Conservatives like to fret that the United States is turning a giant
European-style welfare state. But our big government and banking rules are what keep us from becoming Europe.
The last few years have been a tale of two currency unions.
On one side of the Atlantic, you have the euro zone. It features a dysfunctional group of state economies that don't necessarily make sense together. Bailouts, recession, and general doom have been the norm lately. On the other side of the Atlantic, you have the United States. It features a dysfunctional group of state economies that don't necessarily make sense together. Bailouts, recession, and ... no, wait. Growth has been disappointing since 2009, but the American economy has grown. Europe would be thrilled with our disappointing growth.
Why is our currency union working so much better than Europe's? As mentioned above, it's not because American states are much more economically uniform than European ones. It's not at all clear that it's easier for the Fed to set monetary policy that makes sense for every American state than it is for the ECB to do for European states. Consider the below chart, courtesy of the Bureau of Economic Analysis
, shows GDP growth at the state level for 2009-10. Notice the wide divergence.
Why isn't Nevada our Spain? Why isn't Mississippi our Portugal?
There are three broad reasons. First, we have a federal government that sends around more money when times get tough. After the housing bubble burst in Nevada, citizens still got Social Security, unemployment insurance, food stamps, and Medicaid check mostly paid for by the other 49 states that weren't hit as hard.
Second, it's not just about making poor states less poor by giving them money. It's also about the banks. More specifically, about failed banks. We have pan-American banking regulators to close down troubled banks. The euro zone doesn't. So, Nevada isn't on the hook for the bad loans its banks make. But Ireland is. And that can be the difference between a depression-lite and depression-heavy for the local and state economies.
Third, it's about people. They move to where the jobs are. Admittedly, people aren't moving around quite as much
as they used to, but it's still easier to do than it is in Europe. It's not front-page news when people move from Nevada to Nebraska for jobs. It is when people move from Portugal to Germany
. After all, it's much harder to move when you don't share the same languages or customs, as is the case in Europe.
Conservatives like to fret that the United States is turning a giant European-style welfare state. The irony is that it's precisely our existing big federal government and prudential banking regulation (at least for smaller banks) that has prevented us from turning into Europe. Without those institutions, our currency union wouldn't work either. Hopefully, the euro zone will embrace big federal government before it's too late.