Currency Union, "Welfare", and Inequality

 The US is much more of a welfare state than Europe is in some ways.  For example, one reason the US works as a monetary union, but Europe does not is because the US constantly bails out Mississippi and Missouri as Derek Thompson explains:

The euro zone has Greece. The United States has Mississippi. Or Missouri.

The difference between the U.S. and Europe is that when the Greek economy "pulls a Mississippi" (or perhaps I should say, when Mississippi "pulls a Greece"), the EU and the U.S. have 180-degree opposite reactions. Over here, we calmly write checks to Mississippi in the form of Medicaid and unemployment insurance, no questions asked. Europe has no comparable "Peripheraid" for its weak peripheral states. Instead, it has chaos.

Michael Cembalest, the JP Morgan analyst and author of the my favorite new chart about monetary unions -- it's not a crowded field, admittedly -- passes along another clever graph which shows fiscal transfers (don't worry, that's just another word for money) between the rich California-Connecticut-Illinois-New Jersey-New York quintuple and poorer states like Tennessee. If similar, seamless transfers existed in the EU, the rich north would have to send to Portugal and Greece at least an additional 30 cents for every dollar they paid in taxes, year after year after year.

When you hear commentators say, "the euro zone must begin to transition toward a fiscal union," what they are saying, in human-speak, is that the Europe needs to be more like the United States, with balanced budget laws for its individual members and seamless fiscal transfers from the rich countries to the poor, to protect the indigent, old, and sick, no matter where they reside.

The Germans call this sort of thing "a permanent bailout." We just call it "Missouri."

 This is why the US actually has less inequality than Europe does as a whole.  We transfer money from rich states to poor states.  Europe transfers much more money from rich to poor individuals within their states, but they have very few transfers from rich states to poor states and that makes Europe much more unequal than the US.  Moneybox:

One very interesting point that James Galbraith makes in his newish book Inequality and Instability is that if instead of looking at Finland then Spain then Germany then Greece all as separate countries but instead look at "Europe" as an integrated marketplace with perfect capital mobility and legal labor mobility then it's even more unequal than the United States:

And when you do that, when you take what had been isolated labor market situations and bring them into direct interaction with each other, you have to measure the inequality on the new basis, on the new foundation. And nobody had done that. And what we found was that in fact when you do that, European inequality, taking into account the differences that exist between, let’s say, Germany and Poland or between Norway and Portugal, is actually larger in wages than it is in the United States.

Galbraith melds this into a policy argument that will be very controversial, but I think it would be helpful for people with all different kinds of political perspectives to just consider this isolated fact more clearly. Further analytic issues fall out of it quite clearly. Europe the collection of separate low-inequality places has generally high taxes and generally high levels of income redistribution. But Europe the collective has extremely low taxes and almost no income redistribution.

Below is a map from The Economist of what states subsidize what other states.  The map would be much more dramatic if it had county detail.  For example, I think I remember reading that San Francisco alone subsidizes about what the entire state of Kentucky absorbs.   New Mexico, Mississippi and West Virginia have all gotten well over 10% of their annual state incomes from subsidies coming from the green states over the decades.  Puerto Rico has been getting the most: almost 15% of its income from net federal transfer payments.  That may be why they do not want to revolt against 'taxation without representation'.  


The European Union is an unwieldy currency union because it is surprisingly heterogeneous and that is because it has little political union and almost no fiscal transfers.  Derek Thompson

Compared across more than 100 factors measured by the World Economic Forum Global Competitiveness Report, from corruption to deficits, JP Morgan analyst Michael Cembalest calculates that the major countries on the euro are more different from each other than basically every random grab bag of nations there is, including: the make-believe reconstituted Ottoman Empire; all the English speaking Eastern and Southern African countries; and all countries on Earth at the 5th parallel north.

And here is your tweetable fact: A monetary union might make more sense for every nation starting with the letter "M" than it does for the euro zone.

If you find yourself wondering, as I did, how the 50 states within the U.S. would compare across this measure of dispersion, remember that the nice thing about the United States is that baked into the first word of our name is not only a monetary union (i.e.: we all use dollars) but also a fiscal union. If Mississippi has a bad year (or decade, or century), Washington doesn't debate whether we should force the state to raise taxes or cut spending to become more competitive. We just keep paying it Medicaid, which is basically a transfer from rich Americans to poor Americans, many of whom live in Mississippi.