One reason why independence for Scotland would be a bad idea

by on May 8, 2011 at 1:50 am in Economics, Political Science | Permalink

There is now talk of a referendum, but let’s scroll back to 2008:

The massive bailout of banks has been widely received as welcome and necessary across the United Kingdom. But it has not been lost on Scots that the largest shareholder in Scotland’s two largest banks is now the British government.

…Brown said the $65 billion bailout of the Royal Bank of Scotland and the bank formed by the merger of Lloyds TSB and the Halifax Bank of Scotland (HBOS) proved that the United Kingdom was “stronger together.”

“We were able to act decisively with 37 billion pounds; that would not have been possible for a Scottish administration,” said Brown, whose own political fortunes have been boosted by his handling of the crisis.

Others have pointed out that the bailout for eight major British banks — including capital for banks and government loan guarantees — is worth a total of almost $700 billion, which is about five times Scotland’s annual gross domestic product.

Here is more.  The conceptual point is simple.  If you think that the world is now more prone to financial crises (and I do), the optimal size for a nation-state has gone up.  Risk-sharing really matters.

1 Jonathan May 8, 2011 at 2:23 am

I agree that the world is more prone to financial crises but suggesting that the solution is that states should remain larger (in this case not have Scotland secede) you are recommending a positive feedback loop. Maybe default is what we needed in the UK rather than pushing the obligations up the chain to the Sovereign level or in the Irish case the EU level.

I think ET will be upset to find out that one of the first things we will ask him to do is to take on our future failing sovereign debt as the optimal nation state size needed to cope with the debt outgrows that of this planet?

2 8 May 8, 2011 at 3:16 am

It’s not the optimal size for the nation state, it’s the optimal size for broke banks and nations putting off the eventual default. If you’re a poor or middle class person, default and a much smaller nation state are quite attractive. If you’re a large or multinational bank, or a sovereign state, you want to fail up.

3 The Anti-Gnostic May 9, 2011 at 11:31 am

Correct. Ponzi schemes can never have too many suckers.

4 bob May 8, 2011 at 4:48 am

If default is preferable to a bailout, then the optimal size of a nation state is smaller. The Icelandic government was too small to bail out their banks, and comparing Iceland to Ireland you can make a pretty strong case that a bailout would have been worse. Isn’t it obvious that bailouts are really just an example of state corruption?

5 Mulberry May 8, 2011 at 4:53 am

If you’re a poor or middle class person, default and a much smaller nation state are quite attractive.

6 Tom Davies May 8, 2011 at 4:02 pm

parent comment is spam

7 Pierre May 8, 2011 at 4:38 pm

Parent comment is bankster spam, original post is insightful. If Scotland declares independence they should absolutely repudiate and default on all debts and guarantees. They were illegitimately acquired by a foreign regime to finance the destruction of private property, in technical terms they are odious debts.
The Scottish should go back to the free banking system based on precious metals that they once had, except with 100% reserve for demand deposits. Any short term economic loss incurred by the Scottish people in the short term would be dwarfed by the prosperity they will enjoy while the rest of Europe undergoes grueling austerity that only benefits the Establishment elites.

8 Tomasz Wegrzanowski May 8, 2011 at 5:57 am

Small currency areas (Australia, UK, Poland etc.) are in general much better off than large currency areas (eurozone, US, Japan),
and even Iceland’s size seems much better than Ireland’s size, so if anything the crisis proved the opposite.

In any case Scotland independence talk is about more money and more devolved powers.
Threat of independence referendum and mess it would cause puts pressure on UK government to be nicer towards Scotland, that’s all.

9 Scaremon May 8, 2011 at 6:24 am

You seem to believe that bank inflation is link to well-being. Maybe scotts will believe othernwise, especially now they have given the brits the bank debts

10 Will Richardson May 8, 2011 at 7:11 am

I think smaller countries seem to be more manageable at around the 5-10 million mark.

Although I think the Scots overlook the economic benefits of a single trade area UK and pooling defence costs/resources, they’d probably do fine as long as they had their own currency sovereignty, understood Modern Money Mechanics and only had public debt, if they chose that option, in their own currency.

11 E. Barandiaran May 8, 2011 at 7:41 am

Tyler, as some other readers have already suggested, you’re wrong. First, Gordon Brown has always been a terrible politician, the sort of fraudulent clown that Don Boudreaux likes to denounce. He will say anything to hide the great loss that his Labor Party suffered in Scotland. Second, if you were the Primer Minister or President of a small country, you’d have to be stupid to guarantee the debts of a private bank with your tax revenue and your stupidity would be larger, the larger the debts are. You should tell the bank to get insurance abroad. Third, if as Primer Minister or President of a small country you took over a large bank, I hope tax payers revolt to overthrow you and to denounce any payment to the bank’s creditors. Fourth, if as Primer Minister or President of a small country you were so clever to get some Gordon Brown –PM of a much larger country– to guarantee with his tax revenues your small country’s bank debts, you should give Gordon Brown’s address to the bank’s creditors and celebrate GB’s stupidity. Fifth, if you want to live in a small independent country, you should talk about the advantages to nationals of managing their taxes by politicians elected by them –that is, by their own fraudulent clowns rather than clowns elected by others that care even less about their taxes.
Note: Although my bank –Scotiabank Chile– has recently bought the Chilean branch of Royal Bank of Scotland (meaning that the latter is quickly being reduced to Scotland size), I declare no conflict of interest because I’m only a customer (I must say, however, that being a bank customer in Chile –as everywhere– is not the same as being a bakery customer because banks have privileges to not let customers vote freely with their feet).

12 E. Barandiaran May 8, 2011 at 8:28 am

ADDENDUM — Is there anything that fraudulent clowns’ servants can do well?
Read about the latest contribution from EU’s bureaucracy to SNL:
http://beta.uk.news.yahoo.com/apology-over-christmas-diary-error-163422823.html

13 Lord May 8, 2011 at 9:17 am

But presumably not for a confederation like the EU.

14 Matthew May 8, 2011 at 9:27 am

When the value of the dollar collapses and takes down the entire financial system (coming very soon) the incorrectness of Tyler’s argument will be apparent to everyone.

15 Rahul May 8, 2011 at 9:55 am

If you think that the world is now more prone to financial crises (and I do), the optimal size for a nation-state has gone up.

Optimal for whom? The nation itself or the world as a whole?

16 Scott Sumner May 8, 2011 at 10:12 am

This is a peculiar argument to make right after you hinted that Ireland might have made a mistake by bailing out its banks. Perhaps you are taking it as a given that most small countries would behave more like Ireland than Iceland. Then the lesson might be to stay out of the eurozone.

17 E. Barandiaran May 8, 2011 at 11:37 am

U.K., albeit a EU’s member, could choose between being in or out of the Eurozone. Small countries that had been benefiting greatly from EU membership didn’t have a choice about Eurozone. Any discussion of Ireland or Greece or Portugal or Spain to leave the Eurozone must take into account all benefits and all costs of being a EU member. Membership is not a monetary issue, it’s a political one. EU has always been and will always be a union of unequals.
FYI, regardless of what is going on today, I believe an assessment of past EU membership would point to a high net benefit for those four countries. Most likely an assessment of the expected net benefit in the next 25 years is not as positive as the past one but anyway positive (largely because of the EU expansion).

18 Rahul May 8, 2011 at 3:44 pm

Hmm….Can’t a country opt to stay a political member of the EU without being a monetary one?

19 Mark A. Sadowski May 8, 2011 at 9:11 pm

“Most likely an assessment of the expected net benefit in the next 25 years is not as positive as the past one but anyway positive (largely because of the EU expansion).”

I predict the euro will die a horrible death pricked on the stiff spear of the everpresent German irrational fear of nonexistent inflation. (And I say this as a huge fan of the euro project.)

20 Blackadder May 8, 2011 at 10:13 am

I have a one word refutation of Tyler’s argument in this post: Iceland.

21 john haskell May 8, 2011 at 11:21 am

First a post about Pakistan’s political stability, now an argument that optimal size of a country = whatever size can’t be bankrupted by crooked bankers. This is starting to get shocking.

22 Sam A Keil May 28, 2011 at 2:44 am

Smaller Countries are easier to manage, there’s more transparency and less corporate power and interference (obviously in reference to a more developed nation like that of Scotland)

23 Terry May 8, 2011 at 11:56 am

“If you think that the world is now more prone to financial crises (and I do), the optimal size for a nation-state has gone up.”

Risk sharing matters, but so does risk taking. If bank size is now decreasing in country size and banks causing financial crises is increasing in bank size, then the argument is much less clear.

24 John Thacker May 8, 2011 at 12:18 pm

The SNP is pro-EU. That was not the case in the mid ’70s, but has been true since the ’80s. They realized that a more powerful EU would weaken the case from remaining in the UK. If UK powers get ceded to the EU and the EU can provide the same sort of financial guarantees, then Scotland may as well be independent from England within the EU.

25 Edward Burke May 8, 2011 at 12:47 pm

Is it possible that as “the optimal size of nation-state is going up” in terms of finance and macroeconomy (if this were in fact the case), the necessity (or mere perception of a need) for political power devolving to localities increases? As global human populations grow by millions and billions decade by century, are federal/national “solutions” to circumstances only actually encountered at local levels (whether construed in terms of state/county/municipality) palpably perceived to be relevant? Do generic political solutions and applications for specific local circumstances emanating from federal/national levels become MORE relevant, MORE effective?

26 Gary May 8, 2011 at 12:51 pm

An independent homeland for the Scottish equals racism.

27 Andy May 9, 2011 at 10:08 am

An independent homeland for the Scottish might equal fairly hefty patriotism, but saying it’d be racism I think is a step too far…

To be honest there is little reason for Scotland to have total independence – the majority of claims are simply that the country isn’t represented properly in government decisions, because London is so far from the border. Just because you’re further away doesn’t mean the country has different issues to everywhere else. Whether you’re 10 miles from London or 300, the issues remain the same – the issue for an independent government in Scotland in my opinion is pure patriotism, nothing else.

28 mulp May 8, 2011 at 1:16 pm

If all the bank bailouts hadn’t been done, and all creditors, especially banks, had all been forced to take haircuts as the weak under capitalized banks entered bankruptcy or resolution dismemberment fire sale, causing many of those banks to become insolvent, which banks would have survived and stayed out of bankruptcy court or government resolution management?

Can anyone name a nation which wouldn’t have had its biggest banks become insolvent? Certainly not the US. Not Britain. Not Scotland. Not Ireland. Not Iceland. Not Italy. Not Greece. Not Spain.

Switzerland? Germany? France?

Would the surviving large international banks been based in Brazil, China, India, Russia?

29 Jon Martin May 8, 2011 at 2:44 pm

If the risk of financial crisis is a black swan in any given country then maybe you’re right; but it’s not. There’s a reason Finland, for example, didn’t need a bailout. It’s because its banks were not that highly leveraged and the level of public debt was quite low.

30 Mark A. Sadowski May 8, 2011 at 4:14 pm

“Others have pointed out that the bailout for eight major British banks — including capital for banks and government loan guarantees — is worth a total of almost $700 billion, which is about five times Scotland’s annual gross domestic product.”

This is complete rubbish. How does Scotland benefit from the bailout of the other 7 British banks?

Do the math. The bailout of RBS cost $65 billion which is about half of Scotland’s GDP. The bailout of the other 7 British banks was $635 billion which is about half of England’s GDP. This sounds like a case of the fallacy of composition in reverse.

If Scotland had a true central government and currency of its own, the money to cover the bailout would not have been a problem. And if Scotland were free to follow an independently loose monetary policy, like Poland, it’s possible the bailout of RBS would not even have been necessary.

P.S. Full disclosure: I’m half Scottish and I support the SNP.

31 Mark A. Sadowski May 8, 2011 at 4:17 pm

Excuse me. the “7”s should be “6”s and “RBS” should read “RBS and the bank formed by the merger of Lloyds TSB and the Halifax Bank of Scotland (HBOS)”. Trivial, as the math and point do not change.

32 Grover Cleveland May 8, 2011 at 4:29 pm

Jason Sorens – contra Cowen – on Bailouts and the Optimal Size of States: http://pileusblog.wordpress.com/2011/05/08/bailouts-and-the-optimal-size-of-states/

33 Chris E May 8, 2011 at 4:35 pm

“Others have pointed out that the bailout for eight major British banks — including capital for banks and government loan guarantees — is worth a total of almost $700 billion, which is about five times Scotland’s annual gross domestic product.”

This is a profoundly silly argument. Not all of those eight banks would count as remotely scottish.

“If you think that the world is now more prone to financial crises (and I do), the optimal size for a nation-state has gone up. Risk-sharing really matters.”

Only if you assume that the nations bear the total cost of every bank failure. The reductio ad absurdum of your argument would be that we either end up with a one world government in the face of continued bank mergers, or we refuse to allow banks to merge beyond the ability of their host nations to bail them out, in entirety [*]

I don’t expect you to agree with the latter – but it would end the ludicrousness of banks hosting themselves in large part in the Caymans, Bermuda etc.

34 Richard W May 8, 2011 at 8:45 pm

I tend to agree that Scotland is stronger in the United Kingdom than they would be by going it alone through independence. However, the case is not as strong as it used to be. Moreover, these were national and international banks that just happened to have their HQ in Edinburgh. Although, an independent Scotland could not have bailed them out. It would not have been Scotland suffering from them not being bailed out because most of their debts were external to Scotland. The situation in Ireland where the Irish banks blew up a
huge bubble in Ireland just did not happen in Scotland. Issues like the optimal size for a nation-state and risk-sharing depends greatly on where the debts are being accrued. The UK government was faced with a situation where not bailing out the banks could have sunk the UK economy.. A Scottish government would be faced with a situation of where they could not bailout these banks, but it would sink other nations economies. Incidentally, your colleague Professor Andrew Hughes Hallett is an adviser to the SNP.
http://en.wikipedia.org/wiki/Council_of_Economic_Advisers_%28Scotland%29

35 Mark A. Sadowski May 8, 2011 at 9:20 pm

“I tend to agree that Scotland is stronger in the United Kingdom than they would be by going it alone through independence.”

I think Scotland would benefit from a union, both economically and monetarily, with a larger entity. But now that there is an EU, I just don’t see any justification for the UK any longer. It is an artifact of history (and not even really our history).

P.S. I don’t recommend Scotland joining a the euro until major ECB reforms are enacted.

36 Mulberry May 13, 2011 at 7:17 am

They were illegitimately acquired by a foreign regime to finance the destruction of private property,The reductio ad absurdum of your argument would be that we either end up with a one world government in the face of continued bank mergers

37 sean May 19, 2011 at 6:29 am

hia pall

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