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!

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.

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.

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 banking, House of Debt's 100% Reserve Banking — The History, Krugman's Is a banking ban the answer?