Friday 8 June 2018

Realms of Gold

I imagine sometime back in the late 1690s there were broadsheets handed out in Glasgow and other parts of Scotland promising “realms of gold”. Perhaps our ancestors studied all 354 pages of the scheme. Maybe they studied in detail the cunning plan to turn Scotland into a great economic power. The whole world would be faced with the same dilemma: either pay us and take the short route or face the dangers and delays in going the long way round. How could it fail? We would all be at least four thousand pounds a year richer.

So get rich schemes are not new. Today they pop up unwelcome in your email inbox. They promise that you can make a good living by staying at home and doing nothing. All you have to do is send off for the following ebook. Please send ten dollars and hope that no-one steals your credit card details. At other times get rich quick schemes promised that Greenland was green and that Newfoundland (Vinland) grew grapes or is that a mistranslation? Who knows? It doesn’t matter. What matters is that whoever was fooled into travelling to either place because of promises of riches found instead somewhere that did not quite live up to expectations. Norse settlement in both places eventually died out when the world turned colder.  No doubt this was because they didn’t drive enough motor cars or is it that humans can only make the world hotter? Global cooling is never our fault but always because Thor is angry.

The gullible and the desperate believe that you can get richer by putting a cross in box and saying that you are independent. They read a headline promising that they would get four thousand pounds if only Scotland were like Finland. But let’s test this? Every single Scot has the right at present to live and work in Finland. So if you move there, do you get four thousand pounds? Luxembourg and Switzerland are also very rich countries. They have GDP per capita that is much higher than in the UK. There is nothing stopping anyone from the UK moving to these places. Does the fact that they have high GDP per capita mean that I personally get a share of this money just by living there? Unfortunately not. The streets of Lëtzebuerg are not actually paved with gold and Scots who move there don’t actually get to pick them up and put them in their pockets.

There’s a relatively simple idea that some independence supporters struggle to grasp. It is this: People get wealthy by working. Even if you could increase the GDP per capita of Scotland, it would not mean this increase was just handed out to everyone in their baby box.

If increasing GDP per capita were easy why doesn’t everyone do it? If independence were the route to prosperity, why isn’t South Sudan as wealthy as Norway by? After all they have been independent for 7 years.  Doesn’t independence kill all known germs and cure all diseases? How can it be that poor South Sudan still has a GDP per capita of only two hundred and twenty eight dollars a year? They too had a detailed plan set out by a Growth Commission. No doubt someone promised them that they too would get four thousand pounds a year if only they were independent.

Increasing prosperity in Scotland requires that we have sensible economic policies and for individual Scots to increase their productivity and help create businesses that make a profit. The easiest way and probably the only way for each of us to make an extra four thousand pounds  a year any time soon is to get a job that pays that amount more than we earn at present. Just working rather than living on benefits is far more likely to lead to an income gain of four thousand pounds than voting for the SNP. If independence supporters put as much effort into working as they do into marching they might find they didn’t need the SNP to give them money, they could earn it by themselves.

The SNP’s latest scheme depends on all sorts of ifs and buts. Their four thousand pounds headline figure depends on growing the Scottish economy over a few decades. With good policies this is indeed possible. But then again with good economic policies the Scottish economy could equally grow as part of the UK. It is pure guess work to suppose that we would be four thousand pounds better off if we were independent. After all it isn’t as if the UK economy would stand still.  What if they grew more than Scotland did. Then we would be worse off. Who is to suppose that this couldn’t happen? Do the SNP have a crystal ball?

The biggest problem with the SNP scheme however, just like the one that was developed in the 1690s is that it depends on everything going right and nothing going wrong. There is a fatal flaw in the plan that makes it as risky as any scheme in Scottish history.  The SNP intends us post-independence to use the pound unilaterally.

It is not uncommon for certain countries to use the currency of someone else. This is usually known as dollarization. Many small countries use the US dollar.   Panama is a good example. Some tiny islands use the Australian or New Zealand dollar. Other countries like Zimbabwe use the dollar because their own currency had a serious inflation problem. For these sorts of places there are advantages that outweigh the disadvantages. But does Nicola Sturgeon seriously think that Scotland should go down the route of Pitcairn Island and Tuvalu?

Using Sterling outwith a currency union with the other parts of the UK is perfectly possible. No-one could stop an independent Scotland doing this. But why would we want to? The main advantage of having your own currency is that you have a central bank that underpins the whole economy. It acts as a lender of last resort. The Bank of England as we have seen in recent years can print money, engage in quantitative easing (QE) and keep interest rates very low indeed so as to encourage growth. In difficult economic circumstances the exchange rate adjusts. This might make it more expensive for us to go on holiday, but it makes our exports cheaper and encourages people from other countries to spend their money here.

Using the pound unilaterally would be possible, but it would hardly be desirable. Scottish banks were bailed out in 2008. Who would bail them out if such a crisis were to occur again? There is nothing wrong about being optimistic about the future, but we have to be prepared for things to go wrong, especially when they did go wrong ten years ago.  

If an independent Scotland were to face a financial crisis while using someone else’s currency we could not print money, we could not use QE, and we could not lower interest rates. If a Scottish bank failed, this could potentially mean that everyone with any money in that bank would lose it. Who would bail out the savers?

But under those circumstances who would put their money in a Scottish bank? Who would use financial services based in Scotland? Who would insure their house with a Scottish firm?

So if things went wonderfully well the Scottish economy might after some decades be a few thousand pounds per person better than it is now. It might. But each of us if we faced a rerun of the crisis of 2008 could lose all of our money.

This I’m afraid is a rerun of the Darien scheme.  In the 1690s absurdly optimistic Scots put all their money in the idea that we could control the Isthmus of Panama. They ignored the fact that Darien was disease ridden and that anyway it was a Spanish colony that the Spanish might fight for. Even if the scheme had succeeded and Scotland had established a successful colony in Panama is it really likely that larger powers than ours would have meekly handed over their money for ever? What would have stopped them seizing it just as we did?

Anyway as we all learned in primary school the Darien scheme failed and bankrupted Scotland leaving many wealthy families bawbeeless.  The Panama pound could have exactly the same effect on Scotland. We are promised riches, but we just as before we ignore the risks. A crisis no-one can dream today may arrive a few years from now, but unfortunately our cunning plan lacks a lender of last resort. I am forced to conclude that the major problem with Scottish primary education is that no-one ever learns from it. Next we will challenge England to a rerun at Flodden.

It might be that even if Scotland were independent the Bank of England would still be forced to bail us out. But this too is a repeat of the Darien scheme. English money bailed out Scotland in the early eighteenth century, if it had to bail out an independent Scotland the result would be the same.

Roll up, roll up, the SNP have a new Panama pound scheme. Get rich quick. Put everything you have into Darien. There are realms of gold there.