Germany Is Not New York

It takes no extraordinary acuity to see that New York is not Germany, and that Germany is not New York. It takes a little more struggle to wish that they were more similar.

For if Germany were New York it would be part of a transfer union where funds flowed easily and anonymously from one local economy to another within the larger whole. Right now that would imply funds rolling out of Germany towards, for example, Spain without a word of debate. It would just happen. And, hey presto, Spain would be bailed out without having to commit to suicidal and, most likely, unsustainable economic policies.

Instead Germany sits in a very rigid and not well designed union where transfers of funds come only after retribution is exacted, penalties assessed, and horrors inflicted so that the creditors can feel morally justified in ‘helping’ out the, presumably morally inferior, debtors.

The Spanish problem is that it had a real estate bubble of sufficient proportion to blow up its banks. In order to save those banks the Spanish government had to borrow a great deal and thus ruined its own creditworthiness. A private sector problem thus became a sovereign debt problem. Lacking an independent monetary policy, and not having its own currency to devalue, the Spanish government was forced to use its only policy weapon, namely fiscal policy. In other words the full brunt of saving the banks was transferred to the unsuspecting taxpayers of Spain. The result is grinding depression, massive unemployment – in excess of 20% across the economy as a whole – and a drop in economic activity that has only made things worse. The drop in activity has made it impossible to hold debt levels down to the levels that Spain’s creditors would like, so interest rates on new debt have risen enough to burden the budget sufficiently that there now looks as if there is no escape. Spain is going down.

Remember, all you moralists out there, that the Spanish government was a model of fiscal rectitude before the real estate bubble burst. Its debt to GDP ratios were better than those of its more self-congratulatory neighbors to the north. The Spanish problem is not rooted in some imagined folly of rotten fiscal policy, nor is it the outcome of a too forgiving social welfare state. It results purely from unwise real estate investment and the huge inflow of foreign capital that inspired too lax and too much lending in the private sector.

And Spain is not Florida.

Happily for Florida it is safe within the same union as New York. I use New York as a proxy for all those states, mainly here in the Northeast with a few elsewhere, that run consistent surpluses with the Federal government. As Florida suffered through the exact same cycle that sank Spain, its tax base, just like Spain’s, collapsed. It sent much less to the Federal coffers as a result. This created a massive deficit with respect to the rest of the US. But, instead of Florida having to slash outlays on social programs it citizens continued to collect their retirement checks and benefit from health care programs because the cash flowed from Washington. Not only this, but its banks were bailed out using Washington money, not local Florida money. So the huge bail out of Florida which amounted to about 25% of its state GDP in 2010 went unreported and largely unnoticed. The good citizens of New York etc kept on paying into Washington more than they received and scarcely whispered a word about the profligacy and ineptitude of the Floridians. There were no great morality lessons preached in the national press. No massive restructuring of Florida’s budget was recommended. No cuts in retirement checks sent to all those retirees. Youth unemployment didn’t surge. Indeed the bail out of Florida was so successful that its Republican governor now trumpets the state’s turn around as a model of economic virtue. The state has, he proclaims, proven that stimulus and deficit spending are not needed to return a state to the black.

Which is, naturally, total rubbish.

Florida is only back to growth because it benefitted from a huge splurge of deficit spending that kept its economy alive while the local real estate market found a floor and local businesses could recover. It was, in many ways, a textbook example of the very Keynesian policies that the its strongly Republican governor so despises and ridicules for everyone else.

The problem for the rest of us is that the cost of bailing out Florida – and all the other big real estate bubble states – ended up sitting on the Federal budget. The funding surpluses from New York and its ilk were not enough. The explosion in Federal debt that kept the bubble states alive – imagine what would have happened to them without the inflow of Federal cash – resulted in the very deficit that the Republican governors and other politicians from those states so decry.

So the economic benefits of being within a transfer union like the US comes with a cost: the self righteousness and denial of reality by conservatives who get bailed out and yet vilify anyone who advocates bail outs.

I wonder what the political atmosphere would be were the good citizens of New York and its ilk informed of the extent of their largesse. And that they just bailed out a number of states who relentlessly criticize their New York style social and economic mores. Or that, by and large, it is the states electing die hard anti-deficit Republicans who most benefit from the deficits they hate.

The US manages to avoid being honest within itself about the real effects of local economic decisions. The flow of Federal cash masks a wide array of local ills. And those ills, being inoculated from error by that flow of Federal cash, create the illusion of being anything but ills. The wealthy sates in the US continually subsidizethe less wealthy. This creates a dangerous illusion. It is the pretense that, somehow, it is Washington that is profligate and not balancing its books, whilst the truth is that the deficit has local roots. And those local roots are often in places whose citizens scream bloody murder at the size of the deficit they see in Washington’s budget.

The flip side of this illusion is, of course, that states can sometimes flop and yet be bailed out without enduring the kind of terror that Germany is insisting the Spanish go through.

No. Germany is not New York. Whether that is a good or a bad thing for Germans and New Yorkers is neither here nor there. But for the Spanish and Floridians the difference is vital. And therein lies the issue. Florida pretends to be a separate state, which it is not. Spain is a separate state but pretends to be part of a union, which it is not.

Odd how that works.