Sunday, 27 March 2016

Clowns Left, Jokers Right

Last week I published the following report.

Read the Full Report Here

The report was well received in the press and by informed commentators. It was quoted extensively in respected publications such as here in the FT:
"The best analysts of Scotland’s finances have been celebrating the day too [..] there is one from Kevin Hague, commissioned by the Scottish Conservative party (of which Mr Hague is definitely not a member). This is the longest and the most comprehensive of the lot."
If you haven't read it, please do (save the pdf, print it out, save as an ebook on your phone). It should serve as a valuable reference for anybody who cares about understanding the facts around Scotland's economic position within the UK.

Former SNP MSP candidate and current independent councillor David Berry blogged a response (Nae Twa Kitchens) in which he reluctantly conceded:
"to be fair, it is hard to poke holes in the extensive numbers he has gathered in this paper, based as they are on GERS and other government documents. He has set rigorous terms for any fiscal debate on Scottish independence [..] That Mr Hague’s numbers show we Scots are running a structural deficit worse than the UK’s is not some unionist plot to undermine the SNP. It is reality. And waving saltires at rallies will not make it go away."
Whilst he couldn't resist a few poorly aimed digs at me in his blog, I applaud David's willingness to address the reality head on.  Of course not everyone responded positively and so with a weary sigh I'm going to offer a brief response here.

I'll ignore the predictable and feeble ad hom attacks from the likes of Wings Over Scotland's Stuart Campbell. In fact I've taken to ignoring him altogether (you should too by the way - it's like taking off a pair of tight shoes, you'll wonder why you didn't do it sooner).

There were two responses in particular that were seized on by nationalists desperate to find an excuse to avoid facing the facts. On the left we have proud SNP member Alistair "wrote a Common Weal paper" Davidson and on the right we have those SNP cheerleaders Business for Scotland (who will need no introduction for regular readers of this blog).

The jokers on right's offering is too feeble to merit a response (check it out here if you don't believe me), but the clown to the left received the enthusuiastic support of Pat "always a yesser" Kane (National columnists and inhabitant of Thoughtland -  a land where apparently only one thought is allowed) who gleefully tweeted:
"One reason I know #Indy will happen is explosion of street-smart minds on our side. @moh_kohn dismantles @kevverage:"
I asked Pat if he'd read the report he thinks is being dismantled but he didn't reply. In fact - demonstrating a rather wonderful misunderstanding of how Twitter works - Pat tweeted that he's muted me because of some of the replies he received from some of the people who follow me. Hey ho.

Anyway, let's see how he thinks Alistair managed to "dismantle" my report. I strongly recommend you read Alistair's effort ("Trial at the Hague") for yourself.

He starts with a pseudo-intellectual ramble about the discipline of economics. He lists some economic schools of thought, just in case you doubt his ability to write down some names he's heard of.

He claims mine can't possibly be an objective report because economics is not an objective discipline. If only he'd managed to read the very first paragraph of my report where I explain very clearly: "These figures are used to explain Scotland’s past economic performance (as an integral part of the UK) so as to inform our understanding of the future choices a possible independent Scotland would face". I'm not attempting to propose an economic solution, this is not a prescriptive report, it's merely an analysis and presentation of the past data. That's why it can be objective; it's fact based.

He also dismisses the concept of an "understanding of practical economics", but we'll come back to that.

He then quotes me referring to the "net fiscal deficit" and in a flailing attempt to make a semantic point he asserts
The author is entirely using gross figures, rather than net.
No, I'm really not. I'm using the same terminology as GERS uses when it refers to the figure I quote as the "Net Fiscal Balance". These are not "gross figures" in any way shape or form. In case we still doubt that he hasn't a clue what he's talking about he elaborates:
This is akin to subtracting your mortgage from your net worth, but refusing to count the value of your house.
This is a quite staggeringly daft statement. Neither my report nor the GERS report are attempting to establish Scotland's "net worth", this isn't an asset valuation exercise. What this statement painfully exposes is the fact that Alistair in fact doesn't know the difference between a Cash-flow and a Balance Sheet. Understanding really basic concepts like this is the sort of thing I was referring to when I claimed an "understanding of practical economics", but I guess we already knew Alistair doesn't believe in such a thing.

He goes on:
£3bn was spent on capital investment, leaving a Current Budget Balance deficit of £11.9bn or 7.8% of GDP. Still a challenging figure, but the author’s misuse of the statistics undermines his entire analysis.
Aha! So he's talking about the difference between the Net Fiscal Balance and the Current Budget Balance (showing he doesn't actually understand the significance of the two figures in the process). Quite why my use of the Net Fiscal Balance figure, correctly naming it as such and using like-for-like definitions when looking at international comparisons is a "misuse of statistics" that "undermines (my) entire analysis" is not something Alistair explains. Maybe he thinks an independent Scotland wouldn't need to make capital investment? Does he offer other countries' Current Budget Balance figures for comparison? No, of course he doesn't.

He then looks at the EU stability and growth pact excessive deficit threshold of 3% and offers the following killer insight;
Many EU members breach the stability and growth pact.
If only I'd shown all EU countries' deficits on a comparable basis, both now and over the last 13 years, so that people could see that very point graphically illustrated. Oh, hold on, I did (maybe this is where he saw it?)

I notice that Alistair doesn't take the EU to task for their "misuse of statistics" by judging countries on their Net Fiscal Balance rather than their Current Budget Balance. He should maybe have a word with them?

Actually maybe he will, because he then gets into full Dave Spart mode about the EU:
The pact was designed according to the same neo­classical economic theories that created the banking crisis and have plunged Eurozone economies into a lost decade of low growth.
Maybe his argument is that rather than having to work within the EU's rules, were Scotland to be an independent country we could negotiate our EU terms by explaining how they're all wrong? He carries on:
This 'objective' report has also taken the Better Together argument about EU membership as read.
Actually no it hasn't. I was very careful to refer simply to Scotland's requirement to "negotiate EU membership". If he's seriously suggesting that Scotland wouldn't need to negotiate with the EU following a vote for independence ... well frankly I despair. Mind you, given his little rant above maybe he doesn't want us to be in the EU anyway? It's quite hard to tell what he thinks to be honest.

He goes on:
This section rests on negotiations going entirely against Scotland. The author imagines Scotland being forced to close its notional deficit faster than any other nation outside the Eurozone has had to, while taking a full population share of UK debt, and no or limited assets.
No it doesn't. I make no assertion about assets, he's just made that up. I make no judgement about the outcome of negotiations (which for example could well include the EU simply refusing Scotland re-entry until it had sorted out both it's own currency and its deficit). In fact let me just repeat precisely what I did say: "it is inconceivable that an independent Scotland would be able to negotiate EU membership (or indeed a workable currency solution) without having a clear and credible plan in place to dramatically reduce the scale of its deficit.".  I stand by that.

He has a quick ramble about how we could "pivot" and simply "launch our own currency". So that's alright then. No mention of the financial challenges that would create, not a whisper about foreign exchange reserves or cost of debt ... but we'll let that pass because what follows is priceless:
To 'prove' how poor Scotland is, the author has taken the 'objective' decision to exclude a major Scottish industry. I am tempted to write a similar report that excludes volatile banking and financial services from the UK's public finances.
If he managed to read my report he'd realise that actually all I've done is isolate the impact of North Sea revenues for what, surely, even to Alistair are bloody obvious reasons. As for the banking and financial services analogy: really? If somebody claims that industry is "just a bonus", if we discover we have finite and maturing reserves of "financial services assets", if "banking and financial services" becomes a globally traded commodity and the price collapses ... well then maybe he should do that analysis. But that would require him actually doing some analysis with real numbers, so we can be pretty confident he won't.

He then implies the current oil revenue slump is just a blip (repeating the standard "it's just about the oil price" line that I carefully debunk in my report) and rambles on aimlessly for a bit - look, I have guests, it's Easter Sunday, I refuse to waste too much time on this.

Then he moves on to the part of the report where I highlight that Scotland has in fact been a significant net contributor to the UK since 1980, so the support we receive now is simply "pooling & sharing" in action. His response to this is quite remarkable:
Fiscal transfers to Scotland show that Scotland is a basket­case; fiscal transfers from Scotland are good pooling and sharing.
I mean seriously? I explicitly point out that fiscal transfers from the UK are "good" pooling and sharing and he accuses me of saying they show Scotland is a "basketcase" (his word, I say nothing of the sort anywhere in the report).

It gets worse.

In my report I clearly reference the five separate pages in the White Paper which offer the illustration that countries with the "bonus of being independent" experienced superior GDP growth of (cumulatively) 3.8% over a 30 year time period. Having already established (on the same page) that the gap to the UK is equivalent to 17% of total revenues, I make the simple observation that, at that rate, it would take over 90 years to close the gap to the UK (in case there's any confusion I explicitly note that I'm assuming revenue/GDP remains stable so as to isolate the effect of GDP growth on the revenue gap). If you calculate the cumulative percentage you'll see that at a rate of 3.8% every 30 years, after 120 years you'd still only have achieved 16% cumulative superior growth. So in fact I was being extremely conservative. Let's see what Alistair thought:
No citation is given for this 90 years figure. Nor does the author seem to understand economics. Arguments that bonuses from independence or the union could be found in the government accounts were always facile.
So he hasn't read the footnotes (57, 58) and/or he can't do simple maths and/or follow the most simple train of logic. He then starts thrashing around, dismisses the White Paper ("we expect such arguments from politicians") and makes the palpably ludicrous statement that seeking evidence of economic impact in government accounts is "facile".


Alistair's document isn't evidence of an "explosion of street-smarts", its a damp-squib. It isn't a "dismantling" of my report, it's a cringe-inducingly confident display of Alistair's own ignorance.

That SNP cheer-leaders seize on Alistair's effort as something to celebrate merely exposes the intellectual vacuum that now lies at the heart of the Nationalist movement.


Anonymous said...

Kevin, what you have to realize is that in the La La world that most Nationalists inhabit, all they ever want is some form of confirmation bias which is usually provided by Stuart Campbell. Stuart or Mr 'thoughtland' could have typed 'here is a dismantling of Kevin Hague's work' and then linked to a PDF containing a copy of 'The Very Hungry Caterpillar' and that would have been enough to send their disciples into raptures.


Anonymous said...

Well done, Kevin. You have the patience of a saint. I think this demonstrates that they are blood and soil cranks, one and all, who will say and do anything, no matter how stupid, to push for independence.

And this particular hatchet job on you is indescribably stupid. I've studied both economics and accounting my entire adult life, and your analysis and the GERS figures themselves are ACCOUNTING exercises - and fairly straightforward ones at that. So, for the guy to say that you are offering an economic analysis is simply wrong, completely trashing his paper from the outset. It strikes me that he doesn't know the difference between the two fields.

Then, the statement about the banking crash being caused by 'neoclassical economic theories' is leftist conspiracy claptrap, written by somebody who obviously does not have the first clue about what actually happened. It was caused entirely by the invention of loopy money-making devices, and had sod all to do with any economic theory.

I would be writing all of this on the guy's blog, but the attack on you doesn't seem to be listed - the home page leads with a hilariously muddled student politics tract about how, and I quote, 'Scotland's social movements can be a model for the world'. These people are living in a fantasy world. Thank Christ we voted No, or they would have driven us off a cliff.

Anyhow, keep up the good work.

Cheers, Caius Robertson

Anonymous said...

Obvious critiques of the pish by Alistair Davidson - ones not included by yourself Mr Hague - on the only paragraph of economics I could find in the whole document - having read it twice:

1. a. Impact of 'controlled devaluation' on fixed incomes. e.g. pensions. If inflation is countered by increases to pensions, then net contribution to deficit reduction is zero, no? Devaluation directly crushes living standards of those on fixed incomes, or those paid by the state, or those who cannot negotiate higher salaries. Devaluation crushes value of money spent where factors are imported into Scotland. e.g. food, power.

b. Which institution of state is it exactly that is managing this controlled devaluation? And what are the means by which it would do so?

2. For the topics under discussion, can specific examples be given of meaningful differences between economic schools of thought that would impact on interpretation? I suggest they cannot. Would such differences manifest themselves in respect of arithmetic or calculus [e.g compound interest/growth/depreciation]. I strongly suggest they would not. What points of contention - for the matters under discussion - exist?

3. What is his explanation for the Yes campaign having a platform of a formal currency union with the UK if the own currency option is preferable? Were they wrong, ignorant, stupid or lying?

I should be interested to learn Mr Davidson's degree of knowledge and skill wrt mathematics. Could he work out a partial-differential? Could he calculate the area under a curve? Or a multiplier? Or the elasticity of a demand curve? Can he work out compound interest?

How would he fare in respect of a first year university examination paper on economics? I suspect very badly. I'm tempted to provide him with an opportunity to sit one and have it graded to the standards expected of introductory higher education.

Anonymous said...

Incredible analysis that is an education to read.

We live in the age of denial, exclusively brought to you by the SNP and Donald Trump!

John Silver said...

A wee tip, Kevin: if you are claiming to be objective, it's probably a good idea not to describe those who disagree with you as clowns & jokers.

theambler said...

It is genuinely troubling to think that there are people who refuse to understand the trouble an independent Scotland would be in. They adopt intellectual contortions to find ways of avoiding this fact. It is almost at the level of the UFO cult featured in 'When Prophesy Fails'. No doubt if we voted Yes, they would now be coming up with wild explanations for why the economy was tanking. All would involve the evil machinations of an external actor, and none would involve the simple reality of an unsustainable deficit caused by oil revenues approaching zero.

Anonymous said...

@John Silver.
He still has an awful lot more patience than I could find within me.

Anonymous said...

So after 300 years of Union, being leaders in both The Enlightenment and the Industrial Revolution, plus 40 years of oil industry, Scotland as a region of the UK has a deficit twice that of the UK.
Some Union.
I got the feeling that somethin' ain't right...

Anonymous said...

Let's go through this once more, Anonymous (of 27/03, 21.25), shall we?

1. Scotland raises just as much per capita as rUK.
2. Scotland has a lower population density than rUK, meaning basic services (healthcare, schooling, bin collections) cost more.
3. This, combined with SNP policies such as free tertiary education and prescriptions no matter the recipient's income, means Scotland spends considerably more per capita than rUK.
4. The Scottish deficit is nothing to do with Westminster mismanagement of our economy, or some kind of conspiracy. In fact, the only reason we can afford to continue the level of public spending we do, is because of the union - we receive considerably more than we put in.

Side note: Yes, in the past Scotland has contributed more than we received because of the oil boom. Latterly, that has not been the case. Had we been independent in the 80s, we would have been laughing - though it's unlikely we'd have created an oil fund then, because the SNP in that period never mentioned the idea, so we'd now be facing even more austerity than under the Tories.

An oil fund is not a magical stash of free money. As with all things, saving for the future involves cuts in the present. The UK government - which included plenty of Scots - decided that the UK economy was not so oil-reliant that a fund was necessary, allowing us to enjoy the benefits of the boom at the time. Scotland received an equal share of these benefits, and in no way have we been 'cheated' out of the money.

Anonymous said...

Mr Hague:

Your report states, and this was specficaly quoted in FT Money at the w/wend:-

To close the deficit gap with the UK – to be in a situation where becoming independent wouldn’t make Scots immediately worse off – would require Scotland to out-grow the rest of the UK by 17%. That’s quite a challenge. If Scotland were to achieve the rates of superior growth that the White Paper suggested as illustrative of the “bonus of being independent” it would take over 90 years.

Is the out-grow figure of 17% per annum ? Please clarify

Mike said...

Even if you argue for independence on that basis, i.e. that being in the Union has been detremental to Scotland and Scottish polititians will make a much better go of it, the deficit that would exist if spend and tax remained the same still needs to be addressed in that argument.

Kevin Hague said...

Happy to clarify.

No the "outgrow" figure is not 17% per annum.

It is a cumulative 17% such that Scottish revenues would be 17% higher than they are today relative to the rest of the UK. As I note in the report I make the simple assumption that tax/GDP remains the same (i.e. for economic growth *alone* to close the gap).

The White Paper statistic (referred to 5 times in the White Paper and again clearly referenced in my report) is for 3.8% growth superior growth (cumulatively, not per annum) for their selected countries over their selected *30 year* period.

So if it takes 30 years to out-grow by 3.8% it would take 90 years to grow 1.038*1.038*1.038 = 11.8%, 120 years to grow 16% *cumulatively* more than the UK. I was being extremely cautions by saying (based explicitly on the illustration in the White Paper) that it would be "over 90 years" to close the gap through GDP driven superior growth alone.

Of course if you'd bothered to read my report you would have seen that for yourself.

Anonymous said...

I hope you were not being patronising when you say' Of course if you'd bothered to read my report you would have seen that for yourself' .

I only found out about your report from the FTMoney article with its specific ref to this 'out-grow' figure. But we live in the 'copy and paste' era of journalism, which tends to be selective,and suspend its critical faculties(FT excluded), hence my request for clarification straight from the horse's mouth, so to speak.

I also come from that certain vintage which prefers to read 'hard copy' rather then the web, irrespective, I will now' bother ' to read your report.


Kevin Hague said...

Apologies if that came across as patronising - it's simply you are posting a comment on a blog that has the report right there at the top and it's a bit of a running joke on here (which there's no reason you should know I recognise) that people post comments without reading the source material they are commenting on.

Hope you find the report to be of some use - I do genuinely try to focus on objective factual analysis and limit my "subjective" interpretation to the minimum level that I think is required to make the thing readable

Anonymous said...

Thanks .I agree with you, that people post comments on blogs without reading the source material they are commenting on!!

I think your statement " The EU’s Stability and Growth Pact Excessive Deficit Procedure (EDP) defines an excessive deficit as 3% of GDP. It’s inconceivable that a prospective independent Scotland could be negotiating EU membership terms today without having a clear and aggressive deficit reduction programme in place" is pregnant with the implications arising from a possible YES vote in the event of Indyref(2) as a consequence of Brexit.

The Stability and Growth Pact suggests some wriggle room. Manifestly there is,but only for existing members!!

Unless Scottish Govt can radically reduce Scotland's deficit as a % of GDP, would it be possible that an Independent Scotland application to join the EU may be refused?

Food for thought ?

sloppy said...

Good post chokka. Keep it up.
I am personally Bo against indepdendce in and of itself, but Scotland is an expensive country to run (high public spending, rural communities etc) and that needs to be borne in mind. I feel the yes campaign don't bear that in mind and until they do I can't support them.
But anyway. Good blog, I enjoy reading it.

Anonymous said...

Not just possible but almost certain, at least until a sufficient track record of independent fiscal responsibility can be demonstrated. There is no reason for the EU agree to vary its accession criteria, particularly with confusion and backtracking over currency, disagreement over the sharing of debt, and other snafus from the SG. Rocoham

Sheumais said...

"Alistair in fact doesn't know the difference between a Cash-flow and a Balance Sheet."

That being so, perhaps Alistair might be better to consider Scotland as a large, drafty house that we can't afford to heat. That might even give him some understanding of environmental and energy policy.

Stuart Winton said...

Alistair doesn't seem to know the difference between macro- and microeconomics either, viz:

"Economics deals with a whole economy, which is very different to the finances of an
individual household or company. This fact has been known since the 1930s."

So it would be interesting to know the source of this 'fact'.

Since Alistair thus seems unaware of what the discipline of economics actually encompasses, it's perhaps unsurprising that his contribution seems distinctly lacking in *economic* rigour.

And as well as that, there's the usual ludicrously literal interpretation of the document he's critiquing and the points made largely out of context, not to mention the eminently predictable ad hom.

Sheumais said...

Stuart Winton, maybe Alistair's getting confused by Home Economics and the SNP's cooking of the books.

David GREEN said...

Kevin, It seems clear to me that your latest analysis, and a couple of analyses published by others at about the same time, provide essentially irrefutable evidence that Scottish independence from rUK is going to cost Scotland "big time". The responses from the Yes camp have either been pathetic or non-existent. Yet, as one of your correspondents has pointed out, this is not even an exercise in economics, but in accounting, and pretty simple accounting at that. Which is why Swinney had the views about the cost of independence that he did 5 years ago. So why don't the Yes side, and the SNP, simply admit that independence will cost a lot of money, lower disposable incomes and see a reduction in public provision of services? The answer surely has to be that the crucial 30% of the total vote the SNP need for independence straddles the Yes/No divide, and will simply vote NO if their standard of living is threatened with severely reduction. It then becomes an issue of busting Miss Nippy's credibility before the 30% vote for an early Christmas.

Sturgeon now wants to re-run the currency debate over the summer, or so we are told, as if that were the Achilles' heel of the whole process. This should be answer enough to those who want people like Mr Hague to drop their guard and stop writing. But what is the currency option to be? The former Governor of the Bank of England, Lord King, says an easy solution was in sight. Peg the Scottish pound to the rUK pound. There would be no representation in governance of the Bank of England, but so what? Mr King thinks the similar recent economic history of the two countries (Scotland and rUK) is such that severe divergence would not occur despite the lack of political union. He has to say this because he excoriates the Euro countries for coupling currencies without political union. That way, Greece gets coupled to Germany. So, what's not to like from Sturgeon's point-of-view? The answer is surely that the 12% annual, never-ending transfer payments from rUK to Scotland, which Germany refuses to pay Greece and which lie at the heart of the Eurozone's problems, would, at a stroke, make the rUK/Scotland economic relationship much more like the Germany/Greece one. Scotland is not as corrupt as Greece (yet), but it sure has Greece's appetite for state-provided freebies to the middle-class. The idea that Scotland would sail merrily on financially under independence without creditor nations noticing the absence of these transfer payments is laughable. Those who short currencies would like nothing better than a currency mismatch to hammer.

And all this before Sturgeon tells the Scots about the benefits of an EU/non-EU border between Scotland and rUK; an accident that is waiting to happen in two months' time. If Brexit occurs, Scotland can expect a physical border with rUK that will involve razor wire and customs' posts.

So, keep up the good work, Kevin. Don't drop your guard. The tide may be turning slowly as it dawns on anyone with a smattering of intelligence that the case for independence is either fraudulent, or austerity-heavy. The idea that Miss Nippy can attack rUK austerity with a straight face when she slurps on rUK gravy train to the tune of about 12% of her budget is as ridiculous as it is distasteful.

Anonymous said...

I am someone leaning towards towards a Yes particularly if the UK votes to leave the EU. However when I look at the ridiculous lies in response to your paper it is virtually enough to make me change sides. It would be much better to agree that the Scottish economy is in a very bad state and that something radical is needed to fix it. Yes, that will involve very tough cuts similar to the Thatcher reforms in the 1980's and yes it will be very, very painful with the public sector radically cut down to size. But a slimmed down, competitive Scotland would emerge over time.