Jason Sorens on Scottish independence

From a longer post:

A closer look reveals that different stocks responded differently to the poll news. Two transportation companies, FirstGroup and Stagecoach Group, lost virtually nothing, and Aggreko, which rents temperature control systems, lost absolutely nothing. Financial and energy/power companies were pounded. An engineering company closely linked to the oil industry, the Weir Group, took a more modest 1.0% loss.

How to sum up?

So far capital markets seem to be telling us that the economic costs of independence to Scotland would be significant but not catastrophic, and that they would be virtually nil to the rest of Britain. How much of those costs are due to the policies Scotland would implement after independence, rather than secession as such? It is difficult to know, but the differential returns to particular firms give us a clue. Transportation companies have closer links to the state, so a more statist policy regime might not hurt them. Financial companies might lose because of the lender of last resort issue (Scotland might not have a credible one). Energy and engineering companies might lose because nationalists want to tax oil heavily to fund social programs. Also, stricter environmental laws may hurt the electric utility SSE, which lost heavily on Monday.

Speculatively, then, capital markets seem to be telling us that the costs of secession as such are modest, but that the costs of dramatically different economic policies are substantial.

But I find this earlier bit less optimistic:

What would happen to these firms’ value if independence were dead certain? Expected utility analysis helps us here. They lost $800 million in value on an increase in the probability of independence of 5.5+2.7=8.2%. We can infer that an increase from 20% to 100% would wipe out $800 million*8/.6=$7.8 billion. That’s a fair proportion of their existing value: about 16%.

There is more here, and for the pointer I thank Chaim Katz.

Comments

The danger of independence is uncertainty, if independence was certain we would already dealing with the ensuing negotiations, such as Scotland's role in Europe, and how that will effect trade with Europe. The question of stupid policies by the Scots is also very real.

However if Indeoendence was a given we would already begin to know the basics of these policies. The danger is the fear of the unkown, not the reality, whatever that turns out to be.

I suspect this is because until this week, nobody with any sense thought the Scots might have the cojones, I guess I should say "tackle" but my familiarity with Modern Scottish crudity extends only to physical harm and unintelligible shouting (usually when I was too inebriated to even care about vocabulary acquisition), to actually go for it. Personally I always thought of the Scottish people as affable and physically brave nutless wonders, kind of like a chumpish Canadian. But who knows maybe the "NO!"campaign has alienated enough of them. So we got our freak out.

As opposed to the very sound economic policies by England? well...

Heh. My late Irish ma would often interrupt her harangue about 800 years of defiance under the English boot heel to castigate the Scots for knuckling under.

when blair was PM? Or brown?

Nope. The guy before Walpole maybe.

..."Most American commentators, from Paul Krugman to Tyler Cowen, oppose Scottish independence and forecast economic disaster for the new country. Are they right?"

Can't say this is an accurate portrayal. I feel Tyler has generally been providing the Links (no pun intended to Golf) and leaving the commenters to battle it out.

I dunno, I get the very clear impression Tyler thinks independence is bad, although seems to be for less narrowly economic reasons as Krugman.

I agree, but bad != economic disaster.

No one is predicting that it will be a disaster the day after. It took a decade, and a near depression before the problems of the Euro became evident. The problem for the Scots if independence passes is that the ideal short term policy (staying on the pound), which minimizes uncertainty and transition costs and the ideal long term policy (their own currency) which gives them control of monetary policy, differ. If I were in charge of Scotland after independence, I'd figure out a way to institute a plan to get off the pound within 5 years. And no, going on the Euro is not a reasonable alternative.

"If I were in charge of Scotland after independence, I’d figure out a way to institute a plan to get off the pound within 5 years. And no, going on the Euro is not a reasonable alternative."

That should be obvious. But who knows.

Would the EU let Scotland stay in without a plan to join the Eurozone? After all, Scotland isn't that big or populous and several larger EU countries are already going to be pissed at the precedent this sets for secession (Spain most particularly but to lesser extents Belgium, France, and maybe even Italy have groups that could be emboldened by Scottish independence). So with fairly limited negotiating power and a number of potential adversaries right off the bat, the "go with your own currency" option while staying in the EU may not be available.

Scotland has its own coin and paper currency. Close the banks for a few days, have their employees scoop up the vault cash produced for the rest of Britain to be shipped to the central bank in return for deposits on reserve, and institute exchange controls. Have the official rate start out at 1:1 (pound scots to pound sterling) and auction off tranches of foreign currency each month, adjusting the peg accordingly.

Krugman's primary function is to reassure New York Times' readers that people who stray off the path of increased statism are idiots, and their own behavior will ruin them. Hence his enthusiastic stream of doom-mongering about Scotland.

Tyler has certainly linked to a lot of negativity on the matter, but he doesn't have as personal a stake in the outcome.

Soren's blog post claims you "forecast economic disaster" if the ascots go independent. Is that really true? Not just in an increased tail risk sense, but in an expected value sense?

To make is slightly more concrete, what is your prediction for the decline it Scottish GDP across all probability-weighted independence scenarios compared to all probability-weighted continuing-union scenarios, over some time horizon of your choosing? I am very amenable to the argument that there are enough low-probability high-impact scenarios to push the expectation value down by 1%, but I wouldn't call that forecasting economic disaster. If you think there is enough probability or enough impact in those scenarios to push the expectation value down by 10%, I'd really appreciate your sketching out the specific scenarios involved. (E.g. a 10% chance of Scottland ending up an uninhibited wasteland with a GDP of $0 due to a nuclear conflict with England? Or a 50% chance of a Scottland-only financial meltdown inducing a Great Depression that pushes down incomes by 20%?)

Really know need to ask that in this venue. Better to say the same in some Glasgow pub at about 10 pm. Curious what the response would be.

I agree with the idea of a forecast. Come on Tyler, make an actual falsifiable prediction!

"Speculatively, then, capital markets seem to be telling us that the costs of secession as such are modest, but that the costs of dramatically different economic policies are substantial."

I'd be hesitant about inferring too much from capital markets about the affect of something like this. Markets can be thought of as distributed learning machines, agents that repeatedly prove successful acquire more capital and hence more pricing power. As such markets work best on events that are related to events that they've been trained on before. For example markets are very good about getting earnings announcements correct, because similar events constantly repeat. But a one-off, highly unusual scenario like this, there's not much reason to suggest that the current set of active traders and investors holds any special insight.

"That’s a fair proportion of their existing value: about 16%." That calculation is so ridiculous... typical economist BS .... As already was pointed out, it could be that the uncertainty per se, is the factor which is making the stocks go down. I fail to understand why people are so afraid of an independent Scotland. Also for both sides it seems like only money matters. I thought independence struggles were important for other motives... national pride, own culture, etc. If the result of the referendum is 51 - 49 for staying in Britain, I think it will be more prejudicial to Scotland then independence, because this issue will surely comeback to the agenda.

But it's not just uncertainty, it's uncertainty about the sustainability of a large financial center by a small state that doesn't control its currency.

Other issue: equity markets have a fairly high discount rate. Perhaps as citizens we should have a lower one and care more about a terrible recession 15 years out. Should the EU have cared about the current economic disaster when it first formed? Even if the financial markers knew this crisis would happen, it's not clear to me the PV change would have been that high.

I'm not sure I'll ever understand why being able to externalize your bad fiscal policy is such an unqualified good. Yeah, governments get to foist off their failure and maybe even boost ngdp to avoid a crisis (has it ever happened) but doesn't even that impart moral hazard risk?

Yeah. The gold standard is to run a sensible fiscal policy, but this looks increasingly far-fetched for a modern democracy.

Monetary policy isn't magic, but I think it can avoid making a bad situation worse.

Thought experiment: what would the last 20 years for Greece have looked like absent the euro?

Not so hot, I think.

Oops...this was @Andrew'.

Don't call it a "gold standard!"

The hyperventilating about this is amazing. First, the unionists are still more likely than not to win.

Second, we already have a precedence for Scottish independence. Most of Ireland became independent of the United Kingdom in a much more painful and messier process than will be the case with Scotland. And both Ireland and England did fine.

The trend has been for smallish parts of medium sized nation states to break off. One reason for this is that World War 2 showed that in modern warfare, a medium to large nationstate the size of, say, France, doesn't really offer much more protection to being overrun than does a small state. You really need continental sized federations such as the USA and former USSR to effectivey prevail in modern warfare. The British Empire could just about do this, but not the United Kingdom by itself. A Europe sized federation of Irelands and Lithuanias makes alot of sense, though the actual pan-European institutions seem almost designed ot discredit the idea.

Also, there's the obvious fact that Scotland is largely protected from an aggressor by it's geography. It's an interesting question, will an independent Scotland end up with a very low level of military spending. The UK runs about 2.5%, but Canada for example runs about 1.0%. So Scotland can use the advantage of the tragedy of commons to drastically lower it's military spending, assuming that Europe and the UK will protect it from any aggression.

Do Scots not enjoy fighting in Scotland? The Scots-Irish in America, if they had their own nation surrounded by America, would probably have the highest military budget (% of GDP) in the developed world.

I think all the angry ones emigrated.

Estonia. It isn't big enough to withstand Russia.
Nor is it big enough for us (US, EU) to really care.*

* Really really care

What will the effect be on the continuation of the James Bond series?

Scottish attempt to assassinate the Queen.

Trying to determine the validity of political policies by tracking daily stock fluctuations is about one step up from reading entrails.

what will happen to the pound in the event of a yes / no vote? is the recent fall a discounted move that will be completed with a huge fall if it's a yes?

I once did a study of what would happen to an independent Quebec.

I concluded that there was no inherent reason that an independent Quebec could not continue to enjoy North American living standards.

But it would depend on the term of the break-up -- allocation of debt, for example--and the polices the new country followed.

Seems the same conclusion applies to Scotland, except substitute European for North American living standards.

I'm baffled by the doom mongers. I don't see any reason why Scotland standard of living would change much.

I would bet it goes up because it would spur political innovation in the UK and Scotland.

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