Wednesday, July 15, 2015

The Fiscal Union Myth

"You can't have a monetary union without a fiscal union."  This is the constant drumbeat of those who, indirectly, have been championing Eurozone bailouts since 2010.  When economists point to the US as an example of a common currency area without bailouts (think Detroit, Puerto Rico), the "fiscal union" crowd says:  "But in the US the wealthy states make transfers to the less wealthy states."

But, in the US, it is not true that the wealthy states make transfers to the less wealthy states.  In fact, the opposite is true.  The less wealthy states subsidize the more wealthy states in the US.  I suspect that is not the kind of fiscal union that the Eurozone "fiscal union" crowd has in mind.

No one needs to subsidize anyone for a monetary union to work.  In fact a monetary union can work only if no one subsidizes anyone else.  If one state subsidized another in the US, then the monetary union in the US would not work.

The idea that you need either fiscal transfers or currency devaluation to recover from economic recessions is an example of modern-day poor economic thinking.  Where were these transfers or currency devaluations in 19th century America, when, for practical purposes there was no national fiscal transfers of any kind?  The income tax did not exist in the US until 1913 and fiscal transfers were essentially non-existent until the 1930s, yet US economic growth was far, far higher in the decades that preceded these events than in the decades that followed them.

Greece needs to be responsible for its own debts and the rest of the Eurozone should have butted out long ago.  Pretending that the proper policy is for Germany to freely transfer resources to Greece is bad economics and a political delusion.

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