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.

Published in General
Like this post? Want to comment? Join Ricochet’s community of conservatives and be part of the conversation. Join Ricochet for Free.

There are 79 comments.

Become a member to join the conversation. Or sign in if you're already a member.
  1. Profile Photo Member
    @TeamAmerica

    Prof. Rahe,

    Slightly off-topic, but what if a Pres. Romney responds to a Calif. bankruptcy with a bailout conditional on it being reduced to territorial status. (AFAIK, this idea originated with Mark Steyn) Since Calif.’s admission to the union required it to demonstrate the capability for self-government, which it plainly no longer possesses, this would justify a reversion to its former status.

    • #61
  2. Profile Photo Coolidge
    @JosephStanko

    CA debt: $117 billion or $3000 per capita. U.S. debt: $15 trillion or $50,000 per capita. If Sacramento is too far gone, then Washington is utterly hopeless.

    • #62
  3. Profile Photo Inactive
    @NickStuart

    Illinois — The Chumbelone (read John Kass)

    • #63
  4. Profile Photo Inactive
    @JamesGawron

    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

    • #64
  5. Profile Photo Member
    @

    Illinois – Dumbloons.   Here in Illinois, we call it the Land of No-coin

    • #65
  6. Profile Photo Inactive
    @SeverelyLtd

    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.

    • #66
  7. Profile Photo Inactive
    @CandE

    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

    • #67
  8. Profile Photo Member
    @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, 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. 

    • #68
  9. Profile Photo Inactive
    @ScarletPimpernel

    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.

    • #69
  10. Profile Photo Thatcher
    @DougKimball

    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.

    • #70
  11. Profile Photo Inactive
    @ScarletPimpernel

    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.

    • #71
  12. Profile Photo Inactive
    @StephenBishop

    Paul A Rahe

    Just when I thought you were going to make an intellectual leap you fizzed out by creating a quiz . Let me try.

    With the coming revolution in payments being made by cell/smart phone it is not a problem to have multiple currencies in the US. Each state could have its own (and only be legal tender within that state) and the greenback could also circulate.  The exchange rates would be set by the markets and on the basis of Greshams’s Law (bad money drives our good) in the loser states people will mostly do business in the state’s currency. Whereas in the winner states people will do business mostly in the greenback. 

    As an aside the US hasn’t devalued against the Aussie. The Aussie has appreciated worldwide on the back of commodity prices.

    • #72
  13. Profile Photo Member
    @Valiuth

    Right on. The control by public sector Unions is a major problem for CA, and without that structural fault being fixed no federal aid can ever help. If they fix their structural problems, then aid can actually help to the state move from insolvency. 

    That is what Germany was trying to do with Greece. They provide debt relief and aid in return for structural changes. Their problem is the Greeks will rather leave the EU than give up their ways. CINY don’t have this luxury and neither do the other states. 

    A responsible Fed Gov. would try to make these states see the writing on the wall, and help them make the changes that need being made. 

    • #73
  14. Profile Photo Inactive
    @KTCat
    Paul A. Rahe

    K T Cat: While I live in San Diego and will be somewhat affected (though not much) when the state declares insolvency, I can’t imagine that the average fellow in, say, Georgia will notice. I can’t see there is any chance at all of a Federal bailout of any of these states. · 17 minutes ago

    I will confess that I succumbed to a certain puckishness when I posted this piece. I was, however, taken aback when one of the commenters noted that California’s IOUs were accepted at banks at a discounted rate. Those IOUs were, in effect, an alternative currency. · 3 hours ago

    You’re only about 19 months behind me.  ;-)

    • #74
  15. Profile Photo Member
    @PaulARahe
    K T Cat

    Paul A. Rahe

    K T Cat: While I live in San Diego and will be somewhat affected (though not much) when the state declares insolvency, I can’t imagine that the average fellow in, say, Georgia will notice. I can’t see there is any chance at all of a Federal bailout of any of these states. · 17 minutes ago

    I will confess that I succumbed to a certain puckishness when I posted this piece. I was, however, taken aback when one of the commenters noted that California’s IOUs were accepted at banks at a discounted rate. Those IOUs were, in effect, an alternative currency. · 3 hours ago

    You’re only about 19 months behind me.  ;-) · 51 minutes ago

    Indeed.

    • #75
  16. Profile Photo Member
    @PaulARahe
    Valiuth: Right on. The control by public sector Unions is a major problem for CA, and without that structural fault being fixed no federal aid can ever help. If they fix their structural problems, then aid can actually help to the state move from insolvency. 

    That is what Germany was trying to do with Greece. They provide debt relief and aid in return for structural changes. Their problem is the Greeks will rather leave the EU than give up their ways. CINY don’t have this luxury and neither do the other states. 

    A responsible Fed Gov. would try to make these states see the writing on the wall, and help them make the changes that need being made.  · 3 hours ago

    For what it is worth, my instinct is that the federal government should not try to play the role Germany tried to play vis-a-vis Greece. This creates an us-vs.-them propensity. If a Scott Walker emerges in California, only then should the feds offer help.

    • #76
  17. Profile Photo Member
    @Valiuth
    Paul A. Rahe

    Valiuth: Right on. The control by public sector Unions is a major problem for CA, and without that structural fault being fixed no federal aid can ever help. If they fix their structural problems, then aid can actually help to the state move from insolvency. 

    That is what Germany was trying to do with Greece. They provide debt relief and aid in return for structural changes. Their problem is the Greeks will rather leave the EU than give up their ways. CINY don’t have this luxury and neither do the other states. 

    A responsible Fed Gov. would try to make these states see the writing on the wall, and help them make the changes that need being made.  · 3 hours ago

    For what it is worth, my instinct is that the federal government should not try to play the role Germany tried to play vis-a-vis Greece. This creates an us-vs.-them propensity. If a Scott Walker emerges in California, only then should the feds offer help. · 6 hours ago

    I think we agree on this, and I hope rather strongly California and Illinois get their own Scott Walkers or Chris Christie…

    • #77
  18. Profile Photo Inactive
    @KTCat

    Paul, I love ya  buddy, but I hope this is just deliberate silliness. While I live in San Diego and will be somewhat affected (though not much) when the state declares insolvency, I can’t imagine that the average fellow in, say, Georgia will notice. I can’t see there is any chance at all of a Federal bailout of any of these states.

    • #78
  19. Profile Photo Member
    @PaulARahe
    K T Cat: Paul, I love ya  buddy, but I hope this is just deliberate silliness. While I live in San Diego and will be somewhat affected (though not much) when the state declares insolvency, I can’t imagine that the average fellow in, say, Georgia will notice. I can’t see there is any chance at all of a Federal bailout of any of these states. · 17 minutes ago

    I will confess that I succumbed to a certain puckishness when I posted this piece. I was, however, taken aback when one of the commenters noted that California’s IOUs were accepted at banks at a discounted rate. Those IOUs were, in effect, an alternative currency.

    Let me put this in another way. California is like Greece in one crucial particular. It is controlled by the public-sector unions. Unless there is a political revolution and those unions are neutered, no one is going to face up to the fiscal crisis. Massive tax increases will not work. Businesses and those who work for them will move, and revenues will decline, not increase.

    Apart from the revolution I mentioned, the only way out is devaluation. Thus, the “joint” or the “surreal.”

    • #79
Become a member to join the conversation. Or sign in if you're already a member.