By George Kerevan
Since I was stood down by Channel 4 News to debate US economist Paul Krugman on Scottish independence and currency – with no explanation – I thought the readers of Newsnet Scotland might like to hear what I would have said.
WHO IS PAUL KRUGMAN?
Krugman is a controversial US economist who, on Monday, published an article in the New York Times rubbishing Scottish independence and suggesting we would “end up becoming Spain without the sunshine”. He thinks seeking a common currency with the rest of the UK is “mind-boggling”.
Of course Mr Krugman is a friend of Gordon Brown and in 2010 called for his re-election. I only mention this in case you think Krugman is impartial. He was also chief economic advisor to…er, Ronald Reagan. This suggests political opportunism if not downright intellectual confusion.
BUT ISN’T KRUGMAN A NOBEL PRIZE WINNER?
Folks, there is no Nobel Prize for economics. There is a Nobel MEMORIAL Prize, which was founded in 1968 by the Swedish central bank. The real Nobel prizes were endowed by Alfred Nobel in 1895 for “those who … shall have conferred the greatest benefit on mankind”. Speaking as an economist, I’m not sure my profession fits that description. Krugman got his memorial “Nobel” in 2008, for “his analysis of trade patterns”. In other words, he is not a monetary specialist.
By the way, if we are trading reputations, the chair of the Scottish Government’s commission which recommended a common pound is a Scot, Sir James Mirrlees, who got his economics Nobel in 1996. Mirrlees also taught Mark Carney, the Governor of the Bank of England, which should come in handy in any future negotiations. Mirrlees recently told the Daily Telegraph that Independent Scotland should refuse to take on any of the UK’s £1.4 trillion National Debt if England refuses a currency union.
WHY DO WE WANT TO KEEP THE POUND?
Our prices, debts and pensions come denominated in pounds – it would cause chaos to change. So after independence, regardless of what England decides, we will have a currency that is called the pound and which is exactly the same value as the pound in England. Ireland did the same thing for the same reason, for over half a century after its independence in 1922. Furthermore, no one can stop us doing this. The real political issue is whether we do this by ourselves or in partnership with England through the Bank of England.
WHY IS A COMMON CURRENCY A GOOD THING?
To create jobs we need trade. But international trade requires a currency that both parties trust – no one will sell expensive high tech stuff for funny money. The more a currency is trusted between different parties, the greater will be trade. Anyone who implies that a common currency is a bad notion (i.e. Paul Krugman and Alistair Darling) is bonkers – or trying to deceive.
In fact, the entire world had a common currency up till 1914 – called the Gold Standard. Individual nations fixed their paper currency (pounds, dollars, francs) to a given amount of gold. Central banks promised to “pay the bearer on demand”, i.e. swap their paper money for gold. You could ship that gold to another country and purchase a fixed amount of paper currency. Everybody trusted each other’s paper money because it was “as good as gold”. This was the era when Clydeside became the “workshop of the world”.
Then came the Great War and the Gold Standard collapsed as nations fought each other. Between the two World Wars, it proved impossible to reconstruct a global common currency. The resulting economic uncertainties helped cause the Great Depression.
After 1945, American capitalism forced Britain and the world to adopt the dollar as a common currency – we had to agree to convert pounds to dollars for US companies, at a fixed rate. Paradoxically, this helped promote economic growth. But this “dollar” common currency system collapsed with the Vietnam War.
The world has been trying to re-create a common currency ever since. That is why the Europeans created the euro and why the Chinese and Americans have a de facto common currency with each other (the dollar). Most of the world’s trade is now conducted in either dollars or euros. Even during the worst of the so-called “euro crisis”, the value of the euro went on rising – it will eventually become the world’s main currency.
SO WHY DOES KRUGMAN THINK A COMMON POUND IS A BAD IDEA?
Krugman cites the recent history of Spain as proof that “the combination of political independence with a shared currency is a recipe for disaster”. Between 2000 and 2007, Spaniards borrowed too much and property prices soared astronomically. This was because a common currency means common interest rates.
But interest rates in the Eurozone were set by Germany and were very low. Too low for Spain, which led to the excess borrowing and the property bubble. When everything went pear-shaped, the Spanish Government had to bail out the banks. This meant tax rises, austerity and 50 per cent youth unemployment. Who wants that?
But hang on a second. The property bubble was not the fault of the euro as such. The UK had a similar property bubble and a similar meltdown at exactly the same time, when Krugman’s friend Gordon Brown was Chancellor. The UK also had low interest rates, because Gordon leaned on the Bank of England to keep them down so he could become Prime Minister. So what was the REAL problem?
In both countries, the politicians could have headed off the property bubble but they chose not to do so in order to win undeserved popularity. In a currency union you accept the common interest rate. But if this is too low and in danger of causing a property bubble there are measures you can take. You can raise property taxes, you can limit mortgage lending by order, and you can make banks hold more reserves.
Krugman is talking through a hole in his head. The Spanish economic disaster was the result of political incompetence (not to mention impropriety). Ditto the UK.
Scotland wants independence precisely so we never engage in such daft and reckless economic policies. We need to place restrictions on profligate borrowing, public and private. Otherwise the City bankers and hedge funds will bribe Westminster politicians to stoke up the next unsustainable property bubble, so they can justify their absurd bonuses.
BUT DON’T YOU NEED YOUR OWN CURRENCY IF SOMETHING GOES WRONG ECONOMICALLY – WHICH IT ALWAYS DOES?
Here Krugman has half a point. A central bank is just a device that lets a government print its own cash income in an emergency. When Spain got into (unnecessary) trouble it had no such printing press – the Germans ban the Eurozone’s central bank in Frankfurt from printing euros on demand for member states. So Spain had to introduce austerity, to pay through the nose for German loans. Which may, of course, be what Berlin wanted.
Krugman says an independent Scotland in a currency union with England would be like Spain. The Scottish Government would not be able to print money to cover itself (or bail out private banks) in an emergency. Why take the risk?
But hang on again. The correct approach is to ensure we don’t over-borrow in the first place. The correct approach is to control our banks so they don’t implode and need rescuing. The correct approach is not to print money to refund financiers and hedge funds who engaged in reckless financial gambles – that only encourages them to do it again. BUT YOU NEED SCOTTISH INDEPENDENCE to free us from the grip of the City spivs.
Besides, Krugman is actually saying a government should be in a position to print as much as it needs to cover its mistakes. Taken to excess, that will only result in hyperinflation. But inflation is a tax on working people, pensioners and the poor. So much for Paul Krugman’s social conscience.
DECLARATION OF INDEPENDENCE
PS: Scotland wants self-government for exactly the same reasons as the citizens of Boston did in 1773, when they dumped the tea in Boston Harbour. We want to raise and spend own taxes, not be told what to do by the Tories in London. Strangely enough, I’ve not come across any of Mr Krugman’s fellow Americans who want to reverse the Declaration of Independence and be governed by David Cameron.