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...

No comments:

Post a Comment