The Non-Economics of Desperate Dave

By Dan Gay

David Cameron today again repeated the nonsense claim that anything other than swingeing cuts will cause “economic chaos”. In an indication of just how impoverished mainstream British political debate has become, he lambasted Labour’s plans to balance the budget but keep spending on infrastructure as if it were Zimbabwe-esque profligacy.

Yet far from lowering the deficit, the cuts are one reason why the economy has suffered its worst period of growth since the Great Depression in the 1930s. Balancing the budget is exactly the wrong medicine in a crisis. The coalition has sucked so much money out of the economy that demand and investment have collapsed, raising welfare payments and reducing tax revenues.

The mainstream media’s fixation with the last five-minute’s news means that they tend to focus on headline economic growth, which recently hit a quarterly rate of 0.7%. But the economy shrank so much after the crisis hit in 2008 that it was likely to rebound sooner or later. Because of population growth, it’s still smaller per head than before the crisis.

Here’s a graph Cameron doesn’t want you to see:

growth-in-uk-real-gdp-per-capita-since-crisis

Taking inflation into account economic output is now 7.3% smaller per head than at the start of the crisis in the first quarter of 2008. We’ve only now climbed back to the levels of about 2005. Of course averages don’t tell the whole story, and a small minority have become much wealthier whilst most people have suffered much more, but of the G7 group of rich countries Britain’s economy has performed second-worst, ahead of only Italy.

Alongside slowing global growth part of the reason for this economic catastrophe – the worst for 80 years – is that the government has extracted tens of billions of pounds from the economy. These sort of cuts are economically counterproductive during a recession.

The recent fall in unemployment to a still-unacceptable 6% has been the result of an increase in part-time, badly-paid and insecure work. People aren’t being paid enough to contribute to government coffers.

The fall in pay is a remarkable feature of the crisis. Again, accounting for inflation, the wages of a British worker have suffered their longest sustained fall since records began in 1862. The International Labour Organisation says that British pay has plunged more than even in Italy. In the five best performing countries shown in the following graph, wages have gone up.

Average real wage index for developed G20 countries, 2007-13

average-real-wage-index-for-g20-ilo

Because we’ve got less pay in our pockets, less money is spent than it otherwise might be, which in turn suppresses growth. Consumer expenditure collapsed during the crisis and is only just recovering. Business investment has shrunk to unprecedented levels as too few people can afford to buy companies’ products and services, and companies remain uncertain about the future. Productivity remains abysmal. I suspect that a fragile recovery based on the services sector and badly-paid jobs will peter out as the underlying economic conditions remain so bleak.

Instead of the debt falling due to government spending cuts, it’s forecast to keep going up until next year because the economy is doing worse than it otherwise would. In fact public debt isn’t particularly high by historical standards and it’s not the main problem, especially when borrowing costs are at such historic lows.

What the Tories fail to mention is that it was private debt which caused the crisis, not government debt. Private debt, mostly financial sector and corporate, grew to four-and-a-half times GDP, compared with public debt which is now 80.4% of GDP.

The deficit has ‘only’ halved as a proportion of GDP since the coalition took power, to £91.3 billion, despite Osborne’s promise to eliminate it by now. This failure is because of the cuts.

There’s more madness to come. Osborne said in his autumn statement that over the next five years he wants to shrink public spending to levels not seen since before the second world war. £60 billion will come from public service cuts. That’s nearly twice the defence budget or the equivalent of dualling Scotland’s A9 road from Perth to Inverness 143 times. Schools, health and foreign aid are ring-fenced, so some departments will be ransacked. This amounts to a full-scale attack on the state.

What we should be doing – and what Scotland could do given full economic powers – is reinflating the economy. Building infrastructure would encourage businesses to invest. Tackling the housing shortage would stimulate demand. We could develop a modern, strategic industrial policy which built a new, environmentally-sustainable economy based on Scotland’s advantages in sustainable energy. This investment would eventually pay for itself, particularly when borrowing is as cheap as it’s ever been.

Osborne and Cameron have taken us so far down the rabbit hole that we’ve confused up with down, good with bad. We should be rebuilding the economy rather than trashing it; looking after each other instead of accepting the cuts. All that rhetoric about hairshirts and tightening our belts is nonsense. We’re being punished when punishment isn’t the answer.



Categories: Economics

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35 replies

  1. Need to get into print.The National.scot for the retired accountants to read

  2. Thank you for that trenchant analysis. At last we are exploring the real economic issues. I would simply like to add the following summary points extracted from the Bank of England Quarterly Bulletin (No.2, 2014):

    “Labour productivity growth in the United Kingdom has been particularly weak since the start of the crisis.

    The recent strength in hiring and modest pickup in productivity growth suggest that spare capacity within firms is unlikely to explain much of the current weakness.

    Factors related to the nature of the financial crisis are likely to be having a persistent impact on the level of productivity” (BofE Monetary Analysis Directorate).

    None of the government’s economic prescriptions, nor the parroting of the same prescriptions by the opposition in Parliament address the fundamenal problems of the economy, or will solve them; clearly either they do not understand the problems which they are so disastrously mishandling, or they do understand them and are merely protecting vested interests.

    • These facts are well established in the minds of most rational people. What sort of diseased psychology must infect the minds of those in government who cannot grasp these truths and instead subordinate them to shallow, ideologically biased beliefs? Frightening!

  3. “Alarm Bells are ringing, answers please Kate Green”

    http://dpac.uk.net/2015/01/alarm-bells-are-ringing-answers-please-kate-green/

    The poor WILL pay.

  4. Desperate Dave & Gideon – 5 more years of austerity that wont work. Mr Ed and Balls up – has pledged to match the austerity agenda. = Red and Blue Tories give the same future.
    For us guys that go knocking doors – what realistic economic examples can we give that would fall under HOME RULE which is the option we will have given an SNP voting block.
    In a nutshell – spell it out to me what Scotland can do if she gets Home rule?

    • I have hesitated to respond to you because the agenda has been set here by Dan Gray’s telling and illuminating article; but I think he supplied some pointers to which you may refer. Since there has not yet been any other response to you, I will (a little reluctantly) therefore take the liberty of borrowing his arguments with as little interpretation from me as possible, in an attempt to respond constructively to your request: I trust I do not misrepresent his position.

      What Scotland could do given full economic powers is:

      reinflate the economy.
      Build the infrastructure, which would encourage businesses to invest.
      Tackle the housing shortage, which would stimulate demand.
      Develop a modern, strategic industrial policy and build a new, environmentally sustainable economy based on Scotland’s advantages in sustainable energy.

      “This investment would eventually pay for itself, particularly when borrowing is as cheap as it’s ever been”.

      I hope that is a fair summary of Dan Gray’s main points. Such an approach is not within the power of the Scottish Government in materially significant terms under current Holyrood arrangements (e.g.., on borrowing) with Westminster. Notice, however that this approach requires “full economic powers”, which in turn I take to imply Home Rule or Federalism (if I understand Gray’s argument) is established.

      Since we will still remain within the UK there are neverteless economic constraints, an over-arching UK framework that will continue in place; and limit the freedom of operation of the Scottish Government, restricting what could otherwise be achieved; but it represents an advance on the ‘status quo’.

      This prospect would be considerably enhanced, however if the UK Government in turn fully embraced the macroeconomic theory that Dan Gray has outlined (although the granting of Home Rule/Federalism must presuppose some movement toward it); but there is no prospect of this being achieved under the prevailing British economic orthodoxy (ideological dogma) currently promoted by the Westminster Cartel.

      I hope that is useful.

  5. And today the BBC gave prime time space to Cameron spouting about not passing debt onto our children.

    Racking up more debt than every government in history, selling off profit making assets for pennies, as well as other privatisation that creates gaping holes that need bigger budgets to try and plug again.

    As to GDP,,, ITS TIME IT WAS SCRAPPED!

    Easy way to fuck up GDP and make it look good in your favour:

    London Housing Bubble. Fuck it if no one can afford to live there it looks good on a balance sheet.

    Time for a new economic model, its failed.

  6. Great article!

    Especially highlighting the centrality of the public/ private debt split. Public debt is, and never was the fundamental issue. Just as is wasn’t in Ireland until they bailed out the private debt.

    Krugman makes the analogy of hitting yourself over the head repeatedly with a baseball bat and the fallacy of austerity growth.

    Some of the measures mentioned, house building, infrastructure investment, tax/ pub cuts investment ratio, strategic industrial policy and rebalancing the econ away from financial services are lbour policy, depsite the rhetoric being about fiscal prudence and restrained borrowing (although their policy is way short of the mark in terms of the auserity/ investment balance admitedly IMO) The reason they don’t go further is due to public perceptions of economics and the myth that Labour governments simply is profligate in office.This leaves them open to attack by the Conservatives.

    But these public perceptions are shared in Scotland also, and given the asymetrical nature of the Scottish econ and its reliance/ integration in the wider UK econ I can’t see how independence would allow the space to dramatically change policy either given the debt inherited and the outside fiscal constraints. Plus there was the further danger of divergence given a radically different fiscal policy to the monetary policy of a shared CU. If it could have I would’ve voted for Indy like a shot.

    I heard another good analogy – the joke about the two naturalists in the in Africa when they get spotted by the pride of lions. One starts putting on trainers. The other looks at him in confusion and says ‘you’ll never outrun a lion’. The first replies. ‘Doesn’t matter, so long as I out run you.’

    That’s kind of Scotland’s response except the sad fact is the lions will chase after the second man, after eating the first.

    What I find surprising (just for intersets sake) is the way the right wing arguement for indy was almost ignored. (indy was a neolibs fantasy come true) Goes like this 1) Scotland gets indy on a plaform of social justice and left wing policies. 2) the first government fails due to these policies – or at least is peceived to fail due to external constraints and realities 3) next government and public opinion swings to the right, low tax/ low reg econ and public sector shrinkage. 4) The right wingers in England leave EU (screwing up 70% of Scotland’s export market as they can now introduce tarrifs.) Scotland has to leave EU also to realign in the Sterling currency zone and mirror the polices of England/ rUk to save business.

    Also a point on rebewables. I work in the marine industry, and can assure you their are big problems in the sector at the moment, with bankruptcies in wind and wave companies, government bailouts needed and job losses in the north east of both industry hubs in Aberdeen and Newcastle. Depressingly.

    • “I work in the marine industry, and can assure you their are big problems in the sector at the moment…”

      You bet there are:

      Look at the size of that cod. Must be something in the water.

  7. Thanks for the comments. I agree that independence was by no means bound to end up with a more progressive country (even though it is more likely based on all the Scottish parties’ manifestos). Some folk are over-optimistic. Nothing would be easy, especially in the early days.

    I don’t share the pessimism about reflationary, progressive policies necessarily failing. Have a little confidence! All the evidence suggests that investment in health, education and infrastructure results in a more robust economy over the long term. The austerity of the coalition is a terrible failure and it will haunt us for many years.

    As for why we need more powers, and ultimately independence, there’s absolutely no possibility of any of the Westminster parties doing anything along the positive lines I suggest, as those parties have repeatedly demonstrated over the past few decades.

    On the idea that the ‘inheritence of debt’ might restrict fiscal space, that’s simply a myth. Borrowing is almost as cheap as its ever been. http://emergenteconomics.com/2015/01/12/borrowing-is-almost-free/

    Scotland needs independence and it can use it to improve the economy. Some of the levers of policy that Scotland needs in order to rebuild and reshape the economy along fairer and more just lines, and which it doesn’t currently have in full, include:

    On the fiscal side:

    Corporation Tax (base and rate)
    Oil and Gas Taxation
    Excise Duty
    Value Added Tax (VAT)
    Air Passenger Duty
    Capital Borrowing
    Welfare and Social Security
    Public Sector Pay/Pensions
    Housing
    Environmental taxation

    Non-fiscal levers of policy:

    Financial Regulation
    Consumer Protection
    Industry Regulation
    Energy Markets and Regulation
    EU Legislation
    Competition Law
    International Trade
    Immigration
    UK-Level Public Goods
    Public procurement.

    Finally, the current problems in wave power may be worrying and the short-term decline in the oil price has had a rapid effect, but the trend in renewables over the long term is overwhelmingly positive and something to be proud of.

    • Great article Dan, but does embracing a quick transition to renewables not encourage the speeding up of the deindustrialization? Renewables require subsides which increase energy prices, reducing competiveness, thus making us rely on more imports from China, encouraging more carbon production. I support the reduction of global carbon emissions, but a big proportion of our carbon reduction as a nation has been from deindustrialisation over last 30 years, not from energy policy, in this period our carbon consumption has increased dramatically as we now get our steel etc from China. So what I am trying to say is a long term trend to renewables would be only desirable in a world of proper carbon pricing/taxation, without it the economic cost of going green might be to high, and we might produce 100% of energy from renewables, but are we actually achieving anything when we import everything from with carbon producing countries.

      • Thanks. No, I don’t think renewables cause deindustrialisation. It’s perfectly possible to embrace and encourage green technologies, bringing about reindustrialisation based on energy-efficient industry that doesn’t rely on carbon.

        Most new technologies required subsidies in the early days but not later, and I expect renewables to be no different. The Internet, for example, was based on public subsidy. In most of the successful East Asian economies R&D was largely public, not private. Eventually there was less need for the subsidies (or governments imposed credible deadlines for their phasing out) and many of those industries became extremely efficient and globally competitive. South Korea’s shipbuilding industry is a good example.

        In fact in many areas Scotland and the UK are more competitive than China, and could be even more so with proper strategic industrial policy for the modern era.

        I don’t personally think that ‘proper’ pricing is a relevant concept. Most prices are political constructs; there’s rarely an efficient ‘market’ independent of the actions of actors and governments. Carbon is probably always going to be priced on the basis of politics and international affairs.

        You’re right, though, that Scotland’s carbon-reduction achievements are a bit hollow given that we import so many of our consumer goods from China. I know lots of MSPs are rightly concerned about this issue.

    • Two points.

      Wave power has long been problematic; intermittent, brutal environment and the physical dynamics are especially complex.

      The long-term future must be with tidal energy. Utterly consistent. When Turing was devising the first computer the intellectual models were not well-established. I understand Kelvin’s work on a tide-predicting machine (1872-3) was one early model.

      The problem, perhaps – and I offer this on no better basis than anecdotal evidence – has been that there has been lack of inter-disciplinary cross-fertilisation between the tidal and other engineers; the oil industry in Aberdeen has the greatest engineering know-how network, and could make an enormous contribution; I would have thought. Are they making it? I do not know, but perhaps some people in the oil industry would not see this as serving their vested interests? I doubt if that is a real problem, oil’s future growth is presumably based principally on transport.

      • Agree. From my limited understanding tidal is better because simpler and more consistent. No doubt Scotland has the engineering skill.

        Looking at things more broadly, in a decade or two if not sooner, the transition to renewables may turn out to have been a masterstroke. We’re destroying the world via carbon emissions, wars will increasingly be resource-grabs, and oil and gas will eventually run out. Scotland is absolutely right to make the most of what it’s got: tides, wind and waves (and the occasional bit of sun).

  8. The elephant in the room here though is finance, and how to afford/ subsidise the growth of renewables until they are a viable commercial proposition. Which at the moment they aren’t (the cost/ energy efficiency ration can’t compete with hydro carbons.) The point you make about Korea and the ship building industry is a good one and the same goes for the Chinese shipbuilding industry also (State own corporations like CIMC or CNOOOC) can subsidise construction to the tune of 95%. Only a country on the scale of China can do this – It costs approx 500 million ish dollars to build a new deepwater semi sub Oil rig and they are being built all over Asian ship yards. Essentially, oil companies/drilling companies get a free rig, and the Chinese/ Korean governments get a long term leased investment + a stake in the down stream industry.

    An interesting development has been the inroads Chinese oil companies are making in th North sea. To my mind this is problematic (potentially but not necessarily) as they are buying up majority stakes in companies with licenses in Brent, like Talisman – one of the index feilds (like the WTI). The purpose is not to secure reserves as much but to manipulate the global price of oil. To keep it low. – During the indy ref, who actually owned the licenses was completely ignored (although Alex Salmond must have known this as he does the liability the government would have for decomissioning – very expensive). There was the false assumption that if there was oil in the north sea it would be monetarized and that it existed in isolation. This is not necessarily the case given that the trend is now towards deep water drilling in new fields – highly controversial due to the fact that production can now occur beyond the 200 mile sovereign zone in the high seas. 45% of the worlds surface is outside national jurisdiction. We need international regulation/ law sharpish (I digress.) And shale in the US – a long term strategic plan to make themsleves energy independent so no more wars in the pesky middle east. (This is partly the motive for Saudi oil price drop- they’re worried the Yanks don’t love them anymore, so they’re having a strop – Iran also plays a major part.)

    This doesn’t mean to say renewables are doomed, far from it but some of the same pathology exists with regards to the development. A) UK / Scotland is not the only country in the world with the potential comparative advantage in the tech – nor the natural conditions – It’s all very well being the Saudi of renewables if your the only one, but if there are potentially multiple Saudis – which there are… B) The raw materials will invariably come from China/ Rusia/ India – by this I mean in particular aluminium to build turbines for wind + the support infrastructure like barges/ vessels and rigs to maintain and install (incidentally same goes for nuclear and other rare minerals – 90% ish of rare minerals on land are in China and Russia. Copper, zinc everything for hightech stuff) This makes it politically difficult – especially for a newly ceded state, with little muscle. C) It takes a long time for industries to reach a maturity where they can operate at a profit in the market.

    And I hate to bring it back to Independence (as really I think it is a moot point – any industrial policy would have to be UK wide) as the renewables/ offshore tech industry is not confined to Aberdeen. It is spread across the UK especially the east coast. As are all the other high end manufacturing companies, in particular subsea tech (why Aberdeen voted no) – but also offshore marine engineering in general. This is why you have so many Geordies/ Sunderlanders working offshore. To split a nascent industry like renewables/ subsea (huge potential especially for deepsea minning) that depends on coordinated government subsidy and protection, with differing policies and differing tax regimes at odds with on another would be very problematic + the UK treasury has the muscle to underwrite the whole thing. Scotland, dependent on the volatility of Oil price could not guarentee this – If anything England/ RUK would get the advantage and Scotland would end up frozen out. Also the upheaval of the UK split would run the risk of losing other capital investment, and essentially hand the marginal comparative advantage to the Europeans, Holland, Germany, France and the States …soon the Chinese (although there is still some way to go and their interests lie still in mass manufacturing due to employment). – then of course there’s the Wood report.

    Also, on the point of politics and China and our reliance on them for developing our industries. The prevailing view is that Scotland would have been temporarily frozen out of the loop (as with many other countries with problematic seccessionist movements would have done.) There would have mostly likely been a distancing, work VISA’s being limited and so on – UK is big enough to stand up to this, just. But this is exactly what happened to Norway when they criticised the Chinese government. Was very problematic for their marine construction industry as almost all construction is in China.

    Also, there is the consideration of the nuclear industry who can now build safe small scale, non waste reactors, where you feed depleated urainium into the reactor. This IMO is how the gap between renewables and hydro carbons has to be met. – the Chinese are building them all over the shop. French and the Americans are the top dog here, but UK could be also (and is part of a wider UK industry energy policy – independent of party politics)

    Food for thought.

    • Oh, And I forgot about the tax conundrum with renewables. The structure is such that it gets taxed at source, not sale. Renewables are at sale which produces far less revenue. Simply put the analogy with Saudi may be good for market share and potential, but not with the potential to actually make money.

  9. Sorry. That’s oil and gas/ coal taxed at production not sale.

    • I agree, renewables have a big part to play in the future, but implementation of more nuclear now Is in the only real option for stopping runaway climate change, it’s probably already to late to reach the magic 2 degree warming mark, ( New coal plants are being brought online at a worrying speed, plus with the projected population and consumption growth we would need to act now to have any hope of leveling of at 2 degree warming).

  10. There’s some useful discussion on renewables here and most of it’s beyond my expertise.

    The main arguments of the piece are that the cuts are destroying the economy and hampering deficit reduction, that borrowing is as cheap as it’s ever been, and that investing for the long-term in green or sustainable industries would help reinflate investment and demand, also achieving social and environmental goals.

    • Agreed. But doesn’t all this come back to the currency point? An independent Scotland would have to borrow in order to implement these policies, and the question then arises which currency it would use.

      In the absence of a currency union (and for the life of me I can’t see why the Bank of England representing the interest of rUK would be prepared to stand behind the debts of an independent Scotland denominated in rUK pounds sterling – why would it?) the only option is an independent currency.

      I look forward to being shot down – but please no posts telling me that Scotland “owns” the pound.

      • If it really is about independence, then I suppose Scotland must either bite the bullit and take the risk of a new currency (which could be disasterous at least in the short term) or wait for a few years and see if the Euro becomes stable/ the politics meet the economics (but then this is just the same as being in a union with rUK.) The pragmantic answer is federalism/ some sort of reorgansing so that local econ levers can best be used where and when it is necessary in compliment to multi level governance levers. – And even thinking beyond England Scotland Wales etc and re focus on other units like the city regions. The most progressive option (IMO) is the core city regions stuff.

      • Yes, when we’re talking about monetary economies, which is what we live in, it does come back to the currency. An independent Scotland would need its own currency; borrowing in a currency which some other nation or entity issues is a fools errand because there’s no guarantee of sustainability.

        Even with a yes vote last September Scotland would not be independent now, so the current oil price crash would not be the Scottish government’s problem, at least not directly. But who knows where the price will be in a year or two, or ten. It wouldn’t be ridiculous to expect a significant step-change in battery technology in the next few years, perhaps with one or more of the various solid-state developments. That would be a significant crimp on demand for oil.

        The flexibility needed to deal with these and other shocks only comes from having your own currency, because that makes sustainable deficits possible when they’re needed.

      • For sure the only long-run viable option is an independent currency, but perhaps, for reasons of stability and credibility, not immediately after any independence vote. That’s the strategy followed by several newly-independent countries, like Ireland. It’d obviously restrict monetary and fiscal policy initially, but a Scots pound would allow additional wiggle room. The euro is an appalling idea.

      • “The euro is an appalling idea.”

        Seconded.

    • Yep. These are all good and valid points I agree with.

      • I know this is deeply unfashionable but the Euro has huge advantages. It is stable and the problems that some countries faced were because of bad political fixes to get in. I’d be much happier being paid in Euros than a Pound that is heading for a big crash

    • And those arguments are correct, except the question of borrowing costs is even less of a problem than you describe. As I pointed out in a thread a few days ago, borrowing ‘costs’ for currency issuing governments are as high as they allow and no higher. There is currently no need to cut the deficit, and the deficit is a bad target in any case. There’s more detail in that thread: Debt Bomb Britain.

      The actual costs – for spending in general rather then borrowing in particular – are in the real capacity of the economy and the damage we do to our environment, which just emphasises the need for a switch to a sustainable society.

      • Returning to currency: the problem is the currency of an independent Scotland is one thing (whatever it is); if it is not sterling the ‘baseline’ debt and interest payments for the UK ‘Legacy Debt’ will still be in sterling.

      • John

        Well, who knows when the next referendum will be, but last time round the UK government said it would be responsible for all UK debt at the time of independence. Any decision by the Scottish government to contribute would therefore have been subject to negotiation, and stating that that contribution would be made in the new currency would have been perfectly reasonable.

        Given the close relationship the two states would have had the rUK government would actually have been quite likely to want to have some £Scot – or whatever – reserves on hand, and a ‘contribution’ to debt servicing would be a simple way to acquire them.

  11. The best option for an indy Scotland would be to float its own currency internally at the same time as using the pound externally, a dual system, where buy the newer currency has the time to aquire value as a non trading currency – no pesky speculators. This is what some countries did when shifting from communism. China again is an example – I think Poland also? but not sure. Have no idea if this would work (and it would be politically difficult as the BoE still unwrites Scotland etc. – pretty certain rUK voters would baulk.

    • Actually Flimflam, I have to disagree on the oil price not being important to Scotland. The estimate is pretty acurate based on the assumption of maximum production in the North Sea at the present moment (even if you increase supply, demand is based on external factors of consumption and who else is selling oil). On this basis you can calculate how much it is worth to the exchequer in tax receipts. For the UK, not such a problem, is around 0.9% to 1.5% of GDP, For Scotland 15% to 20% of GDP. Big problem. But you’re right, the price can go up but that’s not the point. The point is that you can’t plan long term public expenditure due to the massive fluctuations. Even if the oil price goes up again it will also fall again at some point. It’s like buying a house with a fixed mortgage but not knowing how much your salary is going to be each month. Also it would have problematic effects on exports if the price rose and Scotland had its own currency as Petro scot pounds would be high in value. This is why countries with Oil find it very hard to diverisify their industrial base and become one trick ponys. The curse of Oil as it is known.

      • I didn’t say oil price wasn’t important to Scotland, I said it wasn’t the Scottish government’s problem. That’s because, whatever the result in September, right now – Jan 2015 – Scotland was always going to be part of the UK, and the powers necessary to mitigate any damage remain with Westminster. I see today that job losses have been announced, so clearly it is important, but the Scottish government doesn’t have the capacity to properly deal with it.

        “For the UK, not such a problem, is around 0.9% to 1.5% of GDP, For Scotland 15% to 20% of GDP. Big problem.”

        Do you mean it would be a big problem for an independent Scotland? It’s not a problem now because that’s not how the block grant is set. It would be a problem in the future if an independent Scotland lacked its own currency, because it would lack the capacity to absorb those fluctuations.

        We see in the news today that the Swiss government has, and has used, the capacity to keep its currency from being ‘too strong’, but has now – for whatever reason – decided to abandon that capacity. Swiss manufacturers appear to be bemused, not to mention angry.

        So merely having the capacity isn’t enough, governments have to understand it as well, and also of course actually use it to defend the interests of all their citizens rather than just those of special interests. Norway, instead of using its oil income to speculate in foreign stock markets, could have both invested in Norwegian manufacturing and services beyond oil, and held its currency at a level which would have allowed international trade.

        The ‘oil problem’ stems not from possessing oil but from believing mainstream economic myths about the sustained value of a strong currency. What good does Norway’s sovereign wealth fund actually bring to Norwegians? If that money were spent in Norway it would cause runaway inflation. Spending it outside Norway does nothing for the people, unless it is spent on importing productive capital.

        “But it’s for when the oil runs out.” is the reply of course, but the spending problems which apply right now will still apply then. They could be diversifying and building productive capital right now, instead of building a fund and hoping future changes are slow-paced and predictable.

  12. Some good points. I assumed it was a reference to an independent Scotland (hypothetical.) But I can’t agree on it all (IMO caveat – I know a lot is specualtion).

    1) Nicola Sturgeon yesterday (finally) announced a comprehensive package of measures to offset the potential job losses, especially in the small medium size companies and the supply chain through a task force that links the disparate areas of the industry into a coordinated effort to spread losses. Good for her, she’s shown proper leadership and vision (quite possibly the smartest politician Scotland has!) Murphy is a buffoon. 2) Publicly she has criticised the govt but Osborne has already committed to tax relief in coordination (nice to see everyone pulling together whatever the politics.)

    3) the 15% -20% , yes I meant it would be a big problem for Scotland as an independent nation, had it voted Yes given independence wouldbe only a few years away and would undermine industry investment – the oil industry plans 50 ish years in advance for contingencies, due to the massive outlay and investment needed up front. And the problem is volatility as I mentioned and long term public/ govt expenditure. The Wood report mentioned that the key thing is industry unity and the ability to absorb low prices across the supply chain, not just at source.

    If the oil price goes below 40 dollars then it is no longer profitable on the market (in around 20 ish countries) – this means the oil companies will ‘moth ball’ the wells (shut them down), and go elsewhere where it is much cheaper to drill/ explore (the world is awash with untapped oil resevoirs). This never used to be a problem in the past (Brent crude hovered around 20 dollars a barrel in 1999.) – What’s changed (and this is where I get pissed off with Alex Salmond for knowing this but dissmissing it – lying basically) is that the oil price since 2000 has been artificially high due to one thing – the rise in consumption from China as the economy grew at a phenomenal rate 20% a year ish. India and Brazil also. But for a long time now, people in the industry have warned this was not going to be sustained as China’s growth naturally slows and more importantly America pursues the policy of energy self subsistence with shale. The market is now awash with oil. Also the change in technology and the fact that supply chains elsewhere (Angola, Caspian sea, Australian continental shelf and others reach maturity.) can compete. The North sea and Gulf no longer have such an advantage as they used to – very worrying for the Norwegians who as you said should have diverisfied industry. Having an oil fund is all very well but it doesn’t necessarily provide jobs.

    5) The point about own currency and lowering the price is an interesting one, and could work? but (IMO) falls into the same trap of thinking Scotland exists in isolation and the rest of the world is static. If Scotland mitigated the price drop by artificially lowering the currency then there is nothing to stop other oil countries from doing the same – a race to the bottom – plus the low currency becomes problematic for importsand inflation. Scottish industry is reliant on imports – especially the oil industry (all the infrastructure is manufactured abroad.) + if the Saudis (a one trick pony econ) then raise the price – which they will eventually, then Scotland would have to follow suit in order to remain profitable and keep the oil companies who own the licenses drilling. (it’s a fine balance to keep imports cheap and exports proifitable.) This npredictability would banjax other important industries that are reliant on long term planning (whiskey especially – takes years for the product to come to sale – how do you invest if the currency is going up and down all the time?) another reason Aberdeenshire voted no incidentally.

    And it still does answer the question which is a fundamental of econ. Optimum currency area. That in the UK, as we are now seeing, the asymetric shock can be absorbed due to the greater diversity and size of the economy. Scotland lacks that diversity.

    IMO – if Scotland want indy, which may well come? then it needs to keep its head down, use UK to diversify first over the next few years and wean itself of the oil thing. Then it would be a reasonable proposition.

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