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.

CaliforniaFlag.jpgClientelism 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.

NewYorkFlag.gifIn 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.

IllinoisFlag.gifThere 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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  1. Profile Photo Member
    @Valiuth
    I do agree with you that it’s not far from imagining Lee with a tank division, and that it’s the sort of fantasy that can do genuine harm. Americans tend to view themselves as Americans today, rather than eg. Californians (with, yes, the obvious Texan exceptions), and this is for the best. I don’t see any evidence that it is doing harm here, though. · 16 minutes ago

    I’m sorry I don’t mean to imply that this conversation is doing harm, and I may have killed the mood a bit. But, one of the things that irritates me most about Dems is their way of dividing the nation by races, and gender. Well Republicans also tend to do a similar thing with states and an attitude of “It’s not my problem” to issues not happening in their vicinity.  I don’t see why geography should divide us any more than race. 

    • #31
  2. Profile Photo Inactive
    @BrentB67
    Joseph Stanko: …. There’s just one small condition: those of you remaining in the United States will remain responsible for the federal debt. You can’t expect us to help with that if we’re no longer part of the union. Social Security, Medicare, Obamacare, those are your problems now. We’ll make a fresh start without them.Deal? · 2 hours ago

    This sounds like a worthy proposition. I can think of a few states that would like this option.

    • #32
  3. Profile Photo Member
    @PaulARahe

    My view of these matters is simple. California, Illinois, and New York are rich, rich, rich. Respect for federalism and for the right to self-government requires that we leave their responsibilities to them.

    The principle is simple. You borrow, you pay. You make promises, you pay. Bailing them out is simply an invitation of more irresponsibility.

    • #33
  4. Profile Photo Member
    @Valiuth
    Paul A. Rahe

    Valiuth

    Paul A. Rahe

    So you propose that we pick up their debts? · 53 minutes ago

    I don’t see away around it. 

    I am glad to see that I have flushed you out. · 11 minutes ago

    I wasn’t really hiding…was I? 

    • #34
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    @Arahant

    I think the bankruptcy option would be best.  A state, like any government is an incorporation of the citizens.  Now, here would be my caveats:

    1. Politicians who had contributed to the bankruptcy through their policies or votes in assembly would be barred from taking any office of the public trust ever again.  (I’d like to also suggest that their personal assets be forfeit, especially if they can be found to have been negligent.  Or at least the creditors could sue to recover them.)
    2. The state would be dissolved and become a territory of the United States.  It could not reapply in the same configuration and under the same name.

    Just as an example, if California were to go bankrupt, then it might be broken up into three to five pieces to re-enter as states.

    • #35
  6. Profile Photo Inactive
    @JamesOfEngland
    Paul A. Rahe

    Thomas G. West: Paul: Why do you accept Fukuyama’s distinction between Germany, America, and Greece?  · 10 minutes ago

    I accept Frank’s distinction because I have lived in all three places and I can tell you that clientalism is the entire story in Greece and that this has always been the case. Clientalism has always been a presence in the US, as Frank points out in his post. But it is a small part of the story (except in California, Illinois, and New York). In Germany, its presence is modest. The political system is not a kleptocracy (as it is in Greece).

    Are we on the slippery slope? Yes, of course. Is Germany? Yes, again. But here there is reason to think we might pull back to the plateau above that slope. Pervasiveness matters. · 

    I wholeheartedly agree with almost all of this. The differences between western countries are almost always differences of degree rather than of kind, but differences of degree matter.

    The quibble; I’m not sure I believe in a plateau. Jefferson’s early budget discussions are occasionally awesomely extreme (does every cabinet department need a clerk?), but still on the slope.

    • #36
  7. Profile Photo Member
    @Valiuth

    whats with all the talk of breaking states up. That won’t happen. After CINY have restructured their outstanding liabilities, they might just need some money to settle the last of their debts. They don’t even have to be given new money maybe just the freedom to move money around that they already get. I see what will happen. Everyone who thinks they can either remove them from the union, dissolve them as states, or kick them off the dollar, are seeing a fantasy reality.  

    The reason they will be given the money is because all the other states want money for one thing or another too. 

    • #37
  8. Profile Photo Inactive
    @Pseudodionysius
    Joseph Stanko: As a Californian, I accept. Please kick us out. We’ll start our own currency and pay off our own debts. There’s just one small condition: those of you remaining in the United States will remain responsible for the federal debt. You can’t expect us to help with that if we’re no longer part of the union. Social Security, Medicare, Obamacare, those are your problems now. We’ll make a fresh start without them.Deal? · 4 hours ago

    I sense a common currency with Quebec.

    • #38
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    @Arahant

    I understand where you’re coming from, Valiuth.

    For for-profit corporations there are at least two levels of bankruptcy: restructuring and dissolution.  You seem to be in the camp that these states should be allowed to restructure, and I agree.  Wisconsin did that with a few changes in the law, and now cities that were going broke are showing surpluses and the state is in much better shape.  Michigan has also been taking strides in the right direction.

    On the other hand, for states that are just too corrupt or too lacking in the political will, dissolution could be an option, not a requirement.  As I said, though, if they want to go in that direction, there should be some caveats.

    The plus side of that is a state like California might come back in as more states with more Senators and with more cultural unity within those successor states.  For instance, there are large swathes of the state out in the country where the population is less dense and much more conservative.  The same is true of Illinois.  There is Chicago and Downstate.  We could have another R state by splitting off from the D state.  Just thoughts.

    • #39
  10. Profile Photo Member
    @PaulARahe

    For the record, I do not favor dissolving states or dividing them. Nor do I think this possible under the Constitution. It may be necessary for the federal government to pass a law providing for state bankruptcy, but such a law could not entertain a state’s loss of autonomy.

    The worst thing that we could do is to bail out these states, It would set a precedent from which we would never recover. They should be left to stew in their own juices. There is no hope for any of them until a leadership emerges at the local level willing to face up fully to the crises they face. If, like Greece, California, Illinois, and New York insist on clinging to political clientalism — which is certainly their propensity right now — then leaving the currency union really would be their only option.

    As one commenter noted, California with its issuance of IOUs to state employees has already experimented with an alternative currency.

    • #40
  11. Profile Photo Inactive
    @TerrellDavid
    Paul A. Rahe:

    The worst thing that we could do is to bail out these states, It would set a precedent from which we would never recover. They should be left to stew in their own juices. There is no hope for any of them until a leadership emerges at the local level willing to face up fully to the crises they face.

    Beautifully said.  I think if we bail out California, its all over.

    • #41
  12. Profile Photo Inactive
    @ThomasGWest
    Paul: Why do you accept Fukuyama’s distinction between Germany, America, and Greece? All three are currently following self-destructive “clientelist” policies (massive transfers of wealth from the productive to the non-productive, i.e., to the Ruling Class and their friends and supporters). The only difference is that Greece has too small a productive class to pay for it. Germany and the U.S. produce enough to pay for it, but the political system in both cases remains clientelist. Even in Germany and the U.S., clientelism is tending to outweigh productivity, as indicated in the massive and growing government debt in both nations (to say nothing of the rest of the West).I suspect that Fukuyama’s error about the U.S. and Germany (his erroneous claim that they are not dominated by clientelism) stems from his unfounded belief, announced in his earlier “end of history” thesis, that the world is moving forward into an era of freedom.  In reality, we are retreating into an era of clientelism, which is the basic form that politics has tended to assume from time immemorial (as Thrasymachus wisely notes in Plato’s Republic–and Socrates never denies).
    • #42
  13. Profile Photo Inactive
    @rayconandlindacon
    Valiuth: whats with all the talk of breaking states up. That won’t happen. After CINY have restructured their outstanding liabilities, they might just need some money to settle the last of their debts. They don’t even have to be given new money maybe just the freedom to move money around that they already get. I see what will happen. Everyone who thinks they can either remove them from the union, dissolve them as states, or kick them off the dollar, are seeing a fantasy reality.  

    The reason they will be given the money is because all the other states want money for one thing or another too.  · 53 minutes ago

    By the conversation, I see you have chosen door number two.  And behind that door, which is chosen by those who prefer the status quo and cannot abide efforts at creative thinking, or those of us who simply recognize that any attempt to help CINY out of their self inflicted miseries, will end it all.

    Either the efforts of most of the Ricochetois take us into the land of reality, or we had better plan our actions once the house of cards collapses.

    Or dream that politicians reform.

    • #43
  14. Profile Photo Inactive
    @ultravires
    Valiuth

    Illinois already has I think the worst credit rating in the Union. They are running out of the ability to borrow money and will soon have to actually cut pensions. The problem is that while in theory you can cut anything you want, in practice it is actually harder. What if they can’t get out of their contracts or have to settle them for some lump sum.  The state may find itself with a one time budget need it can not hope to meet. 

    In the end the solution may be Illinois begging the Fed for assistance. Which is what every state does when it needs money to cover some disaster even man-made ones.  · 9 hours ago

    Illinois can beg the Fed for assistance, but there is no requirement to heed that begging.  Illinois is a sovereign state, if they default on their debts so be it, but there is no need for the Fed to bail them out.  I am sorry but we made the mistake of bailing out large banks and allowing them to avoid the ramifications of their mistakes.  No need to repeat the same mistake.

    • #44
  15. Profile Photo Inactive
    @BrentB67

    There is another part of the issue worthy of consideration.

    Who is continuing to buy the bonds of these bankrupt states? The rates paid by CINY (props to whoever coined the acronym in this thread) are hundreds of basis points above U.S. Treasuries of similar duration and there is still robust demand for them and they appear liquid. The bond buyers are practicing financial madness.

    I wholly support Professor Rahe’s position that these states must be left to their own devices. The problem in the immediate future is that we are not explicitly letting that happen.

    Whether any of us like it or not there seems in the market place an implied guarantee of these states’ debt backed by the full faith and credit of the United States. 

    If the U.S. Treasury, at a minimum – or perhaps a higher office – came forward and unequivocally disavowed any perceived U.S. guarantees of the states’ debt I believe their borrowing costs would skyrocket instantly and immediately enforce fiscal discipline long before we consider ousting them from the Union.

    I am posting this from Texas – please don’t even consider sending us the bill for these economic hooligans.

    • #45
  16. Profile Photo Member
    @PaulARahe
    Thomas G. West: Paul: Why do you accept Fukuyama’s distinction between Germany, America, and Greece?  · 10 minutes ago

    I accept Frank’s distinction because I have lived in all three places and I can tell you that clientalism is the entire story in Greece and that this has always been the case. Clientalism has always been a presence in the US, as Frank points out in his post. But it is a small part of the story (except in California, Illinois, and New York). In Germany, its presence is modest. The political system is not a kleptocracy (as it is in Greece).

    Are we on the slippery slope? Yes, of course. Is Germany? Yes, again. But here there is reason to think we might pull back to the plateau above that slope. Pervasiveness matters.

    • #46
  17. Profile Photo Thatcher
    @Instugator

    Why do the entirety of the States have to go bankrupt, why not just the programs themselves, they are individually chartered after all. So the pension fund in CA goes bankrupt, why does that take the entire state with it (or not, because there is no provision for a state to go bankrupt)

    If it were I wholeheartedly concur with the earlier suggestions that those states revert to territorial status without the possibility for readmission for at least 10 years… Losing the voting members of the Senate and House for that long would be a suitable sanction for their ineptitude.

    • #47
  18. Profile Photo Member
    @
    Instugator: Why do the entirety of the States have to go bankrupt, why not just the programs themselves, they are individually chartered after all. So the pension fund in CA goes bankrupt, why does that take the entire state with it (or not, because there is no provision for a state to go bankrupt)

    If it were I wholeheartedly concur with the earlier suggestions that those states revert to territorial status without the possibility for readmission for at least 10 years… Losing the voting members of the Senate and House for that long would be a suitable sanction for their ineptitude. · 

    While I agree with the territorial status the 10 years penalty is something I disagree with. I think would be much better if each town and county decide to reunite amongst themselves into a different union until they are satisfied or reach a combined population of 60k. Then they draft a state constitution that does not violate the federal one and apply for statehood. Goes to congress and gets readmitted. If they want to honor some of the old debts that’s up to them and it should be written into their contract (Constitution) they made with themselves.

    • #48
  19. Profile Photo Thatcher
    @Instugator

    Why should a state be allowed to discharge their debts via bankruptcy? I can accept that a state may default on bond payments, but I don’t think it should be allowed to discharge the debts via bankruptcy.

    • #49
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    @Pseudodionysius

    I’d like to announce that its mildly terrifying that Thomas G. West is in this thread and while its not normally my style, I’m tempted to ask for an autograph.

    • #50
  21. Profile Photo Member
    @user_281935

    A bankruptcy process is best. Part of that should include the sale of state assets. These states have assets worth $100’s of billions that are suffering increasingly because of their budgetary situation, and in many cases would provide much more productive use in private hands and providing better service to the people of these states.No state is too big too fail. If they can’t handle their asset base effectively, shrink.

    • #51
  22. Profile Photo Inactive
    @DavidWilliamson

    This would be the same Fukuyama who predicted the end of history, right? How did that work out?As for the currency, I’d suggest that California and the other bankrupt blue states adopt their own currency, called the BO. Then they can print as much as they like, without devaluing the $ for the rest of us. It would also make vacations in California delightfully cheap for us.

    • #52
  23. Profile Photo Inactive
    @ultravires

    I think a new currency is unnecessary – that would just encourage more fiscal irresponsibility, increased inflation, and make federalism more difficult. Just do not bail them out. Reject the notion of “too big to fail.” Math will impose harsh reality on these states. They will likely have their credit rating downgraded, the cost of new debt will susbequently increase, and these states will not have the option of inflating their way out this mess.

    • #53
  24. Profile Photo Coolidge
    @ChrisO

    Posting from Indiana (and in response to Valiuth), here are the figures on tax dollars compared to Federal spending: http://www.taxfoundation.org/research/show/22685.html.   This is probably more indicative of government overspending than anything else.

    This only goes to ’05, but you can see it’s a relatively recent phenomenon (2002 was the first year) that we received more than we paid. When I worked for the legislature years before that, we (the staff, bored in the slow summer months) worked out a secession plan because we always paid more in. Keep the money. We’ll settle for even, subtracting for defense, intelligence, and law enforcement. We’ll stop taking suburban Chicago’s (of which a chunk of our state is considered part of) wealth, but in exchange you promise to take the tornadoes.

    Currency names: California Bear (too many good headlines there, “Markets Emaciate Bear”

    New York Continental (tie to history, and will probably be similarly valued).

    Illinois Shakedown (as that is the current policy to fixing spending problems).

    • #54
  25. Profile Photo Coolidge
    @iWe

    I think a President Romney would favor allowing default instead of bailout. Inasmuch as Romney has principles, he would do the right thing in this case.

    • #55
  26. Profile Photo Member
    @PaulARahe
    iWc: I think a President Romney would favor allowing default instead of bailout. Inasmuch as Romney has principles, he would do the right thing in this case. · 16 minutes ago

    Let’s hope.

    • #56
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    @FredCole

    This is a problem that wouldn’t exist if you didn’t have central banking, fiat currency and legal tender laws.

    Just sayin’ is all…

    • #57
  28. Profile Photo Member
    @Valiuth

    Ah Chris, but you can’t give us the tornadoes or the floods.  They are there because of circumstance above any ones control. 

    I think to answer Dr. Rahe points, about letting the states stew first that is what is happening for the most part. The crushing reality of the foolish promises made about penssions in Illinois is so apparent to all mayors that even Rahm Emanuel is pushing for a drastic overhaul of the problem. It may be possible that because CINY are so wealthy they might not have dug themselves too deep, and they will pull themselves out. 

    I think that the rest of America should just brace for the possibility that it might need to paper over what we can’t actually fix. But I agree 100% the Fed should do nothing until these states take the drastic steps they need to put their houses in order. 

    As for the implicit guarantee that the Fed will pick up the tab if things really go side ways…well that is all part of being a nation for better or worse.  

    • #58
  29. Profile Photo Member
    @Valiuth
    ultra vires: I think a new currency is unnecessary – that would just encourage more fiscal irresponsibility, increased inflation, and make federalism more difficult. Just do not bail them out. Reject the notion of “too big to fail.” Math will impose harsh reality on these states. They will likely have their credit rating downgraded, the cost of new debt will susbequently increase, and these states will not have the option of inflating their way out this mess. · 41 minutes ago

    Illinois already has I think the worst credit rating in the Union. They are running out of the ability to borrow money and will soon have to actually cut pensions. The problem is that while in theory you can cut anything you want, in practice it is actually harder. What if they can’t get out of their contracts or have to settle them for some lump sum.  The state may find itself with a one time budget need it can not hope to meet. 

    In the end the solution may be Illinois begging the Fed for assistance. Which is what every state does when it needs money to cover some disaster even man-made ones. 

    • #59
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    @SettlerMom

    Great thread. Valiuth, I still owe you an answer about Palestinian statehood, but for the time being, I’m enjoying this back-and-forth too much to bother formulating a coherent argument to support my position in that conversation. 

    • #60
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