Politics

 

 

David Marsh, author of “The Euro: The Politics of the New Global Currency” writing about troubles in the Euro zone in the New York Times, noted that, “European countries have decided to spend colossal sums of taxpayers’ money they cannot afford to heal mounting internal disparities they cannot conceal to shore up an edifice many believe cannot stand.”

 

He was, of course, analyzing the dreadful crisis triggered by the European PIGS, Portugal, Italy Ireland, Greece and Spain. These southern nations have borrowed beyond their means and now face a start credit crisis which threatens much of the architecture of for now at least only the monetary part of the European Union.

 

But what happens more generally when semi-independent entities of states make bad fiscal (tax and spend) decisions but then force the larger entity of which they are a part to save them from drowning?

 

Yes I am talking about the United States and its 50 semi-autonomous states. 

 

We recently saw an interesting report that some states such as Minnesota are in very good shape financially and others such as California, Nevada, Arizona, New York, and Florida according to the New York Times face “… budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.”

 

We are not yet ready to fully face this dicey situation and states themselves put their best face forward. California, for example claims that its debt is only 8 percent of its total economy. In fact, when California’s big pension fund is included and county and municipal future commitments are included, the state’s debt burden is calculated as high as 37 percent of its economic output.

 

Others have called attention to the state-level finances but I want to ratchet it up just one notch.

 

To address the European financial and budget crisis cutbacks in government services, layoffs, increases in the retirement age, smaller benefits packages and other measures are being imposed.  What will this do?

 

Well, first of all it will rebalance the finances or at least get the listing ship on its keel and prevent it from rolling over and sinking. However these measures will also cause something else according to David Marsh.

 

“The austerity programs for errant southern states ordained by European governments and the International Monetary Fund are likely to lead to severe unemployment and civil unrest. Some southern euro members may choose to return to their former currencies — or they may be asked to do so by other states.”

 

If California could devalue its currency and go to the IMF for a bailout that might help. In the U.S. we only have one currency so that’s not an option. But the first part, i.e. unemployment and unrest, is a real possibility. 

 

We rarely realize that the reason we’ve been able to ride our bad recessions without violence in the streets is that we have a very robust fallback of federal social programs and unemployment insurance that depoliticize these rough spots. People don’t become desperate and angry because we provide a bridge to the next job and the recovery. The Federal government, as it does with disaster relief, steps in, opens a credit spigot and stabilizes peoples’ lives until the economy picks up again. In that sense we are different from Europe. They still have “national crises” and the European Union does not have the fiscal tools we have in the “American Union.” We are one country, they are one currency, and that’s a big difference. 

 

In 2010 we are reaching a point where Washington may no longer have anything left in the money spigot, or to use a different metaphor, be able to swipe the “Federal Credit Card” that way. Our budget imbalance and our national debt are growing too fast.