How to make America more like the euro zone

May 3rd 2012, 14:17 by M.S.

YESTERDAY Matthew Yglesias and Kevin Drum got into what looks to me like a largely semantic back-and-forth over whether Europe's inability to respond to the euro crisis can properly be termed a "collective-action problem". Basically, both are making the by now familiar neo-Keynesian point about the European dilemma: continent-wide austerity is driving the EU's economy into depression, but no European actor is willing to buck the trend and advocate deficit spending in order to generate growth in other European countries. As my colleague puts it, critiquing the reaction to the success of French Socialist presidential hopeful Francois Hollande: "The overwhelming criticism is a sort of 'look how inappropriate fiscal expansion would be for the French economy' take. The point is that the economy that matters is that of the euro zone as a whole. And when one steps back and looks at the dynamics in play, it becomes clear that the robotic push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the crisis." Paul Krugman agrees.

Mr Yglesias goes on to make the point that the reason why America functions as a pretty decent single-currency area, despite radical disparities in wealth and productivity between different regions, is that unlike the EU, it guarantees very large transfer payments from richer to poorer areas to smooth out the differences.

[M]ost individual European countries have a lot of within-country transfer payments from rich people to poor people but Europe as a whole is marked by a high level of inequality and near-total absence of transfers. If in the United States every bailout of the poor parts of the country by the rich parts was marked by protracted negotiations and stern demands that West Virginia "reform" its underperforming economy we'd be in perpetual crisis. And of course you might ask yourself why the federal government does so much for low-income residents of the United States and so little for the poorer low-income residents of low-income Mexico. And of course the reason is nationalism. Nationalism inspires us to help our fellow American when we can and leaves us relatively cold about the plight of people living in Peru.

Along these lines, one might hypothesise that one way for the EU to effectuate the kind of transfers that could put the euro zone on sounder footing would be to shift responsibility for social safety-net spending from individual governments to Brussels. This is a solution that is at least as politically and administratively impossible as any other euro-zone rescue programme, but it's a way of thinking about the problem. And conversely, one might ask what sort of moves might America make if it wanted, for some insane reason, to give itself precisely the kind of pro-cyclical government policies that are crippling the euro-zone right now. One way to do so would be to shift responsibility for social safety-net spending from the federal government to the states. Drawing down transfer payments from richer regions of the country to poorer ones, and devolving spending onto governing entities that, like European governments in the aftermath of the new EU fiscal stability pact, are required to balance their budgets, would mimic some of the dynamics we're seeing in Europe right now. It would be a move towards transforming America into more of an American Union, as it were.

For example, if Medicaid had shifted to a system of federal block grants to states in 2001, the system would have cut federal funds available to most states by more than 35% in 2010. That would have meant those states, mainly those hit hardest by the recession, would have had to come up with the funds themselves by raising taxes or making other cuts, or simply dropped Medicaid coverage for some of their residents. The effect would mimic what has happened with social spending in peripheral European countries like Spain as recession-induced austerity measures have further crippled the weakest economies, and such state-level recessions would have ultimately threatened the American economy in the same way recessions in peripheral euro-zone countries are threatening the European one. I'm sure Paul Ryan doesn't think that by advocating shifting the social safety net to the state level, he's trying to make America more like Europe, but it is what it is.

LordofHats wrote:The metric system is evil. Using a base of 10 for everything to make it simpler for everyone? How absurd. If god wanted us to make math easy he'd have told us how to do it

I say we return to ancient Indian numeral systems using 16 as a base

Melissia wrote:Link

How to make America more like the euro zone

May 3rd 2012, 14:17 by M.S.

YESTERDAY Matthew Yglesias and Kevin Drum got into what looks to me like a largely semantic back-and-forth over whether Europe's inability to respond to the euro crisis can properly be termed a "collective-action problem". Basically, both are making the by now familiar neo-Keynesian point about the European dilemma: continent-wide austerity is driving the EU's economy into depression, but no European actor is willing to buck the trend and advocate deficit spending in order to generate growth in other European countries. As my colleague puts it, critiquing the reaction to the success of French Socialist presidential hopeful Francois Hollande: "The overwhelming criticism is a sort of 'look how inappropriate fiscal expansion would be for the French economy' take. The point is that the economy that matters is that of the euro zone as a whole. And when one steps back and looks at the dynamics in play, it becomes clear that the robotic push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the crisis." Paul Krugman agrees.

Mr Yglesias goes on to make the point that the reason why America functions as a pretty decent single-currency area, despite radical disparities in wealth and productivity between different regions, is that unlike the EU, it guarantees very large transfer payments from richer to poorer areas to smooth out the differences.

[M]ost individual European countries have a lot of within-country transfer payments from rich people to poor people but Europe as a whole is marked by a high level of inequality and near-total absence of transfers. If in the United States every bailout of the poor parts of the country by the rich parts was marked by protracted negotiations and stern demands that West Virginia "reform" its underperforming economy we'd be in perpetual crisis. And of course you might ask yourself why the federal government does so much for low-income residents of the United States and so little for the poorer low-income residents of low-income Mexico. And of course the reason is nationalism. Nationalism inspires us to help our fellow American when we can and leaves us relatively cold about the plight of people living in Peru.

Along these lines, one might hypothesise that one way for the EU to effectuate the kind of transfers that could put the euro zone on sounder footing would be to shift responsibility for social safety-net spending from individual governments to Brussels. This is a solution that is at least as politically and administratively impossible as any other euro-zone rescue programme, but it's a way of thinking about the problem. And conversely, one might ask what sort of moves might America make if it wanted, for some insane reason, to give itself precisely the kind of pro-cyclical government policies that are crippling the euro-zone right now. One way to do so would be to shift responsibility for social safety-net spending from the federal government to the states. Drawing down transfer payments from richer regions of the country to poorer ones, and devolving spending onto governing entities that, like European governments in the aftermath of the new EU fiscal stability pact, are required to balance their budgets, would mimic some of the dynamics we're seeing in Europe right now. It would be a move towards transforming America into more of an American Union, as it were.

For example, if Medicaid had shifted to a system of federal block grants to states in 2001, the system would have cut federal funds available to most states by more than 35% in 2010. That would have meant those states, mainly those hit hardest by the recession, would have had to come up with the funds themselves by raising taxes or making other cuts, or simply dropped Medicaid coverage for some of their residents. The effect would mimic what has happened with social spending in peripheral European countries like Spain as recession-induced austerity measures have further crippled the weakest economies, and such state-level recessions would have ultimately threatened the American economy in the same way recessions in peripheral euro-zone countries are threatening the European one. I'm sure Paul Ryan doesn't think that by advocating shifting the social safety net to the state level, he's trying to make America more like Europe, but it is what it is.

A fun little discussion of politics and economics.

Frazzled wrote:Why do you hate the USA so much you would want it to be like the failed state that is the EU?
You do know the EU is an attempt to be like the US right? They just 'd it up.

Easy E wrote:So, a States Rights position would make us less able to promote successful economic policy?

. That would have meant those states, mainly those hit hardest by the recession, would have had to come up with the funds themselves by raising taxes or making other cuts, or simply dropped Medicaid coverage for some of their residents.

Melissia wrote:

Frazzled wrote:Why do you hate the USA so much you would want it to be like the failed state that is the EU?
You do know the EU is an attempt to be like the US right? They just 'd it up.

I don't disagree.

Neither did the article.

Flashman wrote:Well in order to be properly like the EU, you need an island nation who makes everyone else speak their language and tells the two biggest states to get stuffed occasionally....

...Hawaii?

hotsauceman1 wrote:Doesnt Texas already do that?

Melissia wrote:What's happening right now is a hideous amount of EU enforced, unnecessarily harsh austerity measures which are driving many economies in to the ground.

Frazzled wrote:
Why do you hate the USA so much you would want it to be like the failed state that is the EU?
You do know the EU is an attempt to be like the US right? They just 'd it up.

Frazzled wrote:Pan European Unity? Wait you mean the Europe that was a regular killing zone every 20 years for the last 2,500 hundred years until the US and USSR left millions of troops there?

Joey wrote:
http://en.wikipedia.org/wiki/Economy_of_the_European_Union
http://en.wikipedia.org/wiki/Economy_of_the_United_States
Also pan-European identy was around a lot longer than the United States. The EU is essentially a continuation of the Roman Empire, as the Catholic Church was. Europe is a lot more united than all those borders would suggest.

Melissia wrote:The US is more unified even now with all our endless partisan bickering than the various EU nations have ever been in the entire length of human existence.

mattyrm wrote:Of course you are, its the same country!

Melissia wrote:

mattyrm wrote:Of course you are, its the same country!

The USA stands for the United States of America. A state in this context refers to "Sovereign State".

The UK is a sovereign state, as is, say, France, or Libya (most of the time), or Japan.

Sure the US is treated like one big country, but it is effectively a union of many smaller ones with a large amount of power granted to the single overarching "federal" authority. The US actually tried the method that the EU has given, but the Confederation didn't work very well.