The nanny state's children

Scotland is seeing a hasty transfer of power from the people to the state. And a few components, including the SNP's unfaltering support from pro-independence voters that they expect to rely on for the near future, are making the transition happen with ease. Even in the face of a growing number of universally free things to adjust people to the state making our financial decisions, nothing of late has quite managed to reach the blatant level of state intrusion and awaken in people such fervent objection as the “named person” law.

This “service” means named persons will be assigned by the state to every child in the country until the age of 18. It is now set to be enforced in 2016 after the Children and Young People (Scotland) Act 2014 passed its final stages as a bill in the Scottish Parliament last year. Social workers, health workers and school teachers acting in a dual capacity of both their profession and as state informants, will have legal responsibilities that can rival those of the parent, while powers to intervene in private life and share personal information with government agencies will be handed to the state.

Educational charities and parents have joined forces under the banner of the NO2NP campaign and last week sought judicial review of the decision to enforce this law. By its opponents, the move is believed to be outwith the government’s legislative competence and to be incompatible with data protection rights and rights afforded to every citizen by the European Convention of Human Rights. In the judgement Lord Pentland said that the challenge brought before the Outer House of the Court of Session “failed on all points”, and approved the legislation. The campaigners expected there would be more than one hearing and so are not defeated as they consider their next legal steps to be heard by at least three judges in the Inner House.

It is important this policy is universal, proponents tell us, because children with additional support needs are not always immediately obvious to services and so this can ensure that intervention happens earlier to prevent crises at later stages in children's lives. A justification that has failed to quieten or satisfy parents’ concerns. But the creators of the legislation want to see it implemented at any expense. Even if it means creating bitter resentment among the vast majority of parents who are getting things right and do not want a named person overseeing everything they are doing. 

State-dictated outcomes are presupposed to be superior to all else by the legislation. But parents do not necessarily agree. The one-size-fits-all approach neglects to consider the fact that parenting is unique to each family. Should "named persons", who don’t know children well, be given the authority to have a greater say than parents - in the eyes of the law - as to what their children ought to be doing then circumstances and behaviours may be misconstrued, leading to unwarranted consequences. It is understandable that more and more parents are viewing the legislation as a breach of their human rights. Their children are being assigned an informant to the state without the option to opt out.

The impact on parents is one thing. But teachers, too, who are required to be instrumental in this new dynamic, have no say nor even a choice in the matter. It has not been made clear when an educator stops being an educator and assumes the roles and responsibilities of the named person. 

So when parents become suspicious of who they reveal information to, for fear that they are confiding in a middle-man between them and some investigator higher in the chain, more harm than good will be done. An environment of mistrust conducive to relationship breakdowns will be created. Not to mention the added time pressures and weight on teachers’ shoulders that the extra duties carry.

Early signs of the ostracising effects it will have are already visible in the Highlands where people were surprised to find it had been prematurely implemented as part of a pilot scheme. We are also seeing the wasted expenditure that this will entail, as referrals to services have risen. 

To make social workers responsible for a population’s children is a costly blanket bureaucracy. And at a time when public services are under severe strain, it is ill-conceived that scarce resources should be drawn from the most vulnerable and urgent cases in order to pry on the 95% of families this legislation will never be necessary for. The case may have failed on all points thus far, but it is in the lack of justification by those behind it where we discover the greatest weaknesses.

Most strikingly important, though, is that every parent from the offset is being treated as potentially guilty of something until proven innocent. And they have to keep on proving their innocence until their child is an adult. It is a sinister state of affairs, indeed, when the onus lies on the general public to prove why we do not want legislation imposed on us.

An independent Scotland should use the pound without permission from rUK, says new ASI report

Today the Adam Smith Institute has released a new paper: "Quids In: How sterlingization and free banking could help Scotland flourish", written by Research Director of the Adam Smith Institute, Sam Bowman. Below is a condensed version of the press release; a full version of the press release can be found here. An independent Scotland could flourish by using the pound without permission from the rest of the UK, a new report released today by the Adam Smith Institute argues.

The report, “Quids In: How sterlingization and free banking could help Scotland flourish”, draws on Scottish history and contemporary international examples to argue for the adoption of what it calls ‘adaptive sterlingization,' which combines unilateral use of the pound sterling with financial reforms that remove protections for established banks while allowing competitive banks to issue their own promissory notes without restriction. This, the report argues, would give Scotland a more stable financial system and economy than the rest of the UK.

According to the report, adaptive sterlingization would allow competitive, private banks to issue their own promissory notes backed by reserves of GBP (or anything else – including USD, gold, index fund shares or even cryptocurrencies like Bitcoin). With each bank given powers to expand and contract its balance sheet relative to demand, this system would be highly adaptive to changes in money demand, preventing demand-side recessions in modern economies such as the ones that led to the 2008 Great Recession.

The report’s author, Sam Bowman, details Scotland’s successful history of 'free banking' in the 18th and 19th centuries and the period of remarkable financial and economic stability which accompanied it. Historical ‘hangovers’ from this period, like Scotland's continued practice of individual bank issuance of banknotes, are still in place today, making Scotland uniquely placed for a simple transition to the system outlined in the report.

The report highlights evidence from 'dollarized' economies in Latin America, such as Panama, Ecuador and El Salvador, which demonstrate that the informal use of another country’s currency can foster a healthy financial system and economy.

Under sterlingization, Scotland would lack the ability to print money and establish a central bank to act as a lender of last resort. Evidence from dollarized Latin American countries suggests that far from being problematic, this constraint reduces moral hazard within the financial system and forces banks to be prudent, significantly improving the overall quality of the country’s financial institutions. Panama, for example, has the seventh soundest banks in the world.

The report concludes that Britain's obstinacy could be Scotland's opportunity to return to a freer, more stable banking system. Sterilization, combined with reform of Scottish financial regulation that:

• removed government liquidity provisions to illiquid banks,

• established mechanisms to ‘bail-in’ insolvent banks by extending liability to shareholders, and

• shifted deposit insurance costs onto banks and depositors rather than taxpayers,

would improve standards and competitiveness in banking, while significantly reducing the prospect of large-scale bank panics and financial crises.

Commenting on his report, the Research Director of the Adam Smith Institute, Sam Bowman, said:

The Scottish independence debate has repeatedly foundered on the question of currency, but if Scots look to their own history they will find that their country is a shining example of how competition in currency and banking can ensure a stable and effective banking system. Scotland’s free banking era was an economic and intellectual Golden Age, and its system of competitive note-issuance was recognised by such thinkers as Adam Smith as one of the root causes of the country’s prosperity during this time.

The examples of Panama and other dollarized Latin American economies are proof that countries can thrive when they unilaterally adopt another country’s currency. Combined with a flexible, adaptive banking system, the unilateral use of another country’s currency can instill a discipline in a country’s financial sector that neither a national currency nor a currency union can provide. Scotland’s banking system is almost uniquely primed for such a system of ‘adaptive sterlingization’. The path outlined in this paper would go almost unnoticed by the average Scot – until the next big economic shock, when they might just wonder why their system was so much more stable than that of the country they’d left behind.

How Scotland could flourish by unilaterally keeping the pound

Between 1716 and 1844, Scotland had one of the world’s most stable and robust banking systems. It had no central bank, no lender of last resort, and no bank bailouts. When banks did fail, it was shareholders who were liable for paying back depositors, not taxpayers. Scottish GDP per capita was less than half of England’s in 1750; by the end of the era in 1845 it was nearly the same. Now that George Osborne has ruled out a currency union if Scotland votes for independence, the Scots have an opportunity to return to this system more seamlessly than any other place in the world could.

As I said to the press this week, there’s nothing really stopping Scotland from continuing to use the pound unilaterally. (Unless the remaining UK introduced strict foreign exchange controls, which would be absolutely crazy.)

What the Chancellor's announcement actually means is that the Bank of England (BoE) would no longer consider Scottish interests when it determines monetary policy and that illiquid Scottish banks would no longer be able to use the BoE as a Lender of Last Resort.

I’m not sure that the first point really matters at all. Scotland’s five million people can’t have much of an influence over the BoE’s policy for the UK’s 63 million people as it is. And, frankly, I’m not sure the BoE knows what it’s doing well enough for it to matter whether it cares about you or not.

The second point is the interesting bit. George Selgin has pointed to research by the Federal Reserve Bank of Atlanta about the Latin American countries that unilaterally use the dollar. Because these countries – Panama, Ecuador and El Salvador – lack a Lender of Last Resort, their banking systems have had to be far more prudent and cautious than most of their neighbours.

Panama, which has used the US Dollar for one hundred years, is the most useful example because it is a relatively rich and stable country. A recent IMF report said that:

By not having a central bank, Panama lacks both a traditional lender of last resort and a mechanism to mitigate systemic liquidity shortages. The authorities emphasized that these features had contributed to the strength and resilience of the system, which relies on banks holding high levels of liquidity beyond the prudential requirement of 30 percent of short-term deposits.

Panama also lacks any bank reserve requirement rules or deposit insurance. Despite or, more likely, because of these factors, the World Economic Forum’s Global Competitiveness Report ranks Panama seventh in the world for the soundness of its banks.

I suspect that there would also be another upside. Following Walter Bagehot, central banks are only supposed to lend to illiquid banks, not insolvent ones. Yet since the start of the Eurozone crisis the ECB has clearly made significant bond purchases to prop up both insolvent banks and insolvent governments. This may have been a lesser evil than letting them collapse altogether, but it’s hard to say that this kind of moral hazard is not present.

So, given that some countries do survive and even flourish without a central bank, how would Scotland do it?

The basic mechanics, I think, would be this: in a hangover from the old free banking period, Scottish banks currently issue their own banknotes. After independence, they could continue issuing their own notes that entitle the bearer to GBP on demand. BoE pounds, in other words, would be the 'base money' that Scottish banks use to back their own private currencies, in the same way gold was used during the last Scottish free banking era.

A banknote from a Scottish bank would be, in effect, a promissory note redeemable on demand in BoE-issued pound sterling. (Scottish notes are already promissory notes, but issuance is closely regulated by the BoE.) Of course, there should be nothing stopping banks from issuing notes redeemable in something else, like US Dollars, gold, Bitcoins, or Tesco Clubcard points. Scottish banks would have to arrange private clearing houses, as they did in the last free banking era, to provide loans to illiquid banks, or they could follow Panama in simply maintaining very high reserves.

No bank would have monopoly privileges: any ‘bank’ could issue notes and it would be up to the market to decide whether to accept them as money or not. As Selgin explains here, banks free to issue their own notes will set their reserve ratios according to people's demand for money, stabilising nominal spending.

With respect to other regulations, I quote Selgin again:

It is, in any event, desirable that there be no Scottish public authority capable of bailing out insolvent banks and of thereby introducing a moral hazard. Deposit insurance should be resisted for the same reason. Foreign banks should be admitted, by way of branches rather than subsidiaries, and should enjoy the same rights as Scottish banks. (Of course the major "Scottish" banks are themselves no longer really Scottish anyway.) Finally, re-establishing some form of extended liability (though not necessarily unlimited liability) wouldn't be a bad idea.

We take no position on Scottish independence — it is up to Scottish voters to decide. And while a return to free banking in Scotland may seem fanciful, this week’s announcement makes it much more likely. Keeping the pound and treating it as the ‘specie’ on which banks can base their notes would make the transition virtually seamless for the average Scot, while giving them a banking system that is unrivalled anywhere in the world for being stable, open, and free.