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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.