"The Methadone Economy"

[rhythmaning]

A while back, I went to a seminar the Edinburgh University management school entitled “the Methadone Economy: the Performance of the Scottish Economy”

It was given by John Thompson – not the comedy actor (Cold Feet, the Fast Show), but the managing director of RIA Capital Markets, a bond brokerage. He was giving his own views of the Scottish economy.

The main thrust of his thesis was that the Scottish obsession with supporting manufacturing industry was stifling the development of the economy as a whole, and in particular, his little bit of it – financial services.

Edinburgh is a financial services centre – the sector has grown by 35% in the last five years*, whilst the Scottish economy has grown by only 8%, slower than the UK economy as a whole (which in turn has the City as an engine room of growth). One tenth of jobs in Scotland are in financial services.

In comparison, manufacturing has contracted 12% in five years. Despite this, according to Thompson, a political bias for “real jobs” means that manufacturing gets financial support; the main target of his ire was Scottish Enterprise (on the receiving end of a right bashing from just about everybody recently – the press, politicians, and now, a bond trader).

His real bugbear was the extent of the public sector in Scotland, accounting for 50% of the economy and 30% of the jobs, which he felt was “crowding out” the private sector and sending up wages.

His proposal was that the Scottish Executive should take advantage of its powers to change the rate of tax, hack away at the private sector and reduce business taxes (particular business rates) to promote investment. He reckoned axing Scottish Enterprise would lead to a lot of savings. He wanted Scotland to stand on its own feet – he was using Ireland as a model – and reduce the dependence (hence “methadone”) on English purse-strings dictated by the Barnett formula (the arcane calculations which determine how much money is distributed by the Exchequer in London to Scotland).

So far, so Thatcherite-market economics, which most of us have grown up with and kind of make sound sense.

The fun started when someone in the audience took umbrage at this market view of the economy. I hadn’t seen him before, and he wasn’t long in Scotland (he hadn’t realised that Scotland wasn’t voting on May 4, when a large number of English councils were subject to the ballot box); someone called him professor, so he was probably an academic of some sort (I didn’t catch the name). He wasn’t an economist, but he did have strong views of the value of the public sector.

This guy was having none of Thompson’s simplistic views. He wanted data and details – just what bit of the public sector would he cut, aside from Scottish Enterprise? Health, education, transport infrastructure? And which bits – were universities ok, since they provided the educated employees needed by the service sector, and would primary education be cut instead?

This was interesting. There was no real debate, but two speakers with deeply engrained beliefs, neither of which would budge to agree the other may have a point.

The professor got uppity at Thompson’s statistics, claiming he was bending them to suit his own views.

I thought they would come to blows.

Ultimately, it didn’t get anywhere: the two protagonists views were two entrenched, and they could see that perhaps they could both be right.

But for the rest of us, it made for an entertaining Tuesday evening. There was a lot missing – funding from the EU (likely not to be available in these times – Scotland would rank below Hungary, say), the effect of interest and exchange rates on market assumptions (and whether these are manageable or not), and not least, the availability of current models (Ireland was a 1990s phenomenon, Estonia and its flat taxes hasn’t really happened yet); and the impact of tax competition within the UK and the EU wasn’t addressed.

What was really missing was any view of the real-politik. For any member of the Executive to stand up and say that actually, the public sector needs to be cut – well, that would be electoral suicide. These were distinctly Thatcherite views being espoused; and like it or not, the Tories do not feature in the Scottish political landscape: the Scots hated Thatcher (rightly, in my view), and they still hate the Tories. So the likelihood of any of this ever happening is a very, very long way away.


* Any stats are taken from Thompson’s talk; I haven’t even considered verifying them. I always believe what I am told.

Comments

[f4f3.livejournal.com]

That was entertaining - I wish I'd been there. I take it this was prompted by last week's Economist?

I very much take your point on real-politik, and the unlikeliness of market driven reform winning acceptance in Scotland - there is, of course, a very good reason for this. The hatred of Thatcher wasn't addressed at her scary hairstyle or habit of using the first person plural, but of her government's willingness to use Scotland as a lab for those economic theories that became known as Thatcherism (probably wrongly, and distractingly, as it raises the danger of someone else recycling the ideas while distancing himself from Thatcher) and the people of Scotland as experimental subjects. The damage caused by that approach is still manifest.

[itchyfidget.livejournal.com]

Yeah, I doubt anyone will forgive the poll tax and water privatisation experiments anytime soon.

[rhythmaning.livejournal.com]

I only read the article in the Economist this morning! I am going to post an addendum... Same kind of message, though - except it was far better argued in the Economist!

I think I really grew to hate Thatcher because of what she did to the miners (unnecessarily, apparently - it was based on faulty economics, according to one of the guys who worked on the analysis). I remember the miners marching in Princes Street. And then of course the poll tax debacle. Seriously, what is the point of piloting ideas and scheme (like the poll tax in Scotland) if you don't learn from the experience? Still, it got rid of the old bat.

[f4f3.livejournal.com]

I think she was unnecessary once her government had sold off everything that wasn't nailed down - once the family silver was gone, it was mission accomplished.

[rhythmaning.livejournal.com]

And I've now posted my view of the Economist's article...

[f4f3.livejournal.com]

Will have a peek later this morning...

[itchyfidget.livejournal.com]

I have an astoundingly poor grasp of economics, but this was interesting - thank you!

I find it slightly weird that the public sector would drive up wages in the private sector. I find it weirder still that someone might want to do away with public sector jobs to make way for private sector ones ... surely the two are interdependent in a healthy economy?

[rhythmaning.livejournal.com]

I don't I have sufficient economics, either. I think the view is that private sector jobs create wealth, whilst public sector jobs use up tax revenues. If taxes are too high - to support the public sector jobs - companies will go elsewhere; whilst if you cut corporate taxes - which Ireland did in the 1990s (I think!), the private sector will create jobs, hence raising more tax. Please don't quote me on this...

[unblinkered.livejournal.com]

he was using Ireland as a model

Y'see...that's where he's going wrong, right there! Who in their right mind would use Ireland as a model for anything, let alone economics???

[rhythmaning.livejournal.com]

Ah, it is probably a narrow view of "the celtic tiger" economy.

[unblinkered.livejournal.com]

I'm sure the Celtic Tiger is every economists wet dream, but they don't have to live in it. I'm on a decent wage and I can hardly afford it, and I honestly don't know how low-income families cope on a day-to-day basis. Any economic "boom" that ends up with a large amount of people being much worse off than they were before doesn't qualify for me, sorry. Also, what goes up must come down....there'll be tears yet, mark my words!

[rhythmaning.livejournal.com]

Which is a really good view to put forward!

Particularly, "there'll be tears" - but hopefully not yours!