As is, I think, known by most readers if this blog, Larry Elliott, who has been the economics editor of The Guardian for decades, has been a member of the Green New Deal Group since its inception. The result is that he and I have worked quite closely on occasion over the years. And we have as a result discussed MMT many times.
I was, as a result pleased to see Larry's review of the economic options now facing an independent Scotland in yesterday's Guardian. Framed in the aftermath of GERS, Larry notes:
[T]he Gers data suggest that those campaigning for independence will eventually have to come clean on what sort of macroeconomic policy regime they intend to run. Saying there are plenty of small, successful independent countries is true but beside the point because there are plenty of small unsuccessful ones as well.
He then notes that:
Scotland has four options, three of which have been touted in the past and a fourth, the most radical of the lot, which has not.
Of these he notes (and I have shortened his arguments):
Option one is for an independent Scotland to continue using the pound and to have its interest rates set by the Bank of England. This is perfectly feasible.
But as he observes:
David Cameron's government said it would not go along with this sort of arrangement back in 2014 and there is no doubt Johnson would say the same in the event of another referendum. Even if Westminster did agree, the downsides are obvious: if the Bank of England decided to raise interest rates, Scotland would simply have to suck it up. Sticking with the pound does, though, seems to be the SNP's preference.
I think we can presume he is a befuddled as anyone as to why this should be so. He is not much more impressed by the second option:
Option number two — leave the UK and join both the EU and the monetary union bloc — would mean Scotland is no longer a vassal state of England, but it also has its problems. Monetary policy would be set in Frankfurt and be even less attuned to Scotland's needs.
So he moves to option three:
The next possibility is for Scotland to create its own central bank, issue its own currency and set its own interest rates. For those who think (as Theresa May might put it) that independence means independence this is the only meaningful option. But it would not be cost free, at least in the early years.
That's because — traditionally at least — it takes time for newly formed states to establish their credibility with the financial markets and they do so by keeping interest rates higher than they otherwise would be and squeezing public spending in order to reduce the budget deficit.
He astutely observes:
Were Sturgeon to appoint a big international figure — Mark Carney, let's say — to run an independent Scottish central bank this would be the sort of policy he would undoubtedly suggest. The alternative would be capital flight, a run on the currency, a ratcheting up of interest rates and an even more severe dose of austerity.
Maybe, I would say: I think Larry ignores Scotland's strengths. But the surprise is in Larry's option four:
The only conceivable way for an independent Scotland to avoid pain would be if it adopted modern monetary theory which proved to be the magic bullet its supporters claim. Boiled down to basics, MMT says that countries operating below full employment and with their own central bank should not be deterred from spending money to create jobs because the central bank can be relied upon to print the readies necessary to cover the cost. Only when inflation rises to an unacceptable level should policy be tightened, and then by raising taxes or reining in spending.
I would usually place the emphasis on tax. So what are the problems? Larry says:
Opponents of MMT say this is the road to hyperinflation, and cite Weimar Germany and Robert Mugabe's Zimbabwe every time the idea is floated. This infuriates MMT supporters, who insist the idea would work but really need a small, newly formed country to give it a try.
Here Larry and I differ. This infuriates MMT supporters because the comparison is invalid. MMT makes clear it describes a type of economy. Despite its opponents' claims, it has never said it reveals a universal truth. It describes what happens in a country with an accountable government, with its own currency, that borrows in that currency, which has a stable tax system and so enjoys the rule of law, and a functioning central bank. That rules out Zimbabwe and the Weimar Republic, excepting that MMT explains why neither could ever work.
And, just for the record, MMT never says that spending can be without limit. It's obsessed with the real limits in spending, and inflation come to that. But Larry continues:
Scotland would tick a lot of boxes. It has plenty of spare capacity and unfulfilled needs. It runs a sizeable structural budget deficit that is being made worse by low oil prices. Sturgeon is respected and Scots might trust her to know when rising inflation required remedial action.
And then Larry lets reality creep in:
It is a fantasy, of course. MMT is too radical and risky for the SNP, which is pretty conservative when it comes to the big picture economic stuff. There's no chance of Sturgeon embracing MMT, which means that she will have to choose one of the other three options.
Or, as Larry makes clear, Scotland has a chance of really making it. Or the SNP could, with its current policy platform, really blow independence. Scotland has a lot to decide upon. The influence of Andrew Wilson, who will drive Scotland to austerity, is one of those things. It's time for the SNP to smell the coffee.
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Not just the SNP has some serious thinking to do but so has the current Labour Party according to Bill Mitchell. He fires a broadside today saying that it’s currently unelectable simply because because it’s economically and monetarily illiterate!
http://bilbo.economicoutlook.net/blog/?p=45699
Of course if the Conservative government’s dreadful performance continues for the next four and a bit years the Labour Party would creep into office by default not by merit!
https://www.theguardian.com/politics/2020/aug/29/how-labour-climbed-26-points-to-match-the-tories-in-opinion-polls
That is most likely
One of the crucial problems is who decides? Time after time in looking at the development of business plans, a bottom up process delivers better than top down. The SMP has shown itself to be a centraliser, and a secretive one in addition, the worst type of decision making framework. This, and the inability to develop any of the institutions necessary for independence are the most worrying signs for the future of Scotland.
Agreed
And seconded.
Here are the ingredients for the debate the Labour Party leadership desperately needs to have amongst its shadow cabinet members:-
https://www.prospectmagazine.co.uk/magazine/the-duel-covid-19-coronavirus-tax-rises-debt-modern-monetary-theory-mmt
“ That’s because — traditionally at least — it takes time for newly formed states to establish their credibility with the financial markets and they do so by keeping interest rates higher than they otherwise would be and squeezing public spending in order to reduce the budget deficit.”
That’s the bit I find really infuriating – his description of option 3. Lots of word salad without actually getting into the mechanics of it.
We simply have to ask Larry, where do the financial markets get the new Scottish currency ??
How do you have a run on a floating currency – especially when there is very little of it around ‘in the early years’. Did he examine where/why previous bank runs have taken place? If there is a genuine worry, then there is the option (whilst we are outside of the EU) of capital controls
I think Larry was describing the thinking, not his view
Indeed, the SNP leadership requires a wake-up call. They have spotted Prof Mark Blyth’s support for the possibility of independence; given his recent “conversion” to MMT, I trust certain SNP members (you know who I mean) will be pushing that up the tree.
Beyond that, who better to deliver the message than Professor Mariana Mazzucato, who is on the Scottish Government’s Council of Economic Advisers? As well as promoting policies which are in line with those espoused by Nicola Sturgeon, Prof Mazzucato is also on board with Modern Monetary Theory and very familiar with the Stephanie Kelton approach to explaining MMT.
Meetings of the Council of Economic Advisers are minuted, and appear to focus on the detail rather than the big picture. I wonder if Prof Mazzucato could be influenced to change that? 😉
It would be great if she could
But the problem is the SNP are being told MMT is illegal by the usual culprit
Won’t she be being told that leaving the UK at all is illegal too? She must surely be ready to reject arguments based on legality, given the law, made at Westminster, will never be in Scotland’s favour.
We are in ’emperor with no clothes territory’; the Scottish Government relies on ‘bankers’ for advice on monetary policy. Think about that for a moment. What is the back ground of this ‘expertise’? We are being offered as our “experts” experienced operators of a banking and financial system that, we should never EVER forget, recently fell apart spectacularly in the biggest financial bust in seven decades, and had to be saved from itself by a startled Government: and from the knife-edge of the utter ruin of all of us. The bankers, as a “profession” cannot side-step, front-and-centre responsibility for their culpability for their disaster. They have not paid any professional price for the utter, unforgivable failure of the whole banking ‘profession’: ‘unforgivable’ means unforgivable.
The British banking system, post-Crash was not comprehensively overhauled after the Crash, but benefited from the exceptional power of the City in Parliament (Government by Remembrancer, when ‘the chips are down’?); but it was patched up and continued to be managed, largely by the culprits for the failure, and accompanied by Government austerity; so the bankers could go on making fat profits out of a still inadequately regulated system, while passing on the losses to the public sector without recourse (a commitment we still make – in perpetuity); and the price for this was paid for by the weakest, the disabled and the vulnerable in our society: paying the fullest price for the sole failure of bankers.
These are the so-called expert bankers who as a professional, generational cohort, who were brought up in an age of intellectual imbecility to control an uncontrollable, risk-generating machine that they failed comprehensively to manage, and never understood; that are now supposed to provide the very best wisdom on monetary policy.
We are helpless in the hands of mere machine minders, who as a cohort do not even seem to understand the principles of the machine they are minding.
You are, as usual, spot on John
Similarly since HFT was introduced some stock market traders are now more spectators than participants.
Much of Larry’s analysis makes sense, in particular his criticism of sterlingisation as a policy for currency. I strongly wish for Scotland to be independent of the UK, but, in any future referendum/plebiscite on independence, I’d be severely conflicted unless our own currency is proposed. My heart would tell me to vote for, but my head would be asking what’s the point of an “independent” Scotland if its economy is hobbled and compromised from Day One? I want a sensible and realistic solution to this crucial issue, not for myself at my age, but so that my children and grandchildren can have a decent chance of living in a stable, democratic and equitable country.
If the SNP leadership wakes up and commits to an independent currency, it doesn’t make any sense not to adopt MMT principles for management of the economy, since we know that MMT reflects the reality of how a sovereign currency system actually works in real life. The small ‘c’ conservatism of the SNP leadership has to be convinced of these issues quickly: there’s a Holyrood election in 8 months where a mandate for independence has to be part of the SNP manifesto and there has to be a clear, easy-to-understand summary of the currency issue (along the lines of statements already issued by Dr Tim Rideout) to clarify the parallel-running of the £Scots and GBP, and the eventual, inevitable substitution of £S for GBP.
A large swathe of experienced SNP old hands are not standing for re-election in May 2021 due to age, so the thrust of any education process must be directed at the younger MSPs who will replace existing cabinet ministers. With 8 months to go, I see no sign of such a process and time is now of the essence. I’m not an SNP party member, so I have no influence, but I will write to my SNP MP and MSP to raise the matter with them and will encourage others to do so too. It would also help if someone who is an SNP member, not necessarily an MP or MSP, and has the necessary financial/ economic knowledge could raise the matter internally to get some momentum going.
Ken
The obstacle to your wishes can be named
Andrew Wilson of Charlotte Street partners thinks it impossible for Scotland to have its own currency for a long time to come
Why? Because that’s what his banking friends tell him
And not one of them will feel the impact of the resulting austerity
And why does he think this? Because he does nit wish to expose his banking friends to any exchange risk
And for that reason Scotland may be denied the independence it deserves
Richard
I’m aware who the problem is and alarmed that, despite Tim Rideout’s amendment being carried at the last Conference and a Scottish currency being approved in place of Growth Commission’s sterlingisation proposal, the party leadership appears to act as if the amendment had never happened. It really needs someone on the inside track to remind the SNP’s inner circle of the amendment and to educate any doubters about the critical importance of a Scottish currency. That might be a difficult clique to penetrate, which is why I think the “changing of the guard” at the May 2021 election provides an opportunity to get the new candidates onside and build critical mass in favour of the £S.
If sterlingisation is pursued, it may indeed be an existential threat to the party and would certainly delay independence. Any significant delay would inevitably lead to the appearance of alternative pro-indy party/parties and the dilution of the indy vote.
I think there is momentum building Ken. Take a look at the Scottish Currency Group Facebook page, administered by Tim Rideout. The group is growing rapidly and now has over 700 members, including several SNP MSPs/MPs. I am not an SNP member either but I am currently hosting an “MMT discussion group” via Zoom and invitations to this were circulated to the local “Yes” group as well as other local groups and individuals with interests which MMT is relevant to. Several participants in this discussion group are rank and file SNP members.
There is a comment on Larry’s article in The Guardian which posted this link to a bizarre article
https://economics.rabobank.com/publications/2020/july/money-printing-first-do-no-harm/
It seems not to understand sectoral balances and the whole thing made no sense to me. What caught my eye though was that they conclude that the UK is not a country which could adopt MMT. They don’t explain why the UK is on their “no, no” list but the article does refer to the need for a strong institutional framework for MMT to work. Maybe they think the UK lacks one. Which brings me to a comment you have made previously Richard……that the UK is heading for the status of a “failed state”. As the UK seems to be falling apart, and with the potential break up of the UK and a disastrous exit from the EU could England be left in such a parlous state that MMT is no longer a useable option? It has a troubling and dystopian feel to it.
It’s the usual clap trap
Why us it that to discredit MMT its opponents always have to create a condition that does not apply
There is no way on earth that MMT requires a current account surplus but they claim it does
They also claim it is a policy when it is a description
And it does describe the U.K.
The article is pure drivel….
So Kevin has been up to his tricks again editing wiki concerning GERS
http://scotgoespop.blogspot.com/
I wonder if anyone but Kevin takes Kevin seriously?
We (don’t) need to talk about Kevin.
Incidentally, that Rabobank article comes to entirely the wrong conclusions because they think a trade surplus is required to “implement MMT”.
(btw, I was wondering if you could prime Mariana to have words with Nicola)
I am afraid we are not that close…
And she most definitely runs her own agenda
Which is fine by me
Did this YouTube video get edited?
https://youtu.be/Ni5dTPBgLKE
Sounds as if sections are missing.
Yes of course that is edited
If you edit it you can make things sound different to what was actually said
That’s been edited to achieve that
One thing that strikes me about anti-MMTer’s is they don’t understand what a Ponzi scheme is. Mysteriously they imagine that all the UK’s money is created by private sector banks including the interest that’s paid on these banks’ loans. But if they actually bothered to think about it for a country running a persistent current account deficit like the UK this would result in a ballooning payment of interest on interest and ultimately the bankruptcy of the private sector. Money for private sector bank loan interest payment can logically therefore only come from government having the ability to create money from thin air just like the BoE tells us private sector banks create their loan money.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
Agreed
And when the BofE’s Michael Kumhoff makes the statement “Banks are not warehouses” here https://vimeopro.com/bankofengland/research/video/332687750 he pointedly doesn’t say that that doesn’t apply to central banks. He just declares it the norm for banks in general.
Yes, well.
Anyway, as others have pointed out, I spotted that Mark Blyth is claiming, luke-warm grudging, support for independence (a wee bit like his conversion to MMT ? … Well, it’s a journey, for either, and it can take a while). So I went for a rake around his Twitter, being nosy as I am, and found he’d done a Tedx thing, ‘in’ glasgow, on something like economics after Covid. And those attending were Linda Yeuh (she seemed really nice, and had lots of interesting things to say), Mark Blyth, and Andrew Wilson,,,
I don’t really know that much about Mr A Wilson so I thought I’d watch it (it having been pointed out to me by Richard that he may be a rather bad influence on the SNP hierarchy – I wasn’t aware that his influence would be so great but it does seem as though ,,, ) – anyway, I don’t particularly recommend this, unless you have plenty of spare time (or a particular reason like I did):
https://m.youtube.com/watch?v=Db35RkwpK1U
My overarching impression is that Andrew Wilson is a micro (emphasis on the tiny-ness of micro) economist. They were discussing macroeconomics, and Andrew was talking about childcare costs,,, so it was fairly obvious! I still like the way Mark Blyth describes the big picture of political macroeconomics, that’s why I always wondered why he wasn’t an early supporter of MMT, he describes most of it as it is and makes the effort to make it accessible – but maybe it’s the financial markets bit he doesn’t like and that it doesn’t fit in with ‘his’ version of capitalism (he said that, he’s got his own version).
The interesting thing, from Twitter stuff, Mark B said that it was Andrew W’s piece in the Times (unreadable as it was I thought) that turned him to supporting independence. Aha, says I, are these two new buddies? There does seem to be some mutual admiration going on there. So, I reckon it could go one of two ways – both have good positive influences on independence and MMT on each other (even if neither are what you might call passionate on the subjects it could build to something that feels more like it has some integrity) and we get two better people out of it that might change things – OR they both stick to a half-baked establishment-approved versions of the ideologies and sink into obscurity. Well, maybe not, but it would be interesting to see if Blyth, the recent convert to MMT, will embrace it enough to convince Andrew Wilson?
I’d go for Mark Carney for top central banker by the way, even if he is an evil neoliberal capitalist dark-forces-loving dodgy international finances person (I was watching some conspiracy videos a while ago about Blair’s administration, I can’t remember the detail now), I thought he was reasonably competent and has a fairly favourable high profile. Not necessary, obviously, but you know how people like establishment figures to make them feel safe and cosy, it would add a bit of confidence to the MMT / GND framework ,,,
I might need to reach out to Mark
I have ways to do so through a friend in common
I think the biggest stumbling block for Mark Blyth coming fully on board to MMT – and I have no doubt he would be a vocal and articulate advocate – is his newly published book.
I can sympathise; if you’d spent all that time and effort, and expect tons of dosh in return, and only then start to change your thinking,,, realise that part of your treatise doesn’t quite fit with the new thinking,,, but you still need to promote the book as good stuff – what are you to do? Well, I think it will make for an awkward transition and explains the reluctance shown so far for MMT. I can imagine it’s extremely difficult when you have everything neatly mapped out in your head of ‘how things work’ – and I believe Mark is a true macroeconomist – to then adjust all the causality relationships.
I need to seek out that lecture he did on ‘why do people vote against their own best interests’ – it had a focus on populism as a driver. In that lecture he had Nicola Sturgeon thrown in along with the usual suspects, which was strange from the macro economical point of view (as there is none in Scotland, yet) and indeed not much was said on it. But it does appear that populism is a major factor in SNP support – this will either hinder progress, or maybe can be used (unthinking support like that deserves to be used). I certainly don’t see us going into 2021 Holyrood election with no changes to the same old, whatever those changes might be. That might be optimism on my part though! Anyway, I need to rewatch the lecture to remind myself of the detail in it.
I have heard a rumour that if there is a second edition it may be revised
Just a rumour, mind you
If the rumour is correct, he might have to get rid of his co-author. 😉
🙂
Can I remind readers of a post Dr Tim Rideout (an SNP Member) made on 10th August in response to John S Warren’s piece on the currency issue: “the SNP members, via the branch delegates that attended the April 2019 SNP Conference were very clear when they voted that “an SNP Government should take the steps necessary to enable the Scottish Parliament to authorise the preparation of a Scottish Currency AS SOON AS PRACTICABLE after a vote for Independence with the aim that the currency be ready for introduction AS SOON AS PRACTICABLE after Independence Day’.
Only the SNP leadership and Andrew Wilson think that ‘as soon as practicable’ means 10-15 years. For everyone else it is a month or two. Note also this is NOT subject to any tests. We are only supposed to be ‘guided by the 6 ‘tests”, and I think we are all indeed very guided to put them and the rest of the No Growth Commission report in the bucket.”
https://www.taxresearch.org.uk/Blog/2020/08/10/currency-is-the-number-one-issue-in-scottish-independence-debate/
On independence most parties in Scotland will face an existential crisis at the first post-indy election. What will the Unionist parties do? We can write off the Tories, as presently constituted, but Labour and Liberal will have to decide whether to continue arguing for Unionism, a fairly absurd proposition, or accept independence is a reality and work towards creating a “new” Scotland. I hope they can be persuaded that a new Scottish currency will be an essential part of that process and that they may be keener than some in the SNP to end the rule of bankers, who, since becoming gamblers rather than financial facilitators have done so much damage. I suspect the Greens would be onside as they have stated they want a Scottish Currency.
The SNP may well face the biggest crisis, since, really their job will have been done and the various factions that comprise a coalition for independence under the SNP banner may go their own way – some to the right and some to the left.
My hope is that the first post-independence Scottish Government will be a coalition of those leaning towards the left and that the likes of Wilson and his fellow financial austerity hawks will be given short shrift. The Greens will be arguing for a Scottish Pound and should make that a red line for supporting any government. New, younger members of the SNP may well take the same line, so we also need to get Labour and Liberal on board too as well as reminding the SNP leadership that conference has already voted for a “Scottish Pound”.
Many thanks Graham.
Hi Richard
Fully support Scotland’s independence if the people who live there want it- only wish it was an option for Yorkshire!
I would like you to offer some debate about the impact of Scotland leaving the union on those countries/people
“left behind”- will the dominance of London/Westminster become even more detrimental to the rest of the
country?
Warren Mosler gave this very interesting outline of how Italy could leave the EU,without the sky falling in. I think it may well apply to Scotland leaving the pound.
One issue he advocates is not forcing bank accounts to change currencies overnight but to let people chose,which will in itself create a demand for the new Scottish currency rather than risking flight and devaluation.
https://www.youtube.com/watch?v=LQRgJPEAvIM
As Tim Rideout says, often