09 September 2014

In for a penny, in for a pounding

Paul Krugman outlines the absurdity of the case for Scottish independence, as Salmond is making it, with some basic sound oeconomic pence (er, sense):
Comparing Scotland with Canada seems, at first, pretty reasonable. After all, Canada, like Scotland, is a relatively small economy that does most of its trade with a much larger neighbor. Also like Scotland, it is politically to the left of that giant neighbor. And what the Canadian example shows is that this can work. Canada is prosperous, economically stable (although I worry about high household debt and what looks like a major housing bubble) and has successfully pursued policies well to the left of those south of the border: single-payer health insurance, more generous aid to the poor, higher overall taxation.

Does Canada pay any price for independence? Probably. Labor productivity is only about three-quarters as high as it is in the United States, and some of the gap may reflect the small size of the Canadian market (yes, we have a free-trade agreement, but a lot of evidence shows that borders discourage trade all the same). Still, you can argue that Canada is doing O.K.

But Canada has its own currency, which means that its government can’t run out of money, that it can bail out its own banks if necessary, and more. An independent Scotland wouldn’t. And that makes a huge difference.

Could Scotland have its own currency? Maybe, although Scotland’s economy is even more tightly integrated with that of the rest of Britain than Canada’s is with the United States, so that trying to maintain a separate currency would be hard. It’s a moot point, however: The Scottish independence movement has been very clear that it intends to keep the pound as the national currency. And the combination of political independence with a shared currency is a recipe for disaster.
Sadly, the Yes-bloc Scots seem to be taking no lessons at all from the successive crises of the European Union, particularly from those of its poorer members, and ignoring at all costs the wisdom of a national government retaining control over its own currency, so that the agencies of monetary and finical policy are not at loggerheads. There is even more to the case than Krugman is making here, because a Scotland without its own monetary policy would soon find itself at the mercy of London with regard to financing all of the generous welfare programmes the Yes vote is trying to sell itself on. And that London would no longer have any non-oeconomic reason to provide that financing. Krugman uses the example of Spain’s housing bust misfortunes under EU monetary policy to demonstrate just this point, but given that Scotland is much more historically and oeconomically integrated into the United Kingdom even than Spain is into the European Union, the pain when Scotland faces similar crises (and face similar crises it shall) without the aid of its own banking system will be so much the keener.

Give this entire article a read, and share it post-haste with any and all of your Scottish friends, correspondence and acquaintance. There is yet time before the vote; calm and rational arguments like the ones Krugman makes should be given precedence here.

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