May 31st, 2013

History, Economics and which United States are we talking about here?

http://carolabinder.blogspot.com/2013/05/this-time-is-not-so-different-euro.html

Wound up here from Brad DeLong's blog, and I really want to love this post, but I feel like it ends on a confused note. Here are the bits I agree with:

There are real problems with the ability of some Euro member states in terms of doing basic state things like collecting taxes, registering land and so forth (Greece being the current target and quite possibly the most deserving target of this kind of Shape Up, Now! outrage). States which are currently good at this sort of thing were not always so.

There are some obvious parallels between the United States of 100 and more years ago and the European Union currently, in that neither the current EU nor the United States of 100 and more years ago (actually, more recently, but let's pretend that what counts it the creation of the Federal Reserve Banking system, even tho it's not really what counts for our purposes) is/was a "fiscal union": they share a nominally identical currency (the EU is more truly a currency union than the US of 100 and more years ago) but money decisions (both collecting and distributing it) are made at OTHER than a central level.

The confusion in the above blog starts with a possible implicit misunderstanding of what happened when the Second Bank of the United States lost its charter. I don't _know_ that the blogger misunderstood what the transformation of the bank post-Congressional charter meant -- but I don't see clear indicators that the blogger "gets" that after the charter elapsed, that bank was Just Another Private Bank. But never mind that now.

The real confusion occurs in the final paragraph, with the third sentence, certainly the fourth. "The United States is both a monetary union and a fiscal union, so even though the states adopted balanced budget amendments, the federal government could still do countercyclical fiscal policy." But the US that she is comparing the current EU to _was not_ a fiscal union and HAD NO COUNTERCYCLICAL FISCAL POLICY. Period. End. Shouty caps. In 1836 or 1841 or whatever year she has in mind, The United States was a nominal monetary union and states adopted limits on borrowing and no one did countercyclical fiscal policy, except when private individuals and/or organizations undertook to do so a la the organization formed after the lapsing of the Congressional Charter of the Second Bank of the United States. [<- Edited for clarity. Also, _cannot_ over-emphasize how nominal the currency union was.]

It gets worse.

"The euro area is a monetary union without a fiscal union, so it would be very costly for states to institute such restrictions on deficit spending."

Euro area already has restrictions on deficit spending! Scandal associated with fakery to get around it! Duh! W.T.F.! And yes, it is a problem. Which is why the US ultimately had to create a fiscal union.

"One possibility is that the euro area will become more of a fiscal and/or banking union; or there may be other changes in the structure of public finance that I can't foresee."

I don't understand why the slash between fiscal and banking union. If the Euro is going to survive, it _will_ have to improve the productivity? efficiency? effectiveness? of its member states (just like we chronically have to improve education and elections and so forth in some of our member states, and fix benefits distributions and tax policy in all of them). AND it will have to come up with something in the direction of a fiscal union.

If she thinks banking union = euro wide deposit insurance, I probably agree, altho I don't see how that connects to fiscal union. I'd have to think about that for a while, to see if I can imagine ways to do it without fiscal union (I think I can, actually, but I haven't worked it through enough to be sure).

ETA: If she has in mind the creation of the Federal Reserve Banking System as a "banking union" then you can _definitely_ do that without a fiscal union.

ETAYA: Down in the comments, the point is made that there wasn't any counter cyclical federal fiscal policy (there's an assertion that "a de jury potential" existed, whatever that means). The blogger agrees, adding:

"Absolutely right, the US wasn't doing countercyclical fiscal policy back then. I know the 1870s had some bad panics, but will need to read more about what the 1850s-60s were like."

Printing money for a war, is what was going on for a chunk of that period, also an income tax that may or may not have been constitutional and definitely got unwound in a hurry, the legal elimination of a major form of "property", etc. The printing money thing is sort of interesting, because everyone expected that stuff to become worthless but it sort of didn't exactly do so.

I'm starting to understand why everyone finds the idea that the Euro Zone could survive this thing, and that what they are doing other-than-stimulus maybe needs to really be done so tough. Apparently we've collectively forgotten our own process with this material.