Can the American Currency Union Survive?
The other day, I came across a piece entitled The Two Europes posted on The American Interest website by Francis Fukuyama. For a brief time, in the mid-1970s, Frank and I were graduate students together at Yale – I in history and he in comparative literature (wherein a man who writes as clearly as he does would have been bound to fail), and I have always found him worth reading.
So that is what I did. I read Frank’s piece, which made a simple, sensible point: to wit, that there is no way that Greece can remain in a European Union dominated by the likes of Germany. As he explains, there are two Europes. One is clientalistic; the other is not. Greece epitomizes the former; Germany, the latter.
Clientelism occurs when political parties use public resources, and particularly government offices, as a means of rewarding political supporters. Politicians provide not programmatic public policies, but individual benefits like a job in the post office, an intervention on behalf of a relative in trouble with the government, or sometimes an outright payment of money or goods.
Politics in Germany is about principles and policies; politics in Greece is about pay-offs – and no political party in a country like Greece can actually introduce a policy of austerity without committing suicide. Greece’s troubles arise from a swollen public sector. Absolutely nothing has been done in the last four years to fix the problem, and nothing is going to be done. The election a week ago simply confirms what everyone knew. This means that, unless the Germans are going to sign up to pay the bills of the Greeks in perpetuity, Greece will have to give up the euro.
In the absence of fiscal discipline – and no clientalistic state has any fiscal discipline – the only way to cope with the swelling of the public sector is to devalue the currency. In this fashion, you can effect a genuine cut in public-sector salaries across the board, and the private sector can adjust by raising nominal prices. This is what Greece and, for that matter, Italy, Spain, and France used to do at frequent, if irregular, intervals.
Frank’s argument, which makes perfect sense to me, set me to thinking about the United States. After all, we have the same problem as the European Union. Some of the states constituting our Union have spent money on public-sector salaries and benefits and on welfare programs as if there was no tomorrow. California has a budget deficit of $16 billion for this year, and that is just the beginning. As time passes and pensions promised in the past come due, public expenses will skyrocket. Something similar is true in Illinois and New York. In effect, these are clientalistic states on the Greek model, and they are approaching the end of their tether.
There would appear to be two ways in which this problem could be dealt with. The federal government could assume the debts and pension obligations of the more profligate states, and it could underwrite future profligacy. Or California, Illinois, and New York could leave the American currency union, introduce their new currency or currencies, and let them float against the dollar. This would inflate away public-sector obligations, open the door to tax cuts, and reinvigorate the private sector. It is true that it would also destroy the savings of anyone in these states foolish enough to have any. But, hey, you pay for the place in which you choose to live, right? Alternatively, of course, we could devalue the dollar (which, if you judge it with an eye to the Australian dollar, the Canadian loonie, or gold, is what we are doing). In this fashion, we could and stick it to innocent folks in Texas and Indiana.
My first thought, when at a manic moment I proposed this to my wife, was that California, Illinois, and New York should adopt the Mexican peso as their currency. But then I realized that this would be unfair to the Mexicans whose currency is in considerably better shape now than it would be if superintending it was shared by a civilized placed like Mexico with the governments of states like California, Illinois, and New York.
On reflection, I decided that each of these states needs its own currency. But what should we name them? I suggest that the Stoner Republic out on the West coast call its new currency the joint, that the people of Illinois name theirs after their favorite son and call it the obama. New York’s could then be called the spitzer.
But perhaps you, gentle readers, you could come up with names that are more appropriate.
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Comments:
May '10
Re: Can the American Currency Union Survive?
Illinois -- The Chumbelone (read John Kass)
Dec '10
Re: Can the American Currency Union Survive?
Dr. Rahe,
Does this involve the "Tinkerbell Theory of Economics"? The fundamental equation of the "Tink" theory is that "If everyone just believes in Socialism and Massive Government Spending then the Economy won't die!". Krugman is the prophet of the Tinkerbell approach. His latest version of the theory involves recognizing a provable thoerem from the "Tink" basic hypothesis. Anything less than an infinite amount of credit despensed through a robotic keynsian government must be "AUSTERITY". Gosh! We wouldn't want that!
Do you think there is any possiblity that California, Illinois, and New York would want to secede from the Union? At this point I think even old Abe would just let them go.
Regards,
Jim
Edited on May 14, 2012 at 3:46amMay '10
Re: Can the American Currency Union Survive?
Illinois - Dumbloons. Here in Illinois, we call it the Land of No-coin
Oct '10
Re: Can the American Currency Union Survive?
The California LaBrea. After the black tar pits that swallow all.
The Illinois Capone. After the Chicago thug that spurned bourgeois American values. Maybe this one isn't an improvement on the Obama you suggested.
The New York Barge. After the trash-laden vessel turned away from all other ports.
Jul '11
Re: Can the American Currency Union Survive?
Any marriage counselor worth his salt will tell you that at the root of most failed marriages is money trouble. Looks like that will be the cause of the eventual dissolution of this Union as well.
-E
Apr '11
Re: Can the American Currency Union Survive?
It would seem odd for people to want three of the wealthiest states to leave the union. I mean California, Illinois, and New York are the number 1, 5 and 2 contributors to federal tax revenues. In fact these states pay more in federal taxes than they receive back in federal spending. Without them poor southern, and western states would have a much harder time maintiaining their budgets.
This is not really a defense of the way these states have been run, but these kind of "let them burn attitudes" seem rather stupid to me. People will leave these states, and they will just simply default on their pension obligations. These are options Greece doesn't really have. While one can complain that California defaulting will be bad on Indiana or Texas. These states did not seem to mind the transfer of wealth that occurs every time tornados, huricanes and wild fires hit them from safe suburban Chicago to them.
Unlike Europe America is one nation, indivisible. We can no more let part of our nation financially implode than we could let part of it be conquered.
Mar '12
Re: Can the American Currency Union Survive?
With a nod to some of our neighbors in South America, I suggest the NY currency be called the un-real, and the California currency be the sur-real.
Aug '11
Re: Can the American Currency Union Survive?
Didn't CA issue its own currency when it issued "IOUs" in lieu of tax refunds? It was my understanding that banks would discount these IOU's for dollars, which is precisely what you suggest.
Mar '12
Re: Can the American Currency Union Survive?
Or perhaps we should establish a means for states to go bankrupt? Some argue that sovereign immunity would allow states simply to repudiate debts--as no one would have legal authority to compel them to pay. Such actions would, of course, be terrible for the credit ratings these states have. But somehow history shows that there has always been money to be borrowed, even after such actions.
Mar '11
Re: Can the American Currency Union Survive?
Not the Capone, Severely. Illinois (or at least Chicago) was already corrupt when Alphonse was still strong-arming pushcarts in Five Points.
Mar '12
Re: Can the American Currency Union Survive?
Given the number of pols in Illinois who have landed in jail, how about the felony for Illinois?
Re: Can the American Currency Union Survive?
Fabulous.
Re: Can the American Currency Union Survive?
Keep it up. You are on a roll.
Jun '10
Re: Can the American Currency Union Survive?
But the reason the California budget deficit is such a crisis, leading to a stark choice between deep spending cuts or higher taxes, is that like most states it is required to pass a balanced budget each year. In that respect, the state's finances seem a model of sobriety next to the federal government that keeps on merrily piling up trillions in debt without any serious effort to balance the budget.
Won't the federal government face a credit crisis long before any of the states do?
Re: Can the American Currency Union Survive?
Valiuth: It would seem odd for people to want three of the wealthiest states to leave the union. I mean California, Illinois, and New York are the number 1, 5 and 2 contributors to federal tax revenues. In fact these states pay more in federal taxes than they receive back in federal spending. Without them poor southern, and western states would have a much harder time maintiaining their budgets.
This is not really a defense of the way these states have been run, . . . these "let them burn attitudes" seem rather stupid to me. People will leave these states, and they will just simply default on their pension obligations. These are options Greece doesn't really have. While one can complain that California defaulting will be bad on Indiana or Texas. These states did not seem to mind the transfer of wealth that occurs every time tornados, huricanes and wild fires hit them from safe suburban Chicago to them.
Unlike Europe America is one nation, indivisible. We can no more let part of our nation financially implode than we could let part of it be conquered. · 19 minutes ago
I proposed their secession from the currency union, not the Union.
Jun '10
Re: Can the American Currency Union Survive?
The new currency in California should be known as the eight-ball. The name describes both California's current situation and a common measure of crack cocaine.
Re: Can the American Currency Union Survive?
Bravo!
Mar '12
Re: Can the American Currency Union Survive?
California's could also be the fault. And Illinois could be the kickback.
Dec '10
Re: Can the American Currency Union Survive?
Paul A. Rahe
Valiuth: It would seem odd for people to want three of the wealthiest states to leave the union.
...Unlike Europe America is one nation, indivisible. We can no more let part of our nation financially implode than we could let part of it be conquered. · 19 minutes ago
I proposed their secession from the currency union, not the Union. · 11 minutes ago
Hey, I can dream can't I. Seriously, of course we will be stuck muddlling through with them. This may be like 1975 with New York City defaulting. Mitt could easily have this dumped on him in his first year.
Hey maybe we could harness Governor Moonbeam's hot air source and improve our energy situation..whoops sorry there I go again.
Valiuth, couldn't we abandon Calfornia, New York, and Illinois maybe just a little? I mean only until they are a little less insufferable.
Regards,
Jim
Oct '10
Re: Can the American Currency Union Survive?
As long as the feral government is in the hands of statists, California, NY and the apt abbreviation, Ill., have nothing to fear. BO rewarded California's profligacy in the past with stimulus funds to keep the union pensions rolling in, and the past is prologue.
The feral government will maintain a form of chaotic equilibrium among the states until one of three things happens:
1. The more responsible states finally rebel.
2. The whole house of cards collapses under it's own weight of irresponsibility.
3. The Dems finally lose the feral government, including the Supremes, and the GOP loses it's statist moorings.
My money is on number 2. Both choices 1 an 3 require a political class with actual character and courage. As I said, I'm betting on number 2.
And what will be the new currency of the defunct feral union? The "barter". I'll make you a fine dinner if you will fix my lawn mower. And I'll trade you fresh organically grown tomatoes for a tuneup on my 20 year old car.
This will be the result of the "progress" that the progressives promise. Demagogues are the salvation of an ignorant people.