What the world’s top economists say about Scottish independence

Taking to social media, Taylor quoted abstracts of emails sent by economist Mark Blyth, suggesting that he was struggling to find evidence for his support for Scottish independence. However, Blyth was quick to respond by pointing out the quotes were actually in relation to his struggle to find data and having to attend Zoom meetings at 4AM in the morning – not in relation to his views on independence.

READ MORE: Mark Blyth: These are my REAL views on the economics of Scottish independence

It is little surprise why activists at These Islands would target Blyth. As a professor of international economics at Brown University, Blyth is a highly esteemed and internationally respected economist within his field. His summary for independence is simple: “Scotland suffers from being attached to a broken debt and consumption-driven national growth model called the UK that teeters on the brink of collapse.”

This would not be the first-time activists at These Islands have not conveyed the full picture when taking part in the discourse on Scottish independence and the economy. Former Liberal Democrat candidate John Ferry interviewed various economic experts for the Spectator to gather their views on the Scottish National Party’s currency policy. The interview included experts such as Jeffrey Frankel, Dame DeAnne Julius, Cédric Tille, and Charles Goodhart. Their comments were far from an endorsement, calling the SNP’s currency policy “a risk experiment” to be met with “difficult economic adjustments” and “high risk”. Tille himself suggested Scotland would need to build good relations with the IMF for a future bailout.

On the surface the comments are damning, and not easy for any independence activist to simply ignore. But Ferry focused on the view of the Sustainable Growth Commission, led by economist Andrew Wilson, not the actual policy adopted by the SNP. Whilst the Growth Commission did suggest the possibility of maintaining Sterling up to ten years, this was not adopted by the SNP. The actual policy of the SNP is clearer – a new Scottish currency would be implemented within the first five years of independence, when voted through by the Scottish Parliament. This leaves open the window to introduce a new currency within the opening period of independence, something which SNP members have frequently voted for.

Including the full picture will elicit a more accurate response, and once a more accurate discussion begins, the view of economists is far more diverse and interesting.

The combination of Brexit and the Sustainable Growth Commission’s report created a peculiar shift in the economics discourse of Scottish independence. For Brexit, many Neo-Keynesian and moderate economists take the view that independence is now an opportunity. This is the view of once sceptical, and now more optimistic, Oxford economics professor and former Labour Party advisor Simon Wren-Lewis.

"But Brexit changes everything" he wrote in the New Statesman. "The economic cost to the UK of leaving the EU could be as high as a reduction of 10 per cent in average incomes by 2030. If Scotland, by becoming independent, can avoid that long-term fate then you have the prospect of eventual economic gain right there … If Scotland can remain in the single market it could be the destination of the foreign investment that once came to the UK as a gateway into the EU. By accepting free movement, it could benefit from the immigration that has improved the UK public finances over the last decade."

He is not alone in that view – far from it. One of the world’s most influential economists, Professor Joseph Stiglitz (below), also sees independence as an opportunity. Stiglitz's experience is one few economists can boast, as former senior vice president and chief economist of the World Bank, and a former member and chairman of the Council of Economic Advisers in the US. In 2001 he won the Nobel Memorial Prize in Economic Sciences and is the fifth most frequently cited author on college syllabuses for economics courses. He is, by a fair margin, the most qualified economist to enter the discourse of Scottish independence.

"Small countries can have their own currency," he told BBC Radio Scotland. "The reason that Iceland, which had one of the deepest downturns in 2008, had one of the strongest recoveries was that it had its own currency. If there was a Scottish pound floating, you could help stimulate the Scottish economy. The deficit would come down to make it acceptable to joining the EU."

The Sustainable Growth Commission’s more conservative economic approach left very few inspired within the SNP. So much so, the vacuum left has been growingly filled by advocates of Modern Monetary Theory (MMT) – an economic framework that accurately describes how modern economies work within a fiat currency system. Advocates have made surprising victories within the SNP, notably pushing the party to adopt a Scottish currency sooner and adopting a universal Job Guarantee programme originally inspired by the US civil rights movement.

Whilst MMT advocates have made their presence known within the SNP, so too have economists behind the framework taken notice of Scotland. One of its major advocates, economist Professor Stephanie Kelton, became an official advisor to campaigners for a new Scottish currency. This was significant news, as Kelton was an economic advisor for US political rockstar Alexandria Ocasio-Cortez (below) and long-time senator Bernie Sanders. Her work was also recognised by Politico, placing her in a top 50 list of "thinkers, doers, and visionaries transforming American politics”.

MMT fundamentally shifts the discourse on independence and economics. Whilst those who debate GERS focus on deficit reduction, MMT economists explain how deficits are not only normal for an economy, but necessary. A government deficit is a public surplus – it’s the money in our pockets we need to earn and spend to maintain healthy lives. And the overall deficits we accumulate, which we call the national debt, is our national savings. It is simply net-financial assets that have not been taxed back yet. For Scotland to reverse UK Government austerity, a government deficit (ie a public surplus) is a major solution. But, as economists stress, this is best delivered with having your own currency and central bank, along with a floating exchange rate.

One of the founders of MMT is Bill Mitchell, professor of economics at the University of Newcastle. Mitchell has taken a keen interest in Scottish independence for a number of years, taking the view that he would have voted No in 2014 due to the SNP's currency plan. But his views became much clearer with the SNP's policy shift to a new currency, writing: "If the newly independent Scottish government used its newly acquired currency-issuing capacity to bring idle resources into productive use (for example, via a national job creation scheme – Job Guarantee) then it would be hard to say that the on-going needs of Scottish residents were not being met."

Suddenly the various array of arguments that could have made the economic case for independence look weak are now completely flipped. It is made even more challenging when institutions, such as the Bank of England and UCL Institute for Innovation and Public Purpose, confirm MMT’s analysis to be entirely correct. Some would argue this was already established, since it was the MMT framework which predicted the 2008 financial crisis, 2009 Eurozone crisis, and the Japanese growth slump of 2020.

In the face of growing evidence from an academic body expanding over 30 years, it is easier for groups such as These Islands to instead dismiss MMT and play to a crowd who already work within household methodologies. Not all economists have changed their minds. One of the most vocal critics of Scottish independence in 2014 was economist Ronald MacDonald (above) at the Adam Smith Business School in the University of Glasgow. MacDonald's opposition to independence was very public, to the point of taking part in official pro-Union social media videos for Better Together. Whilst some may dismiss him as biased, it is worth noting that, like Stiglitz, he is one of the most cited economists in the economics field.

READ MORE: Unpicking the most bizarre myth about Scotland's currency after independence

MacDonald has argued the transitional costs to a new Scottish currency would be of incredible size, suggesting between £40 billion to £300 billion. Since an independent Scotland would not launch foreign currency reserves of its own, this would need to be accumulated through a trade surplus. Yet Scotland has largely run a trade deficit, meaning that a new Scottish currency would leak out of the economy and be met with depreciation. For Scotland to accumulate enough foreign reserves and reduce its government deficit, it would need to implement harsh austerity that would make George Osborne’s cuts look soft.

Ronald MacDonald's views are widely shared amongst opponents of Scottish independence, and not without reason. If Stiglitz represents an economics giant for independence activists, then MacDonald would be close to his equal.

But not all economists are convinced by the arguments proposed by MacDonald. Dr. Alberto Paloni, Head of the Economics Department at the Adam Smith Business School, the same institution MacDonald works at, questioned many of the assumptions made by his colleague.

In his recent paper "The choice of currency and policies for an independent Scotland", Paloni argues that MacDonald's use of orthodox models does not stack up to macroeconomic reality. Paloni points out that orthodox models have a poor record of predicting exchange rates, and even economists who use them do not have a unified framework. On this basis, Paloni argues that MacDonald's analysis "may lack solid foundations".

Paloni further considers the policy scenario where the introduction of a Scottish currency is accomplished in a manner that avoids depreciation. He analyses the policy in which currency conversions are voluntary and that capital markets actually lack new Scottish assets. By avoiding excess supply of the new currency, Paloni writes: "In these conditions, there is little reason to expect a rushed sale of the currency or its depreciation."

This policy design is inspired by the work of economist Warren Mosler, Visiting Professor at the University of Bergamo in Italy. Perhaps unknown to Paloni, Mosler had previously given a lecture at the Mitchell Library in Glasgow on the very same topic. His talk included setting Scottish fiscal and monetary policy to target full employment, accessible public services, and social equity, all which could be achieved with launching a new Scottish currency.

Paloni's paper further refutes MacDonald's claim that austerity will be necessary to build up foreign exchange reserves. Once again returning to the policy design of launching a new currency, Paloni notes that voluntary currency conversions would not be strictly free. Scottish residents would need to exchange their current Sterling assets to accumulate the new Scottish currency, which he estimates would be between £40-70 billion. Such an amount of reserves would be of huge abundance for a country Scotland's size, and would not be strictly necessary for a floating exchange rate.

At the end of his paper Paloni makes two points. First, the economic analysis presented by economists of Post-Keynesian and Modern Monetary Theory backgrounds are "arguably superior perspectives for such debate". Yet despite this, he further points out "mainstream economics remains the only approach to economics taught in many economics departments … The agenda for research and change is long”.

READ MORE: Why an independent Scotland must reject the Euro and use its own currency

This leaves many within the independence movement with an apparent dilemma. With the discourse on economics and independence lenient towards failed mainstream models, activists have the opportunity to challenge this with modern and accurate frameworks. Yet with new frameworks also comes more progressive, even radical, policy. But with the Sustainable Growth Commission lacking in any vision beyond the orthodox model, it is clear the SNP still maintains some fear of scaring away voters. For the SNP there is no long game, as the moment of truth for independence is around the corner – this is not the time to frighten Scotland's electorate.

But who is frightened? One step outside and the fear we are told of is energy. Be it the hundreds of thousands of young people marching to tackle climate change, Glasgow residents swarming to defend refugees from the ornery Home Office, or the courageous activism of trade unionists standing up to hegemonic corporate greed, Scotland is living in a time of change. New ideas and movements are springing to life, left, right, and centre. If change is to come on the economics discourse on Scottish independence then it is now.