Why the "Dollar Zone" doesn't face a break-up

[cthulu2016]

A provocative observation from Doctor Krugman. The Eurozone is being torn apart because the entities within it have different economic realities. To save the Euro requires that the rich Euro nations funnel money to the poorer ones. But the idea that Germany should bail out Greece is a moral outrage... preposterous... incredible.

But New York and Mississippi are as different as Germany and Greece and New York bails out Mississippi continuously, year after year. The only reason Mississippi isn't Haiti is that the blue states continually subsidize Mississippi's existence. Is that a moral outrage... preposterous... incredible?

A common currency that is not also a nation is probably unworkable. It will function in good times but in a serious crisis the frictions become unendurable and the constituent nations will be "every man for himself," and understandably so since they are, after all, separate nations.

The Euro is Flat
Paul Krugman

As we contemplate the euro mess, there’s a strong tendency to think of it as having a lot to do with the fundamental inequalities in overall productivity and economic development between euro members — backward, semi-developed countries like Greece or Portugal (not my view, but what you often hear) awkwardly tied to powerhouses like Germany.

So it comes as something of a shock to look at Eurostat data (pdf) on real GDP per capita (or productivity, which look similar). Sure, Greece and Portugal are relatively poor, with GDP per capita of 82 and 77 percent, respectively, of the EU average; this means roughly 76 and 71 percent of the eurozone average, since the euro countries are a bit richer than the EU as a whole. Meanwhile, Germany is at 120 percent of the EU, or 112 percent of the EZ.

But it’s no different, really, than the US situation (look under per capita GDP). Alabama is at 74 percent of the US average, Mississippi at 67, with New England and the Middle Atlantic states at 118 and 116.

...

The difference, mainly, is that we think of ourselves as a nation, and blithely accept fiscal measures that routinely transfer large sums to the poorer states without even thinking of it as a regional issue — in fact, the states that are effectively on the dole tend to vote Republican and imagine themselves deeply self-reliant.

http://krugman.blogs.nytimes.com/2012/06/22/the-euro-is-flat/

[nadinbrzezinski]

1. Because we have federal fiscal policies

which Europe lacks, and needs

[DCBob]

2. Which is why the dollar is likely to continue to rise in value.

Many investors see it as the safest haven now. Funny it wasnt long ago many "experts" predicted the demise of the dollar.

[freshwest]

4. The only thing the experts had to sell was fear. There are real problems that won't be solved by it.

Krugman is a big thinker, not looking to see the next opportunity to get rich, but the whole situation. He values people, not profit for a few.

[dkf]

9. Profit is what drives people to get off their butts and do something.

And it creates all the stuff we have. I wonder how far we would have gotten if there was no reward for effort. Would we have all the perks that make our lives better?

We rest on the accomplishments of everyone else.

[freshwest]

14. There is the fear that drives us to grow and create and a fear that paralyzes the thinking process.

So that nothing gets done except to protect the profits of the hustlers. A lot of these 'experts' are making profit off of CT scams and drive the votes of the Tea Party fanatics. If anyone idolizes and gives them their money, that's their choice.

Krugman is talking about making things work which increases the general welfare of a large group of people. Holding on out of fear, pitting everyone against each other, may win for some in the short run, but not the long term.

For some, profit is not what drives one to get up and work. It is the love for our families and neighbors and wanting to make their lives and our own better. The joy and satisfaction is in the work itself, in transformation, not what it pays. Such people will not get rich; it was never their goal. As Obama said, and I agree with him:

Focusing your life solely on making a buck shows a certain poverty of ambition. It asks too little of yourself. Because it's only when you hitch your wagon to something larger than yourself that you realize your true potential.

I have personally that when I went straight for the dollar, doing what not did allow me to really use all of my potential, out of a fear of not being at par with others, I was the loser. So I learned to get by with less and thus fulfilled my purpose.

[girl gone mad]

10. Krugman comes late to these realiztions.

Sorry, but Post-Keynesians predicted it 2 decades ago.

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=91920

I don't know which experts were predicting the demise of the dollar. Not me.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=73297&mesg_id=73301

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=89169&mesg_id=89185

Even just a few months ago Krugman was wondering why Japan wasn't being punished by bond vigilantes for its sovereign debts while Italy was. Weisenthal asked him about it in his Reddit Q&A.

http://pragcap.com/paul-krugman-does-qa

[freshwest]

3. That's clarity. We need to remind the GOP to respect all Americans.

[dkf]

5. Is that true with our current huge deficit?

Is California still paying more than they get back or are we getting the funds from bond sales?

[cthulu2016]

8. Yes, because...

The debt will fall to the blue states since they will continue to pay most of the taxes

If I use my credit card to pay for my dead-beat brother-in-law's car repairs I am transferring money to him, even though I am not paying it from my bank acount... yet.

[girl gone mad]

15. You're missing the full picture.

Under a sovereign fiat currency regime, federal taxes serve to regulate aggregate demand, not raise revenue. Individual states are never actually burdened with the sovereign's debts in the manner you describe.

[MannyGoldstein]

6. Brilliant column

Thanks.

A number of years ago I made a study of blue vs. red states. Looked at all kinds of statistical meaures. Basically, statistically the blue states look like Europe, the red states like Central America.

[dkf]

7. Or maybe no state is subsidizing another state because we distributing borrowed money

http://californiabudgetbites.org/2010/01/19/does-california-get-its-“fair-share”-of-federal-funds/

In his State of the State address, the Governor described the federal government as “part of our budget problem,” claiming that California only gets $0.78 cents back in federal spending for each dollar of taxes paid by California taxpayers. We’ve never been big fans of the debate over whether California and Californians get back in federal dollars as much as they pay in federal taxes. We’re one of the 50 United States and we’re part of a federal system. And the capitol of the federal government is in Washington, DC, not Sacramento. As a result, a disproportionate share of federal dollars are spent in the District of Columbia and nearby Maryland and Virginia. New Mexico, a state cited by the Governor in his speech, receives a large number of federal dollars because it is a small, poor state, but also because it is home to the Sandia and Los Alamos National Laboratories – which receive a large volume of federal funds.

It turns out that that not only is the Governor’s argument flawed from a policy perspective from our point of view, it is also based on seriously flawed data. California Senator Barbara Boxer released an analysis of how much California receives in federal funding that shows that, in fact, the state received more in federal funds in 2009 than state residents paid in taxes. The Boxer memo was posted on John Myers’ Capital Notes blog. Never one to accept someone else’s data without question, we reviewed the data and assumptions behind the data. Our own analysis suggests that California actually receives $1.50 back for each dollar in taxes paid, a figure slightly higher than the Senator’s.

How can the numbers be so different? The Governor’s figure is based on 2005 data and a deeply flawed study by the Tax Foundation. Using figures from 2005 ignores the significant infusion of federal funds from the American Recovery and Reinvestment Act (ARRA) of 2009. The second flaw with the Governor’s data comes from the assumption that all federal expenditures are paid for in the year incurred. This is tantamount to saying that there’s no federal deficit – an assumption that we know to be untrue. The federal government is spending more than it takes in largely due to moneys spent to respond to the “great recession,” as well as the cost of the wars in Iraq and Afghanistan.

We strongly believe that there’s a case to be made for federal aid to all states, not just California. With most states facing serious budget shortfalls, there’s reason to fear that another round of state and local government budget cuts could push the nation back into recession or, at a minimum, delay what is already anticipated to be a weak recovery. We hope the Governor will change his tune, join with his fellow governors, and call on Congress and the President to build on the success of the ARRA by providing states additional funds to blunt the impact of budget-balancing efforts.

[MadHound]

11. There's really no saving the EU unless they bind themselves closer together.

Right now, the EU is functioning much like the states did under the Articles of Confederation, in short, poorly. They need to take the same step we did, namely become a federated nation with a central government and a true central bank. If not, then the EU is destined to fail.

[cthulu2016]

13. Ageed.

[girl gone mad]

12. Glad to see Krugman changing his tune on this.

Last edited Sat Jun 23, 2012, 03:50 PM - Edit history (1)

Credit where Credit is due, Wynne Godley nailed it in 1992, 20 years ahead of PK:

Predicting the Euro’s Demise: To Those Who Got it Right, We Salute You!

By Mitch Green

To many of the world’s most highly-regarded economists, the Eurozone’s meltdown has come as a major surprise. Committed to the belief that One Market needs One Money, most economists expected the Euro to serve as an important complement to Europe’s integration. But, as Cullen Roche at Pragmatic Capitalism has pointed out, those who recognized how the monetary systems actually work saw the writing on the wall, as the seeds of the Euro’s own destruction were unwittingly put in place right from the beginning. Wynne Godley was the first to point out that the unprecedented divorce between the Eurozone governments’ monetary and fiscal powers would place its members in a fragile position and render them powerless in the face of a crisis. It was a warning that Cullen suggested might amount to ”the greatest prediction of the last 20 years.” Similar praise came just last week from John Cassidy of The New Yorker magazine, who dedicated an entire piece to Godley’s insights, calling him “The Man Who Saw Through the Euro.”

In honor of Professor Godley we sought permission to reprint his 1992 article Maaschrict and All That in its entirety. It’s a piece that is suddenly getting a lot of attention, as journalists and other commentators search for something, anything to help them understand why things in the Eurozone have unfolded so badly. As one of Britain’s most accurate economic forecasters, Wynne was accustomed to getting things right. Many contributors to this blog owe a great deal to Wynne. He taught us to develop stock-flow consistent macro models, emphasizing that every financial flow must ‘come from’ somewhere and ‘go’ somewhere and that these flows lead to stock adjustments that affect balance sheets and ultimately the stability of the economic system. Wynne passed away in 2010 but his insights continue to impress. With any luck, those seeking solutions to the present crisis will rediscover his work and learn from the warnings he issued in 1992, before the ink on the Maastricht Treaty had even begun to dry.

By Wynne Godley

A lot of people throughout Europe have suddenly realised that they know hardly anything about the Maastricht Treaty while rightly sensing that it could make a huge difference to their lives. Their legitimate anxiety has provoked Jacques Delors to make a statement to the effect that the views of ordinary people should in future be more sensitively consulted. He might have thought of that before.

Although I support the move towards political integration in Europe, I think that the Maastricht proposals as they stand are seriously defective, and also that public discussion of them has been curiously impoverished. With a Danish rejection, a near-miss in France, and the very existence of the ERM in question after the depredations by currency markets, it is a good moment to take stock.

The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn’t need any management at all.

I am driven to the conclusion that such a view – that economies are self-righting organisms which never under any circumstances need management at all – did indeed determine the way in which the Maastricht Treaty was framed. It is a crude and extreme version of the view which for some time now has constituted Europe’s conventional wisdom (though not that of the US or Japan) that governments are unable, and therefore should not try, to achieve any of the traditional goals of economic policy, such as growth and full employment. All that can legitimately be done, according to this view, is to control the money supply and balance the budget. It took a group largely composed of bankers (the Delors Committee) to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated, supra-national Europe.

But there is much more to it all. It needs to be emphasised at the start that the establishment of a single currency in the EC would indeed bring to an end the sovereignty of its component nations and their power to take independent action on major issues. As Mr Tim Congdon has argued very cogently, the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony. Local authorities and regions obviously cannot devalue. But they also lose the power to finance deficits through money creation while other methods of raising finance are subject to central regulation. Nor can they change interest rates. As local authorities possess none of the instruments of macro-economic policy, their political choice is confined to relatively minor matters of emphasis – a bit more education here, a bit less infrastructure there. I think that when Jacques Delors lays new emphasis on the principle of ‘subsidiarity’, he is really only telling us we will be allowed to make decisions about a larger number of relatively unimportant matters than we might previously have supposed. Perhaps he will let us have curly cucumbers after all. Big deal!

read more: http://neweconomicperspectives.org/2011/11/predicting-euros-demise-to-those-who.html