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?