a more appropriate scale (convex costs of complexity?). Perhaps there are spillover benefits to running a country rather than being a peripheral region of a larger country like the ability to attract talent (high status government employment, and many international firms want at least a small office presence in your region) which leads to a more diverse business ecology, which involves the provision of the full range of support services that new and growing businesses require.

In any case, if the correlation between size and income is approximately zero, then it suggests that the (GDP-related) costs and benefits of size roughly cancel out. This does not, itself, provide a case for independence or for union. It just suggests that if we value independence for other, non-GDP reasons, then there does not appear be any significant GDP cost/benefit to pay/gain in general. Of course, there may be issues specific to Scotland and the UK could lead to the expectation of GDP costs or benefits of independence.

If there is no relationship between country size and long run growth/wealth then surely this is bad for independence, given transition costs?

Usually, yes. But Scotland already has most of the infrastructure of a state. HMT's estimates of the transition costs were rubbished by the author whose research they relied upon. In any case, even if HMT's figures were appropriate, this is a one off cost which should be met by extra government borrowing and amortised over a very long period. If we, extremely pessimistically, assume £3bn cost at 5% borrowing rate, then this is an annual cost of £150m or 0.1% of GDP. This is not a big issue.

Lumping lots of disparate countries together produces this zero correlation between size and income. Would it not be more valid to consider subsets of reasonably similar polities? For example biggest is richest for Spanish-speaking Latin American countries (excluding Puerto Rico which is really part of the United States). And for English-speaking countries, the largest, the USA, stands out as the richest, in spite of the fact that it does not appear to have better institutions or national endowments per capita than Canada, Australia or New Zealand.

Interesting points. I'm glad you thought of making comparisons across countries which, other than size, have some similarities. I contend that a suitable comparison group for looking Scotland and the UK is the EU members of northern Europe which have never been communist. For these 11 countries (Ireland, UK, France, Belgium, Luxembourg, Netherlands, Germany, Austria, Denmark, Sweden, & Finland), there is a significantly negative correlation between size and income. Set against the Spanish speaking Latin American countries, or the worldwide English speaking countries, this isn't something that nails the argument - but it does show that your other two examples certainly don't nail the argument either.

More interestingly, looking at these countries allows us to make a specific point about Scotland and the UK rather than considering only the general size of countries issue. Eurostat has data that divides these countries up into 48 "NUTS1 regions" (*). These are shown in the graph below. I know of no reason to expect that 7 of the 12 UK regions should occupy the bottom 7 places in the ranking, with 11 of the 12 in the bottom half. The UK is not less fertile, it is not landlocked, nor is it lacking in natural resources (indeed it has the largest oil and gas reserves of any of these 11 countries). I contend that this is indicative of institutional problems in how the UK is run: perhaps to the benefit of London which is one of the richest regions in Europe, despite the poverty of the rest of the UK (indeed, the UK has the highest regional inequality in Europe). Are we to believe that it's luck that all the poorest regions are in the UK? Ireland had income per head of 70% of UK average when it gained independence in 1922, now it is in the top half of this ranking and would be the UK's second richest region if still in the UK. Escaping whatever causes the outcomes shown in this graph provides a clear expectation that Scotland can gain - in GDP terms - from independence. This is of course in addition to the non GDP benefits like electing political parties more closely aligned with preferences of the Scottish electorate.

(*) All NUTS1 regions of these 11 countries excluding 1 region from France: French overseas territories - not in northern Europe; and 6 regions from Germany: the East German Länder - formerly communist.

Sunday, 31 August 2014

End August Links

# Chris Dillow's Repressive Diversity makes the point that it is possible that as 'opinion-former talent' is drawn from more disparate sources (variable cultures, ethnicity, genders, and sexuality), the opinions of these opinion formers may become more homogeneous. This sounds possible to me: if you don't share some strong cultural bond with the person you're about to hire, then you're more likely to select on intellectual conformity. This contrasts with points made by Lesley Riddoch in her book, Blossom: "The exclusion of women doesn't just narrow the pool of talent available to play the existing game - it excludes the most likely game changers" - and again it's certainly true that variation in life experience will lead to variation in opinion. So there're two mechanisms going on here, one which represses and one which promotes diversity of opinions as the diversity of the talent pool rises. It would be interesting to know which mechanism is dominant.

# This series on welfare economics from Interfluidity was great. From the 5th in the series:
"You might, think, then, that I’d advocate abandoning those diagrams entirely. I don’t. All I want is a set of caveats added. The diagrams are redeemable if we assume that all individuals have similar wealth, that they share the similar indirect utility with respect to wealth while their detailed consumption preferences might differ, and the value of the goods being transacted is small relative to the size of market participants’ overall budget. Under these assumptions (and only under these assumptions), if we interpret indirect utilities as summable welfare functions, consumer and producer surplus become (approximately) commensurable across individuals, and the usual Econ 101 catechism holds. Students should learn that the economics they are taught is a special case — the economics of a middle class society. They should understand that an equitable distribution is prerequisite to the version of capitalism they are learning, that the conclusions and intuitions they develop become dangerously unreliable as the dispersion of wealth and income increases."

# Simon Jenkins in the Guardian says that Northern cities need more than 'powerhouse' rhetoric: "... lively group of local executives.... Their obsession was simple, how to stop their brighter employees, not to mention their own children, vanishing to the bright lights of London. Their problem was not industry, it was image.... An English provincial revival will never lie in pre-election promises of half-hearted localism. The wealth and subsidy gap between London and the rest is now ludicrous and impossible to defend. The cliche, implied again by Miliband today, that the provinces make widgets while London makes money, will not close it.... These places must acquire some of the glamour that is attached to York, Oxford, Winchester and Brighton, cultural magnets for young and old. Cities must fizz or die. That means big government should move itself out of town. Big art should disperse if it wants subsidy. Big media should become geographically pluralist."

Sir Harry Burns says Yes vote could be 'positive' for health - but how do I put that in an economic model!!

Dinner with No Voters or “What I wanted to say before the Pudding hit the fan” - this is the best description of the politics of independence that I've seen

# This is maybe an issue which doesn't translate well across the Atlantic: How The Public Funding Of Elections Increases Candidate Polarization at Marginal Revolution. Tyler Cowan seems to be suggesting that proponents of public funding of political parties say that it would reduce the political distance between the parties, and that this is a good thing (divergence causing gridlock in American politics). Whereas the evidence seems to show that public funding increases the polarisation, and so public funding is a bad thing. My British view of this is that the evidence is unsurprising - I'd expect it to promote polarisation - and that therefore public funding is likely to be a good thing if it means that the two main parties who fight it out (in England) don't attempt to occupy the same ideological ground.

# Interesting: A marriage made in hell: Housing and foreign demand

# I have a mention in Full Fact's article on Scotland’s international trade under independence

# I entirely agree with de Zeeuw & van der Ploeg, Climate tipping requires precautionary accumulation of capital and an additional price for carbon emissions, but in the context of this I do get a bit annoyed that no-one would publish my A Balance of Questions: what can we ask of climate change economics? paper!

# A great simple description by Noah Smith, Chris House on stimulus spending, of why it is highly likely that increased government investment is a better form of fiscal stimulus than tax cuts.

# Also from Noah Smith, a description of two papers, RBC models we can believe in, in which network effects and a complex economy, mean that local idiosyncratic shocks combine to produce aggregate fluctuations (rather than cancelling in a law of large numbers type way). My interest is not so much on how complexity underlies the business cycle, but rather the impact such complexity has on issues of optimal size and scale. However, these papers do sound like something I should know about.

# Paul Cairney, from a completely different perspective, also discusses complexity: Scottish Independence: Will Anything Really Change? In particular, this is about the tension between the "inescapable trade-off between a desire to harmonise national policies and to encourage local discretion."

# Paul Krugman reports that "Vox has a great explanation of the Roman Empire in 40 maps". Like Krugman, I love this sort of stuff.

Citizens are happier in countries where the government intervenes more frequently in the economy

38 maps that explain the global economy

Friday, 22 August 2014

"Borders" Workshop materials

The SIRE ‘Country Size and Border Effects in a Globalised World’ workshop keynote speaker presentations are available:

Keynote Lecture 1: JAMES E. ANDERSON (Boston College) – "Border Effects: Canada-US Lessons"

Keynote Lecture 2: ENRICO SPOLAORE (Tufts University) – “The Political Economy of National Borders”

Wednesday, 13 August 2014

Deutsch Hausaufgaben

Translating an article from 20 Minuten (Zürich equivalent of the Metro) - but it is borders and independence/union related...

What the new Swiss superpower looks like
Always more neighbouring regions want to join Switzerland. Over 80% of 20 Minuten readers find this a good idea. We have put the pros and cons together.

After Baden-Württemberg and Lombardia, South Tirole now also shows interest in joining Switzerland.

A non-representative survey of more than 44,000 participants shows that over 80% of 20 Minuten readers want Switzerland to receive these new cantons from abroad. "They are a great expansion for a great country," writes reader Bruno, 13. Mike finds "These are all "cantons" which would do well in Switzerland."

Some of the readers would be willing even to barter: "We take the Welshland from the French" or "For this we let Zürich belong to Germany".

Reasons for letting border regions join:
- Bath seaside holidays: Switzerland gets a seaport due to the "Maritime Canton" of Sardinia.
- Pizza, Pasta and Veltliner wines become the official Swiss cuisine.
- Thanks to the friendly South Tyrol, we can score even more points with the tourists.
- Thanks to the Germans, Switzerland can be football world champions in four years time.
- The Brenner Pass would belong to Switzerland. Therefore, it would have a monopoly on the (Alpine) "North-South axis"
- The new economy in Switzerland-Baden-Wuerttemberg-South Tirole strengthens Switzerland.

Reasons against letting border regions join
- When Baden-Württemberg is in Switzerland, we can no longer go abroad for cheap shopping.
- The "original" Swiss population would be outvoted against the interests of the big cantons of Bavaria and Baden-Württemberg.
- Armed conflicts threaten: in the example of Ukraine one sees the devastating effects that expansionary policy can have.
- Bavaria or Baden-Württemberg do not fit - in terms of the language - in Switzerland.
- Swiss motorcyclists in South Tyrol would have to gamble with nasty speed traps.

Monday, 11 August 2014

Towards a Citizens' / Basic Income

Bit of self promotion here - but in a good cause...

The Scottish Green Party have published their Green Yes Briefing Note on a Citizens' Income for Scotland (press release here) - and I was responsible for the numerical calculations. These were done using the same model as was used in Comerford & Eiser (2014) "Constitutional change and inequality in Scotland" - which is forthcoming in the Oxford Review of Economic Policy.

I have no idea how politically feasible a Citizens' Income is, but it's interesting that this issue also seems to be being discussed in the US econ blogs at the moment - see e.g. Noah Smith: Basic Income is good because it's basic.

Tuesday, 1 July 2014

End June Links

# Having just moved to Zürich in Switzerland, this post, Alive and awake in the dreaming time from the Wee Ginger Dug, makes me a bit wistful and homesick! "Sleepwalking? This country has never been more alive. ... We’re excited at the countless possibilities that are springing up like Scottish bluebells after a long cold winter of the soul. We’re not sleeping walking to independence, we’re casting off our crutches and getting up on our own two feet, we’re running towards the future with hope in our hearts, we’re dancing towards it with our own rhythm, we’re singing dreams into being with our own tunes. We’re following the songlines to a future we seize in our own hands. It’s good to be alive in the Scottish summer, and it’s even better being awake. Alive and awake in the dreaming time."

# I never liked Angela Knight when she used to feature in the media on behalf of the British Bankers Association, so I'm kind of pleased to have my prejudices confirmed by finding that she is a former tory MP who opposes renewable energy: time to rethink 'green' power policies in Brussels. The article shows that Scotland's huge comparative advantage in renewable energy is objectively ill-served by the UK political establishment.

# I think I agree with Matthew Kahn that Krugman is wrong (!!!) on Carbon Mitigation, Self Interest and Ideology: sub-urbanites with a high rate of time preference (and no infinitely negative utility attached to civilisational risks) rationally oppose carbon pricing. Krugman's point is that the cost is low in aggregate GDP terms, but those individual sub-urbanites stand to lose a lot.

# Research on VoxEU to read: Are large headquarters unproductive?

Thursday, 5 June 2014

'Pooling & Sharing' versus 'Local Control'

The BBC has an interesting article up entitled Why is Glasgow the UK’s sickest city? Harry Burns's theory is particularly striking: "Harry Burns ... raised a few eyebrows when he compared Glaswegians to Australia's Aboriginal people. Yet he believes deindustrialisation in a city where tens of thousands once worked in the factories and the shipyards has deeply wounded local pride. As a result, people here have much in common with demoralised indigenous communities."

This I think allows us to consider an alternative history which may be informative about the visions presented in the SNP (White Paper) & Labour (particularly the pronouncements of Gordon Brown) contributions to the referendum campaigns. Suppose we were back in the early to mid 1970s. It is widely recognised that Glasgow's shipbuilding capability is becoming uncompetitive and that the capital stock is in need of major investment. Likewise London needs a great deal of investment, and some are forecasting a major growth in financial services worldwide that London will be well placed to take advantage of. Let's assume for simplicity that the investment required for both these projects is roughly the same, and that when the civil servants crunch the numbers, the expected returns on the London project are higher. Assume the risk premiums associated with both projects are the same.

Finally, let's assume that investment funds are in short supply such that borrowing for both projects pushes up the rate at which you can borrow. The impact of this is such that, while the NPV of both projects (considered separately), each under the higher rate (charged by capital markets for funding both projects), is still positive; combined it is lower than the NPV of the London project done in isolation at the lower rate (charged by capital markets for funding only one of the projects).

The pooling and sharing vision set out by the Labour party is consistent with funding only the London project. This maximises value (in NPV terms) at the UK level, and some of the surplus is distributed to Glasgow to pay the unemployment, disability and health costs that result. Maximise wealth, pool it to some extent, and share from rich to poor. This is a fair description of what actually happened.

Given the importance of Glasgow to Scotland (Greater Glasgow is 2 5ths of the total population), it is inconceivable that this is what would have happened if there had been sufficient local control at the time. [Clearly the independence argued for in the SNP's White Paper constitutes a sufficient degree of local control (though other constitutional options may also meet this description).] The Glasgow project would have been funded, and NPV would not have been maximised. Economic contribution would have a more even geographical distribution, as would the location of talent and human capital, and likely the destination of investment capital too. Self esteem in Glasgow would be enhanced - without, I'd argue, damaging the self-esteem of communities in London.

Without specifying a social welfare function it is impossible to say which of the two paths maximises welfare. But I know which path I prefer...

Monday, 2 June 2014

End May Links

# "If you want r to get under g and stay there, inflation and financial-repression is a big part of the picture. And for this to be of any use, it has to be proper inflation – i.e. the sort that includes wages." Inflate! says A Fistful of Euros

# "in an economy that operates on prices, as ours ... clearly does, the economic quantity of consumption is not tethered to the physical quantity of resources people consume. ... Think about it: how can economic growth be “bad” and recessions, with all the cutbacks they entail, not be “good”? ... replacing a capital stock built up over decades in response to insanely low fossil fuel prices with one that runs sustainably is going to require a lot of economic activity—you know, GDPEconoSpeak Finally Can’t Take Naomi Klein Any More

# Adam Ramsay's series again on reasons to support independence: The flotilla effect and why smaller countries are richer

# Martin Wolf doesn't sit on the fence: Wipe out rentiers with cheap money

Western Antarctic ice sheet collapse has already begun, scientists warn. And so it begins...

# I'm a bit wary of endorsing this post from Business for Scotland, but properly qualified they are on to something. Why Quantitative Easing has been bad for Scotland could be read as an indictment of QE as a whole, but Scotland needed an extreme monetary policy response to the financial crisis, in common with the whole of the Western world. However the post should be read as making the (correct) point that this particular form of loose money meant that the distributional benefits were towards those with large financial holdings - and this resulted in geographical imbalances. If new money had been created and distributed on an equal per capita basis then we could have had the required loose money policy without favouring the already wealthy, and implicitly the South East of England at the expense of the rest of the UK.

# Lev Ratnovski, Luc Laeven, & Hui Tong ask Are banks too large? in VoxEU

Friday, 30 May 2014

I'm in the New Scientist!

But I'm not particularly happy about it! The article is entitled Scotland: What if independence goes horribly wrong? and I'm quoted as saying "Raising tax rates to provide pensions could be a self-defeating policy if it leads to an exodus of workers"...

The actual exchange with the journalist was:

I’m writing about how Scotland’s aging population could be a problem post-independence, and was hoping you could answer a few questions:

1.       Is the pension cost gap between Scotland and the UK that you describe a significant problem for Scotland, or just a minor difference?
The pensions cost gap between Scotland and the UK, based on the Office for National Statistics 2012 (ONS2012) projections, is a minor issue for an independent Scotland. This difference, projected to peak in the late 2030s, means that to pay equivalent pensions across both Scotland and the rest of the UK (rUK), would require workers in Scotland face a tax rate that was between 0.5% and 1% higher than that of rUK.

This should be compared with the absolute costs of an ageing population. This extra cost to Scotland is much less than the increase in pension costs that both Scotland and rUK can expect to face over the next half century due to an ageing population (maintaining current pension policy in the UK without diverting funds from elsewhere will require an increase in the tax rate that workers face of around 6%). Looking across the advanced countries of the OECD, there is a wide variation in the projections of demographic change. On this comparison, Scotland and rUK are almost indistinguishable, and are relatively well placed: the costs of an ageing population are even higher in Germany, France, Italy and Spain for example.

2.       How politically difficult would it be to implement the immigration fix you describe?

To eliminate the cost difference between Scotland and rUK through increased relative immigration would require that rUK follow the central projection from ONS2012, whilst Scotland follows the actual experience of 2000-10. The experience of 2000-10 is clearly politically feasible at least in terms of annual flows since it has been followed for the last decade without provoking any great public reaction in Scotland. It was however a period of above average (relative to a longer historical view) net migration into Scotland, especially due to net migration from rUK and from Eastern Europe.

3.       How does this problem relate to your other paper on constitutional change and inequality? If I’ve understand that correctly, Scotland would need large tax rises to tackle inequality, which is presumably at odds with paying the pension bill?

Reducing inequality through raising taxes clearly raises revenue. This revenue could meet the cost of paying pensions so there is no conflict in principle between reducing inequality and meeting the costs of an ageing population.

My paper with David Eiser on Constitutional Change and Inequality in Scotland made the point however that the exercise of fiscal policy to reduce inequality (say by raising taxes) could have adverse impacts due to labour force movements. This is an especially important point to consider when deciding on the tax rate to charge to fund pensions: providing pensions requires a working next generation, so raising tax rates to provide pensions, if it leads to an exodus of workers, could be a self-defeating policy. As discussed above though, this is an issue of relevance to the whole of the western world, not particularly an issue with Scotland or the UK per se.

And they linked to the wrong David Comerford!

Monday, 12 May 2014

The UK Government really doesn't seem to understand the concept of fairly splitting assets and liabilities

Given the size of the UK debt stock which the UK Government has guaranteed to honour, the rest of the UK has a lot to gain from the fair division of assets and liabilities in the event of Scottish independence. You would therefore think that it would help its own interests by identifying the asset side of this transaction, so that picking up its share of the debt would seem like a fair deal for the Scottish negotiating team.

Statements like the following from today's Scotland in the UK report, seem to suggest that the UK Government is intent on claiming all of the assets whilst simply kicking up a fuss when it is reciprocally left with all of the liabilities:

"Instead of gaining from the UK’s EU budget rebate, an independent Scotland would actually have to pay towards the rebate of the continuing UK."

The EU budget rebate is clearly an asset of the current UK. If the UK Government wants Scotland to take its share of the debt, then it will have to share such assets. Someone should explain the impact of outside options/disagreement points on the bargaining solution to Alastair Carmichael.

Monday, 5 May 2014

Creating a border effect

My blog on The border effect and Scottish independence(*) was published last week at the LSE Politics site. The exercise that this post was based on, is the comparison of the apparent border frictions between Scotland and the rest of the UK, with the apparent border frictions between Ireland and the UK. These differences do not arise because of language or because of any explicit tariffs or border controls (the UK and Ireland share the Common Travel Area). Rather, the differences in apparent border frictions are likely to arise because firms in UK and Ireland do not share all of the same social and business networks(**).

In this context then, the recent CBI debacle is very interesting. The Confederation of British Industry, as well as being a fairly political animal in its lobbying behaviour, puts on events and provides a forum for socialising and networking for the British corporate sector. By explicitly aligning with the No campaign in the referendum, many organisations in Scotland which wanted to remain neutral, felt they could no longer remain members of the CBI. And so the networks that maintain the low intra-state border frictions start to unravel...

Another area which fits well with my border effect work is Prof Brad MacKay's business surveys. These find that "companies that have a majority of their trade in the rUK rather than in Scotland (often at a ratio of 90% to 10%) appear far more affected [identify more risks than opportunities] than companies with the majority of their trade either in Scotland, or globally. ... companies which were ... trading predominantly in a global market appeared to be less affected by the constitutional debate than PLCs with significant trade in the rUK". This is exactly the prediction of the scenarios I presented in which Scotland does both badly or well out of independence:

  • Scotland does badly (5.5% of GDP cost) if its border with rUK becomes as frictional to trade as the current UK-Ireland border, and
  • Scotland does well (3.5% of GDP benefit) if its border with rUK becomes as frictional as the current UK-Ireland border, at the same time as its border with the rest of the world becomes as frictional to trade as the current average for small northern European countries.
In both cases trade with the rest of the UK falls substantially: companies for whom this is the entire focus of their business are correct to think that independence implies risks. But companies which operate internationally should see opportunities: Scotland's trade with the rest of the world could and should be better.

(*) "The border effect and Scottish independence" was the title I submitted. I'm pretty unhappy with the title they chose to run it under: "The costs of a border between an independent Scotland and the rest of the UK is estimated at 5.5% of Scotland’s GDP". This sounds partisan, and an equivalently accurate statement of the content of the article could be "The benefits of normal borders between Scotland and both the rest of the UK and the rest of the world is estimate at 3.5% of Scotland's GDP".

(**) There will be other contributions like impact of common regulations, and perhaps also the impact of the Irish Sea.

Thursday, 1 May 2014

End April Links

# Great satire of both economic methodology and its critics from Simon Wren-Lewis: Retiring macroeconomic theory

# Martin Wolf says ‘Too big to fail’ is too big to ignore: "The IMF suggests three options: restrict the size and activities of banks; reduce the probability of distress; and lower the probability and size of any bailout if a bank becomes distressed. Of these, the second is much the best. ... it is always the system, stupid. It would be quite wrong to suppose the chief problem is individual banks that are too important to fail. A system with a large number of small and interconnected banks exposed to correlated risks, on either their assets or their liabilities, would also be perilous. ... This is why higher equity requirements than the businesses alone would want are needed for all leveraged institutions. Systemic risks are the issue. Capital requirements related to such risks are needed, be the components of the system a few giants or a multitude of minnows."
I agree, but I think that regulation should also be biased in favour of a multitude of minnows over a few giants (contra the government arranged absorption of HBoS by LTSB). A system based on giants will be overly interconnected, but while a system composed of a multitude of minnows may be overly interconnected, it need not be.

The eye, the needle and the camel: Rich countries can benefit from EU membership, by Campos, Coricelli, & Moretti

Taxing, spending, and inequality - what is to be done? by Clements, Coady, de Mooij, & Gupta is consistent with my own work on inequality and fiscal policy

# I want to do something linking e.g. 'Why the elites are so ruthless that they destroy themselves' from the Resource Crisis blog which discusses the collapse of complex societies, with something much less scary sounding like Paul Cairney's 'What is complex government and what can we do about it?'

# Spot on from Matthew Yglesias: Beyond the Laffer Curve — the case for confiscatory taxation & No, inequality doesn't help the economy grow

# Adam Ramsay: "Confusing solidarity and centralisation was the greatest mistake of the left in the 20th century". Brilliant. From 40 reasons to support Scottish independence - reasons 1-3. I also like Clifford Singer's We must find ways to devolve economic power

# Interesting debate emerging: Martin Wolf calling for state monopoly on money creation, John Cochrane's Towards a run-free financial system, Francis Coppola's The death of bankingHouse of Debt's 100% Reserve Banking — The History, Krugman's Is a banking ban the answer?

Monday, 31 March 2014

End March Links

# This is the economic argument for independence: "If the most ambitious or creative people leave, then it becomes progressively more difficult to facilitate the recovery of an economy ... Scotland cannot remain as a reservoir of talent for other economies and societies without descending into decline ... This is also why we shall need to attract talent from abroad through intelligent immigration policies." Options for Scotland, Report highlights emigration fears

# Fantastic post from Simon Wren-Lewis about how the argument 'that if a Sterling Union is in rUK's economic interests then current ruling out of currency union must just be a bluff' is wrong: when has George Osborne ever let bad economics rule out a policy!!

# Piketty's new book:
   - Some slides with charts
   - Krugman: Notes on Piketty, Working for the ownersWealth over work & NYRB Review
   - Atkinson & Morelli: Chartbook of Economic Inequality (and Vox article)
   - Relinking to great Matt Yglesias post about land

# I love this video showing 1000 years of European border changes: Watch as 1000 years of European borders change

# As usual, Interfluidity's latest has some great ideas in it:
"Suppose, reasonably I think, that ceteris paribus humans prefer to “be good”. That is, we prefer to do work that is productive and engage in behavior that is ethical. Suppose, also reasonably, that a well ordered society depends upon people sometimes making choices opposed to their material interests on ethical or other grounds. Then it is obvious how inequality might be costly. Instead of talking about “incentives to” (produce, extract rents, whatever), we might describe outcome dispersion as a tax on refraining from mercenary behavior. If the difference between economic winners and losers is modest, people of ordinary virtue might refrain from participating in activities they consider corrupt, might even be willing to “blow the whistle”, because the cost of doing so is outweighed by their preference for behaving well. But as outcome dispersion grows, absenting oneself from or even opposing activities that would be personally remunerative but socially undesirable becomes too costly. The required sacrifice eventually overcomes a ceteris paribus preference for virtue. Preventing the misbehavior of large coalitions is a collective action problem. An isolated malcontent or whistleblower is likely to be evicted from the coalition without meaningfully improving behavior, if others choose to “circle the wagon”. Outcome dispersion both increases the costs to individuals of engaging in pro-social behavior, and diminishes the likelihood that bearing those costs will be fruitful, since others will have strong incentives not to follow. ... there really isn’t anything any one individual can do to remedy the bad practices. Making a big issue of them would lead to useless excommunication. Instead we shrug ironically. ... Ethical behavior is endogenous. “Inequality” renders it costly."

# Note to self: I need to remember (and then use sometime) the OECD Fiscal Decentralisation Database

# Will the ECB go negative?

Friday, 28 February 2014

End February Links

# Simon Wren- Lewis on the English floods, and the economic policy & climate skepticism of the Tories. It may come back to bite them. Austerity and flood damage & Are the UK floods Cameron’s Katrina?

# Is Liberal England starting to "get" Scottish Independence? Aditya Chakrabortty in the Guardian

# Fantastic point by Matt Yglesias about public policy incentives in Scotland: "A place like Scotland is a sufficiently small share of the United Kingdom that it makes sense for a Scottish political activist to be more focused on 'how much money does this program bring to Scotland?' than on 'how good is this program at generating social benefits in a cost-effective way?' An independent Scotland ... would have politics that I think would ultimately be more constructive." The whole thing is good though too, Should Scotland become independent?

# I love Robin McAlpine's new website C'monScotland (though he needs to get an RSS feed sorted or it's going to be too easy to ignore and miss new posts). It's focus is on the bargaining powers of Scotland in Post Yes vote negotiations, and I think he has it spot on. Some choice quotes:
   - A thousand years old and brand new: "If Scotland is a continuing state then both Scotland and the remainder of the UK inherit all aspects and elements of the preceding state in a proportionate manner. If the UK is party to a treaty, after independence both the remaining UK is a party and independent Scotland is a party. If the UK owns an asset beforehand, rUK and Scotland then own that asset proportionately. If the UK has any obligations (such as debts) then those obligations pass to both rUK and Scotland ... Or you are a successor state in which case there is not a single certainty ... If we're out of the EU and we have no access to Sterling, we have no obligation to UK government debt ... there are some downsides to that position. Yes we'll need to agree terms for EU entry ... But it's not all downside; with no obligation to accept debt (and no mechanism via which it can be imposed on us) we have a very strong bargaining position. In fact, if only we could start thinking about ditching Sterling we'd have all the cards."
   - On unicorns for tea: "let there be no more talk of default. Let there be no more talk of 'crippling rates of interest' which (a) recent precedent suggests is pure scaremongering not related to events and (b) refers to the crippling interest to be paid on debts we don't have. If the worst came to the worst and Scotland was left in a position where it had to play its most aggressive card, we would walk away with no debt, no default and no problem raising money."
   - The difference between having and using: "if we set up a deal [the shared constraints implicit in a Sterling Union] to maintain a sensible approach to running deficits in the early years of independence ... that means we're not independent?... Apparently, however, the loss of interest rate-setting and the need to hold to a reasonable pact on deficit are the red line that must not be crossed. Neither of these things are anything like as fundamental to the operation of the state as the loss of control over trade, state investment or domestic law, but for some reason we are supposed to hang our heads and give up. It's not real independence. ... There are only two constitutional positions; sovereign and not sovereign. Being a nation state puts you into the former of these categories. What you do with your sovereignty – and for how long you do it – is then up to you. Hence 'sovereignty'. Britain has given up much more sovereignty already than even the most cautious SNP position proposes we additionally give up post independence. Germany has given up even more. In fact, Germany will probably have given up more power than Scotland when all is finalised. Is Germany a sovereign state? How do the poor Germans get through the day when they realise that their 'independence-lite' constitutional status is barely worth having? ... A sovereign nation is in control, not just now but indefinitely. If Scotland joins a Sterling Zone-pact and if that pact is badly negotiated ... we can just change our mind. We can leave whenever we want, irrespective of what we've agreed. It's called realpolitik and it happens day and daily."
  - Born honest, born clever: "unless the UK accepts Scotland beginning its independent life as a continuing state (something the UK point blank refuses to even contemplate), we have no formal obligation to do, accept or agree anything. This is not Scotland's doing, it is the rules of the game as chosen by Whitehall. ... Still, the people of England were robbed by these bandits every bit as much as the people of Scotland. ... My position is clear on this; if this debt was to be repaid by the elite that created it I'd be off like a shot, leaving them to drown in the backwash of their corrupt financial system. But it isn't. The elite are never the ones that pay for their crimes; it's always the people. And it is the people of England, Wales and Northern Ireland who will be paying for the behaviours of the elite. I for one will have no part of leaving them on their own with no cash to invest in their society while Osborne and Darling enjoy their personal millions. But – and oh what a size of but this is – the terms on which we repay our debt to the English, Irish and Welsh people will be our terms. Every intransigent action take by Whitehall in negotiations which costs Scotland money will be subtracted from that debt. If they really did refuse access to Sterling then the cost of a foreign currency reserve (the cost of running a currency pegged to Sterling) would be taken off that debt. If they mess us around on our share of the assets, we'll make the unilateral decision on what we're deducting in kind. And so on. If the people of the rest of the British Isles want us to take our share then they have the responsibility to make their democratic government behave in good faith. "

# And this post by Prof Christine Bell, Currency Reflections: The Legal Issues, shows that Robin McAlpine is not out on a limb in his interpretation.

# Whilst claiming that 'we really really want a currency union and if we don't get one then our outside option looks pretty good' may be a masterstroke in the bargaining process, it remains the case that a currency union is fundamentally not a good idea: even Krugman agrees.

# This is great: Lasers blast a way forward for nuclear fusion power; but this is disastrous: Fire in the hole: After fracking comes coal

# I like Chris Dillow's examples in When good ideas turn bad

# "So, if you were a ranting leftist, you might say that political attitudes are shaped by class, and that ideological justifications for high inequality are just a veil for class interest. You might also say that “sound” economic policies are really just policies that redistribute income upwards. And it turns out that the econometric evidence more or less supports your rant."

# Data visualisation:
   - Guardian Cities interactive map on life expectancy in cities based on LSE Cities’ data
   - James Trimble's maps: