The Dollar Union: Could We Boot Alabama? Should New York Secede?

Europe has Greece. We have Mississippi. Europe uses the term "permanent bailouts." We call it "Medicaid." And there, in two sentences, is why the dollar zone is working and the euro zone is not.

As this fantastic graph (via Yglesias) from the Economist shows, the poorest states like Mississippi, New Mexico, and West Virginia rely on ginormous transfers of federal taxes in the form of unemployment benefits and Medicaid. Like the United States, the euro zone is all on one currency. Unlike the United States, the euro zone collects a teensy share of total taxes at the EU level and has no legacy of permanent fiscal transfers from the richer countries, like Germany, to the poorer countries, like Greece. The result is the chaos playing over your computer screen day after day.

Here in the U.S., states like New Mexico and Alabama are always "in fiscal trouble." But it's not news. In the last 20 years, the seven states in orange and red in the graph have accepted federal money worth around 200% of their annual GDP. Perhaps you've had a bar debate about whether we should boot Mississippi from the union, but that sort of thing hasn't made its way to Washington.

The better question, as Matt O'Brien posed to me, is whether a graph like this makes the case that states like New York or California or Texas or Massachusetts might be better off on their own currencies. All four are running 20-year surpluses according to the IRS. In other words, they are persistently paying more in taxes than they are receiving in spending. On their own, they could spend a lot more. Today, the states can't borrow money. But on their own, the richer ones might be able to borrow cheaply enough to eventually run persistent small deficits to make up for whatever infrastructure, education, and per capita health care spending they were receiving from Washington. Once they got in on NAFTA, they could trade freely with the other states as the dollar zone disintegrating into history.

Having a big country is a no-brainer when there are large external gains to pooling resources -- e.g. to field an army against the Soviets. But would a peacetime New York Nation make more sense than a New York state?