Economic Mythology


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Government Expenditure and Revenue Scotland (GERS) - Introduction -

In the National on Friday 24th March, Mark Littlewood, the Director General of the Institute of Economic Affairs made a comment headed ‘Nationalists need to have answers when it comes to independence’ Mark’s contribution was fair and balanced and was certainly not hostile, and he was absolutely correct, we in the Independence Campaign must have clear and confident answers to the main questions about the economy and the currency in an Independent Scotland. Mark makes the point that finding these answers is entirely possible. The purpose of this paper is to help to address some of these questions and to present straight and effective answers.

Economic Forecasting (GERS)

Economic forecasting is not a simple exercise, if it were easy the approach of the major 2007/8 banking crisis would have been picked up, by at least some of the many forecasters, and steps taken to deal with it. Economic forecasting is in fact quite complex, because it depends on very accurate measurement of the actual imputes, into what is a very dynamic system, if you are going to have a reasonable chance of calculating the likely outcomes, after a period of time.This is difficult, because small changes in the level of imputes, will normally be significantly exaggerated by the multiplier and the accelerator effect, so that the outcomes are significantly changed.

So, let’s be clear, if an economist has very accurate data on the country’s economy, if he/she makes careful assessment of the multiplier and any accelerator effect, he/she then prudently checks this work with other similar studies; he/she might then pronounce the their findings but would undoubtedly qualify them with the term ‘ceteris paribus’

This qualification means the economist is satisfied that his/her assessments are correct ‘if everything else remains the same’, i.e. the prediction does not hold if there are other ‘unconsidered’ changes. So in a situation where the economist has access to accurate and full data, then, with careful consideration and a significant qualification, an economist can make a scientific attempt at predicting economic outcomes for an economy’s future. This is not considered accurate science, but it is helpful and is widely employed. However such forecasts tend to be regularly updated as new data becomes available and such forecasting everywhere is recognised by its regular missed targets rather than its accuracy.

Accurate Data

Professor Richard Murphy, City University London has looked specifically at GERS in relation to economists doing forecasting on the Scottish economy. He identifies seven separate data streams which would be required for any accurate assessment of the Scottish economy today, never mind the future. These are:

  • How much is total income in the country

  • What effective demand exists in the economy

  • What is the level of private investment

  • What is the level of public investment

  • What are the country’s exports and imports

  • What is the total level of savings

  • What is the total level of taxation

As Professor Murphy points out, we can’t get that from the GERS figures. These figure are not designed to give Scotland accurate data on a Scotland only basis, they are designed to give the UK data. That of course is an entirely different thing. The figures relating to Scotland are just estimates, the GERS home page makes that clear.Now if you do not have any data at all, then estimates from someone else’s data, is better than nothing, but it is certainly not accurate.

As I have said, one requires very accurate data of real imputes if you are going to attempt to predict outcomes over a time period. If you have this, it is difficult, but can be done within the ‘ceteris paribus’ qualification. If however you have nothing except estimates of the real imputes, then it cannot be done; it is impossible. Now if you did have very accurate data in imputes you would then have another major problem, the ceteris paribus qualification. You can’t take a measurement of the Scottish economy as part of the UK today and make prediction, even if you have excellently accurate data, because you can’t apply the qualification “everything else being equal” since the whole point of independence is to change other things. That should be obvious to everyone because the ceteris paribus qualification can’t work; ‘everything else would not remain equal or unchanged’, indeed the very issue of independence demands change, so change would be inevitable.

In summery if someone tells you that an independent Scotland will have a ‘balance of payments’ deficit of £15 billion, that is not, and can’t be, an economic assessment (a) because an economic assessment is not possible on the data available and (b) because an independent Scotland’s economy will not follow the pattern of the UK’s economy. Such a pronouncement cannot be claimed to be on economic grounds, there is no basis for that. It is merely political propaganda, and this must be pointed out each and every time it is claimed, we can’t allow the No camp to establish the idea in people’s head by constant repetition, as they will attempt to do. We need to keep challenging the suggestion that this is a ‘scientific’ or ‘economic’ claim, it is not and it can’t possibly be because the data required to make such a study does not exist.

The claim that an independent Scotland would have a fiscal deficit, no matter who claims it, and how often it is repeated, has no basis in economics. No economist could possible calculate a fiscal deficit if he has no accurate figures for imports and exports.

The claim that Scotland has a national debt is also without foundation. A new State created tomorrow called Scotland would be a new legal entity and would have no National debt unless and until it decided to create one. The UK’s national debt is the UK’s national debt not the responsibility of any other state, unless some other state agreed to adopt it, or some part of it.

Currency

The new ‘project fear’ campaign which will be reinvigorated and no doubt led by the ‘neutral’ BBC, will also make a lot of announcements and provide the electorate with mis-information about the currency issue. It is therefore important that you are clear about one or two issues:

  • ‘Sharing in the pound’ is quite different from using the pound sterling. If Scotland was ‘sharing in the pound sterling’, as was suggested by the SNP Government last time, we would be responsible for sterling and its debts. If however we were using sterling as an international exchange mechanism, sterling would be indebted to us for our sterling holdings

  • If we are going to have our own currency will it be a fractional-reserve currency like sterling, or will it be a full-reserve currency.

  • If it is a fractional-reserve currency, it will, by definition, be lending out more money than it is taking in and will need reserves to bail it out. Who will be the lender of last resort for such a currency?

  • If it is a full-reserve currency it will, by definition, not be lending out more than it is taking in, so it will not need special reserves or a lender of last resort.

  • Scotland’s new currency, particularly if full-reserve, will be a domestic currency not used for international exchange, and not for sale to international speculators. Scotland’s Central Bank, Government controlled, would deal with international monetary exchange.

  • Having a domestic currency, and not an internationally exchangeable currency would not in any way inhibit Scotland’s international trade, in the same way as it does not inhibit the international trade of most countries who have their own domestic currency which is not used in international exchange.

  • Will a Scottish full-reserve currency be secure in the long term? Well, sterling is not secure in the long term because it can only now survive on a large, and ever increasing, national debt. A Scottish full-reserve currency would be debt free and have a secure future.

  • Could the Scottish Government find sufficient funds to significantly raise the amount of public investment with its new currency? Yes, this is one of the advantages of such a currency. The Scottish Government could raise all the funds it required, interest free, for public investment, provided it created public assets with this investment.

Scottish Oil And Gas

We know that one of the claims in the new ‘project fear’ campaign will be that Scotland’s economic case for independence is dependant on oil and this has now been lost as a result of the low oil price.

Let’s look at this issue clearly. Adam Smith, the Scottish ‘father of world economic’ defined what constituted ‘the Wealth of Nations’ in his book of that same name published in 1775. He made it clear that any country which had a good supply of labour and natural resources, and which had learned how to use the ‘separation of labour’ in the production system, could create wealth. Now Scotland was developing its market economy in his day and it has developed significantly better since. Scotland by Smith’s criteria has the basis of a wealthy country, with or without oil and gas. Oil and Gas in Scotland today, add to its rich natural resources, but are by no means its main natural resource. The suggestion that Scotland is a one resource nation is nonsense.

If we make a comparison between Norway and Scotland we can see that no knowledgeable person would consider that Norway cannot continue to be an independent state because world oil prices have fallen significantly. Norway has of course used its oil resources much more effectively than the UK did, but Norway has resources other than oil. Scotland has around the same population as Norway and has around the same oil and gas reserves. but Scotland has a much greater range of natural resources.

There will be oil and gas resources in Scotland for at least another fifty years, the value and price of these resources will vary, but as they become increasingly short in world supply they may tend to increase in price. However if this resource ran out to-morrow it would of course be a set-back to Scotland and Norway, but it would not inhibit either country’s economy to any long term significant degree.

Scotland’s future economy will depend on its people and its wealth of natural resources, it would be almost impossible for a future Scottish Government not to have a successful economy, or indeed to run its economy as badly as the current Westminster Government is running the UK economy.

What we do know, as a result of Adam Smith’s work, is that the wealth of nations, now and in the future, is really based on two things. First the natural resources the country has available to it and secondly the availability of an effective work force. Any country which has both of these things and uses them effectively can become wealthy. That does not of course guarantee that it will become wealthy, but it predicts that it can. Scotland has both of these things to an embarrassing degree.

If people insist that GERS figures show that Scotland’s economy is performing badly then, since these figures, however limited, relate to the past, not to the future; this must be a sound argument for leaving the UK if it is correct, not a case for continuing in the UK. This record shows that Scotland’s resources have been so badly managed by the UK Government who has been squandering its important resources.If this ‘proves’ anything it proves that we must change this Unionist system not retain it.

Reverse Experiment

Let us do a little reverse experiment in order to see the ‘Scottish deficit’ claims in their proper light.

Let us imagine that Norway, one of the wealthiest per capita countries in the world were to be integrated into the UK, Norway is about the same size as Scotland and is in economic terms quite similar. Let us assume that its economic data was mixed in with UK economic data so that, for instance its imports and exports could not be measured but were ‘estimated’ by Westminster controlled civil servants. Let us further assume that Norway’s territorial waters had been ‘adjusted’ by the UK Government to place some of its oil-fields in English territorial waters.

Now let us look at the Westminster controlled ‘GERN’ (Government Expenditure and Revenue Norway) report.

This report would undoubtedly find that Norway was saddled with a high national debt, because although it does not have one now, it would do if it was mixed in with the much larger UK which has a considerable and growing National Debt. Norway would then have to pay interest on that national debt out of its annual income. Norway would also have to pay for its share of the military costs of the wars in the Middle East and the UK’s Nuclear weapons.

The Westminster GERN figures would undoubtedly find that Norway had a fiscal deficit of around £15 billion and the politicians and media in the UK would tell us that Norway could not afford to be an independent country as it would need to rest on the broad shoulders of the UK to survive. The British ‘socialists’ would tell Norwegians that they should share their good health and welfare systems with the UK so that England could do a better job for their low income families.

What utter nonsense it all is.

Andy Anderson

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