Friday, July 17, 2015

Things I should have known

I was pro-EU for many years, reflecting my dislike of parochial nationalisms, and my analogizing from my belief that, in the U.S., the optimal balance as between the national government and the state governments should be tilted much more towards the national side of the scale than it would be we if we were like Europe.

But U.S. federal government policy is run by a nationally elected president plus a national legislature where all states are represented, not to mention that we're all in the same boat economically even when we don't realize it.  E.g., I was reading the other day about how the S&L crisis was essentially a rich coastal states' bailout of Texas, only no one even thought of it that way, as it just happened automatically.

When you lack both democratically elected (and adequately empowered) federal-level political institutions and a federal-level economic union that operates automatically, one thing you can end up with (as anyone versed in American history can tell you) is the Articles of Confederation. But a very different thing that you can end up with - the EU today - is in its own way just as bad.

Herewith Ben Bernanke, not generally known as a fire-breathing lefty:

"In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today the unemployment rate in the United States is 5.3 percent, while the unemployment rate in the euro zone is more than 11 percent. Not incidentally, a very large share of euro area unemployment consists of younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe's longer-term growth potential....
"Currently, the unemployment rate in the euro zone ex Germany exceeds 13 percent, compared to less than 5 percent in Germany. Other economic data show similar discrepancies within the euro zone between the "north" (including Germany) and the "south." ....
"Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home, as shown in its extraordinarily large and persistent trade surplus, currently almost 7.5 percent of the country's GDP. Within a fixed-exchange-rate system like the euro currency area, such persistent imbalances are unhealthy, reducing demand and growth in trading partners and generating potentially destabilizing financial flows....
"Germany could help restore balance within the euro zone and raise the currency area's overall pace of growth by increasing spending at home, through measures like increasing investment in infrastructure, pushing for wage increases for German workers (to raise domestic consumption), and engaging in structural reforms to encourage more domestic demand."

But of course they won't.  It's easier just to let everyone else suffer, while also feeling very noble and put-upon.

Bernanke doesn't address the political institutional side, but you can bet that things would be different if an EU-level prime minister and legislature were setting policy, and if the EU was automatically funding social welfare programs in Greece and southern Italy, like the US national government does in Mississippi and South Carolina.

Many U.S. tax people (not just me) have tended to be pro-EU, in part from the U.S. analogy in which we think that limiting internal tax competition to the relatively small state and local tax systems, which themselves face federal judicial review under the dormant commerce clause, gets it more or less right, all things considered. But we have often not been huge fans of the jurisprudence emanating from the European Court of Justice, which at times creates the worst of both worlds by handcuffing national governments' reasonable responses to aggressive tax planning, while lacking the power to impose federal-level uniformity. I don't blame this on the people at the ECJ - it's structural and inherent to the institutional set-up, rather than being particularly their fault.

What I hadn't understood until recently is the similarity between the structural flaws that tax people have seen all too clearly for years in the ECJ model and what we've seen at the macro level between Germany and the European "south" (not just Greece). Without federal-level democratic institutions, legitimacy, or true economic and political integration, you combine the evils of centralized decison-making that ignores reasonable local needs, with the evils of not being centralized enough to advance the common good in an integrated way.  One would have thought you could only one get set of evils at a time, but the EU has advanced our intellectual understanding of federalism by showing that, with a sufficiently perverse institutional design and ruling ideology, you can simultaneously get both.

Obviously, the ECJ looks great compared to these other jokers.

A broader lesson is that, even if greater EU centralization would potentially be good, it does not follow that decentralizing wouldn't also be good, relative to where they are now.  In my view, greatly decentralizing (e.g., dismantling the Euro and reducing ECJ oversight) would be a sizable improvement over the current state of play, even if it would be better still to centralize more, and in the end truly to become a single nation (subject, of course, to people actually wanting to do that).

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