Saturday, 29 March 2014

Scottish Independence - a Modern Money analysis

Flag of ScotlandAn unbelievable amount of rot has been written over the last few days and months about how Scotland would separate from the UK. Most of it severely uninformed and much of it using very faulty neo-liberal and neo-classical economic analysis. Much has a clear political bent. (The myth of the national debt monster is a regular feature. I debunk that here)

I figured it is time to offer a more sober analysis of how you would actually design a Scottish Monetary system using the very latest Modern Money design principles, and how Scotland would move towards true independence.

IMV Scotland is in a fairly unique position. If their politicians were less interested in having their tummies tickled by the Brussels elite and were actually interested in ensuring that the citizens of an independent Scotland all had a good, secure standard of living, then they are in a position to deliver it.

I'll believe that when Alex Salmond sends for Bill Mitchell to advise on how to setup the Scottish Monetary and the Scottish Job Guarantee systems.

First ignore the money

One of the amusing facts about analysing a modern monetary economy is that the money is not the important bit. Too much of recent analysis on Scotland has been conducted entirely in a unit of account (whether GBP, EUR or even, bizarrely, USD), as though there was a one to one match between reality and money. There isn't. Money is just an abstraction. A useful mechanism. It is not and should not be the primary concern. 

Real people using Real resources to make Real stuff and perform Real actions is what an economy is. Money is oil, not petrol. It lubricates the wheels. It lets them turn faster. It allows things to happen. But it does not make things happen. That is decided by Real people. 

Modern Money is from the Post Keynesian tradition and  is the analysis of the Real Transactions in an economy in historic time, within the context of a monetary system.

It would be better described as 'Realism', and the rallying phrase should be 'Get Real'.

So let's 'Get Real' with the Scottish economy.

The Scottish Economy

Scotland has a population of up to about 5.3 million people. That's slightly smaller than Denmark and Finland, about the same as Singapore and bigger than Norway, Ireland or New Zealand. It has a notional GDP of between GBP126 and GBP 148 billion depending upon who you believe. (Notice the unit of account unavoidably creeping in there). 

The main argument is about where Oil and Gas receipts are allocated, and of course the articles in the press are entirely about numbers, whereas what matters is the reality of the situation. Where do the people that work for and on the platforms come from, and where does the product hit land.

As you can see from the map the majority of Terminals from the main UKCS Oil and Gas fields make landfall in Scotland. Since they make landfall in Scotland, the Scottish government can levy them if required and turn them off if the companies refuse to pay. This is regardless of which jurisdiction the Oil company operating the field is registered in, or whether the notional output is credited to the national accounts of the UK or Scotland. The oil and gas make landfall in Scotland (St Fergus, Cruden Bay, Sullom Voe, Flotta), or Teeside in England. For example the Forties pipeline system which lands at Cruden Bay carries 30% of the UK's oil to shore.

Therefore any Oil company will be employing people and using services from people living in Scotland and therefore they will be paying those people in the Scottish currency (You can see the spread of where people in Oil and Gas live here). If the amount of trade the oil companies' supply chain induces in the Scottish economy is insufficient, then the Scottish government can apply a resource levy to the terminals which will generate a further demand for the Scottish currency - even if all the oil and gas is sold in US dollars and accounted for in some other country's national accounts.

Beyond that the Scottish economy is, like the UK, a largely service economy - about 72% of the Value Add in the economy is service oriented. Beyond that there is a large manufacturing segment, and of course the famous Scottish exports of Whisky and Salmon - which are as important as Oil refining to the Scottish economy.

The Scottish GDP figures document is an attempt to apply the national accounts regime to Scotland as a separate country. It requires careful reading, preferably alongside the input-output statistics. What they show is that Scotland has, in GBP terms, a balanced external sector with the rest of the world and an import deficit with the UK. But the elements of that deficit with the UK are largely notional - lots of services from the financial and service centres in the South of England which are relatively easy to substitute,. So any currency pressure could be resolved in real terms via substitution and relocation if they weren't dealt with nominally via the financial system.

Scotland has a reasonably decent infrastructure thanks to its association with the United Kingdom. It has a National Health Service, good public and private schools, some of the finest Universities in the world, good road and rail links, good airports, and a strong military background. It famously already has a separate legal system and system of land ownership.

On top of all this of course there are the people of Scotland who, in keeping with the residents of the rest of the British Isles, tend to punch above their weight in terms of inventiveness and ingenuity.

With all this at their command the Scottish people could easily operate as an independent nation if they so wished, and would be able to deliver an excellent standard of living and low income inequality to all who live there.

As long as they adopt an independent free-floating currency, control the banks, and implement functional finance correctly (with a Job Guarantee).