Independence referenda

[mtbc]

It may be that in a few months the UK will vote on the question of whether to remain in the EU. If David Cameron fails to negotiate strong national controls against immigration or welfare for immigrants then there is the prospect of a vote to leave. That would probably provoke another vote in Scotland about remaining in the UK, with the no votes boosted by those wishing to remain in the EU. It is plausible that Scotland will no longer be in both the UK and the EU.

I like the idea of being able to move to somewhere like France or Germany though it now looks less likely to ever happen. I would like my children to have some stability during their full-time education. Perturbations of the current situation could be a great inconvenience for me: my position at work is funded largely by UK and European Union sources and I have no reason to expect Scottish government funding to replace that so I may find either vote being for independence to be deleteriously life-changing.

While I am hardly an expert on European governance I am disappointed by having the distinct impression that many people don't know who their parliamentary representative is partly because it matters little as in practical terms the European Parliament is underpowered in comparison with the European Commission. I am also disappointed by the great diversity in how assiduously member states actually enforce European law. Voting for membership of the EU could unfortunately seem like an endorsement of the EU as it presently is. Though, not so badly as a vote for independence for Scotland from the UK could be interpreted as a feeling that the Scottish National Party should have their hands even more strongly on the Scottish levers of power.

A greater source of conflict is the sense that the European Union as it is is a mess: the member states are too strong and separate for the EU to live long and prosper. The Eurozone crisis and the Syrian refugee crisis have definitely been throwing some of the faultlines into sharp relief. If the cultural differences can tolerate it then I believe the EU would do better as a superstate with more fiscal and political integration to make it more like the USA than a free trade and visa area. The UK may be as a millstone impeding the EU in finding its way to that workable state.

So while I would like Scotland to remain in both the UK and the EU I wouldn't want that to be taken as support for the EU as currently realized and I wonder if the UK's influence isn't overall a bad thing for the EU.

Comments

Unappealing medicine

[mtbc]

The ongoing infliction and talk of austerity has puzzled me. I don't know, for instance, if they really believed it the right medicine at first, but by the time they realized how wrong they were, and how big the multipliers are, they'd also so pinned their flag to the policy that they prefer saving face to relieving widespread misery. Or, if they knew all along and welcomed the excuse to cut welfare and public services, or even perhaps they still think it was actually the right thing to do because they live within a bubble of ignorant idiocy. I also have no idea why in the election campaign Labour let the Conservatives spin this narrative that, for instance, public finances were a much more significant cause of the crisis than private-sector debt, which of course mirrors the analysis of the Eurozone problem without having the element of fixed-currency balance-of-payments issues too.

Re: Unappealing medicine

[gerald_duck]

I see three main things Labour got very wrong before and during the financial crisis:

• Reckless expansion of the use of public-private partnerships, which in effect create a disguised debt which doesn't show up on the balance sheet (instead of borrowing the money to build a hospital, have a private company build it and lease it to the taxpayer, who gets to keep it at the end of the lease term — looks like a debt, smells like a debt, isn't officially a debt).
  
• Carping on about how "prudent" they were being, while being spendthrift.
  
• Overspending dramatically when the crisis hit

It's instructive to look at Greece to see how badly things can go wrong if a government tries to borrow and spend its way out of a crisis. Greece has the impediment that it's in the Eurozone; we don't have that problem, but we have the rather bigger problem that international finance is a major component of our economy.

If you look at this graph, there's a major step in our net debt. OK, it's not as ruinously vast as that caused by two world wars, but the current blip looks a lot more like an unforced error to the financial markets. And, of course, the current government now has to service that debt as well as keep the lights on in various government departments.

It feels to me as though the present Chancellor has done a pretty good job of juggling several very angry weasels. The cuts may be very high profile, but they're actually a lot shallower than by rights they should be. Our creditors haven't quite come banging on the door.

We're treading water and gambling that we can fix things properly when the recession is over and the next boom comes. It's been a long, long wait.

That doesn't feel like ignorant idiocy to me…

Re: Unappealing medicine

[mtbc]

Yes, that's a good graph; it is nice that we're still under the 1960 debt level, and I certainly agree that Labour weren't great: especially, if I am anti-austerity, then simple arithmetic suggests that when times appear to be good then one really ought to rein in spending and reduce the national debt.

On this occasion I'm happy for us to agree to differ: I don't especially seek to persuade people and am certainly not a credible economics pundit. But, that doesn't mean there aren't interesting things to learn. It's probably most helpful if I lay out a bit of background of where I'm coming from. It took a few days for me to get the available headspace together.

First, judging by things like long-term gilt prices, the creditors are very far from coming to bang on the door, and from looking at how the markets have responded via similar measures when the US laid on more stimulus, that didn't bother them either. Compared with the size of its economy Greece was left with staggeringly much debt denominated in a currency of which it couldn't print more; you do mention the Eurozone, but I'd suggest more strongly that it makes a massive difference that we're not in that position. Francesco Saraceno has a great low-traffic blog that often discusses the Eurozone situation. Also, letting the currency fall has done great things for countries like Iceland which on paper were in an enormous pickle.

Second, this was an unusual recession: it was a balance-sheet crisis (as described by Richard Koo) wherein the paradox of thrift turns orthodoxy on its head. Simon Wren-Lewis' blog has done a good job of explaining this with reference to the UK and Osborne. In our post-crisis situation (and I wonder if your mention of our being a center of international finance implicitly summons a model element that contradicts this) public spending mostly just moves debt from us to the government at least while demand is depressed while constrained households deleverage.

Either way that debt needs paying, but the economy gets moving far better when people feel as if they have manageable enough debt against their income that they can spend again, then business has income and can keep people employed, and we can collect income tax from them instead of paying them benefits, then with GDP finally improving then debt-per-GDP (which austerity hasn't done much for for many countries) looks far healthier. And, especially given the low rates at which the market is willing to lend to us, we can spend that money on infrastructure, etc. that brings both short-term jobs and decent long-term benefit. I'd rather that than having austerity keep demand depressed (though austerity was rather reduced after the first couple of years which has helped since), then interest on the national debt just compounds while our productive capacity shrinks (years of poor employment has very lasting effects) and we become less able to pay it off.

My story about the debt simply moving and being at low cost admittedly stops being true in more normal times when employment is healthier or non-commodities inflation is rising beyond a few percent or interest rates aren't near-zero or the problem is more supply-side or limited to specific sectors of the workforce. A corollary of this is that if we were to let inflation ride at a good few percent usually then we could use that to deflate household debt and when we were at risk of slowing the economy from reducing spending then we could cut interest rates a bit to compensate without having to spend our way out of that kind of slump. Part of our problem now is that interest rates have already been very low.

I mention those bloggers because what they describe keeps seeming the most credible to me: the graphs seem appropriate, the explanations of why they disagree with, er, those with whom they disagree seem good, and the mechanisms they describe make sense, at least to me. In referring to these, I'm hoping it's useful shorthand for where I'm coming from and why I'm thinking as I am.

Perhaps more familiarly and credibly, I've tended to buy Martin Wolf's take on all this too (he's also written plenty on Greece of course); most of his more interesting recent stuff is behind the FT paywall but I can link to an older summary. I've also been influenced by the occasional paper from sources like VoxEU.

Naturally there are plenty of eminent scholars and writers who strongly disagree with the above, I've just found the rebuttals of their rebuttals generally persuasive. (-:

Re: Unappealing medicine

[mtbc]

I should add a note making explicit an axiom that supply doesn't create demand: that in a demand slump the public spending isn't deleteriously crowding out private investment.