Belatedly – my piece in The Scotsman the Scottish Government economic paper: The SNP’s plan, while recognising some of what not to do, seems to include repeating the mistakes that caused the economic crisis in the first place
If YOU have any interest in Scotland’s economic development, the Scottish Government’s economic discussion paper, “Scotland’s Economy: The Case for Independence” published this week, is frustrating. Not because it’s terrible, but because half of it is good. It’s when you reach the other half that the heart sinks.
The paper gets Scotland’s strengths right – we have all the intellectual, human and natural assets necessary to build a first rate economy. It gets the UK’s economic failures right too. But it seems incapable of joining the dots.
For example, it is absolutely right to point out that successive UK governments have encouraged the UK to operate as a “debt economy” where the big money is borrowed at low interest rates for speculation. This “cheap money” monetary policy means only a madman would invest in productive industry where generating returns might take years, not minutes.
But it can’t say anything sensible about this because fear of talking about a life without sterling glues the party to precisely the monetary policy it rightly identifies as a mistake.
It points out that asymmetrical economic growth across the UK has meant a booming South-East has drained growth from elsewhere in Britain. This is absolutely right – and would usually be described in economics as a “sub optimal currency zone”. Sterling promotes growth where there are big centres of financial speculation and works against growth where there aren’t. Again, the SNP has opted to live with this.
The paper is right to emphasise that massive income inequality is an economic problem and not just a social one. But it then goes on to imply that a corporation tax cut could be an option, apparently blissfully unaware that it only attracts low wage employers, increasing inequality.
Again, the paper is right to point out that the UK mismanaged and squandered its oil wealth. So why within a couple of pages is the SNP proposing precisely to replicate this mistake for another generation in its model of the deployment of renewable energy? “Dear Chinese corporation, please take all the value of our wind for free and we might tax you if we can catch you, but not too much, we promise.”
Finally, while we can all agree that austerity is bad for the economy and a lack of capital investment is a major problem, in writing about these things the authors of this paper seem to take a “backwards with Keynes” approach. It implies that the role of public expenditure is to recover the very economic structure that caused the crisis in the first place.
The biggest problem the SNP faces is that there is nothing substantively different in its economic narrative now than in the crazy days of the first half of the last decade. If a sign of true intelligence is rapidly to absorb lessons of failure and adapt, how is it that we have come through what we can only hope is the worst economic disaster of our lifetimes with exactly the same policies as before?
A big part of the problem here is the architecture of mainstream political economics. Alex Salmond’s belief that a cut in corporation tax would generate economic growth comes from a complex computer model. But is he aware that this model is built on a series of assumptions of causality, one of which is that tax cuts always create growth?
So of course when you input a tax cut it predicts immediate growth; that’s what it’s designed to do. The problem is that in the real world outside of the model economists have been trying to find a causal link between corporation tax cuts and growth for 40 years. They simply haven’t been able to demonstrate it – and you would certainly have heard about it if they had.
But perhaps the real problem has become GDP. It makes sense as a way of measuring a productive economy but not if you’re just summing up financial market gambles won and lost. Just as a reminder, the P in GDP is meant to stand for product.
GDP isn’t Scotland’s real problem. Low productivity, low pay, inequality, inherent economic instability, weak real exports, lack of investment in research and development and all the rest are much more to do with the structure of the labour market. We have pointlessly high wages at the top, unacceptably low wages at the bottom, nothing much in between and no link between economic growth and individual prosperity. Just to remind you, the last ten pre-crash years of economic growth in the UK lifted average wages by zero.
We need to worry less about the notional size of the economy and more about its substance. We could rapidly reinflate the economy with financial speculation, house price rises and more private debt and it still wouldn’t produce good jobs, better pay, exports or adequate tax receipts.
The real failure of the UK economic policy is the failure to stimulate industrial production. Between 1990 and 2011, the following are the rates of change in industrial production: Austria 99 per cent, Canada 35 per cent, Finland 83 per cent, USA 50 per cent, Germany 32 per cent, Sweden 54 per cent, the UK -1.2 per cent. Could the UK’s economic failure be summed up more concisely?
These economies expanded industrial production largely because of highly productive, mainly indigenous, high-skill manufacturing Small and Medium-sized Enterprises. They have industrial policies that support and nurture those industries over the long term. They create proper jobs.
So we do have a corporation tax problem in Scotland; in effect we tax indigenous companies at a much higher rate than multinationals which treat tax as optional. And then we demand that they compete while giving even more subsidies to big corporations as a bribe to bring us their rubbish jobs.
We don’t need any more “China merchants” – business gurus who have done nothing more than buy cheap products from China to sell them here expensively. We can live without more property speculators – who have made themselves rich by making the next generation poor. And the last thing we need is to expand the trade in complex financial instruments which neither the seller nor the buyer understands.
We need a solid strategy for increasing median wages and expanding employment. That would be a much healthier measure of economic performance than GDP, at least from where we start now. But it needs a proper industrial policy, not the series of nudges and winks this paper keeps calling “economic levers”. And that means that for the first time in decades we must start to give a damn about domestic enterprises engaged in industrial production.
A diverse range of economists are currently addressing this problem, working under the loose heading “common weal”. A lot of that work is starting from the same analysis of the problems and opportunities that the Scottish Government identify in this paper. But the common weal approach takes it as a challenge to create something new, not just a new backdrop for the same old same old.
The SNP can continue to operate under the economic framework set out collectively by Gordon Brown, George Osborne and King Canute. It may even believe we’ll be eternally grateful for another thousand supermarket jobs. It just shouldn’t be surprised if we all just walk off in despair.