Precisely! California and Alabama are in a monetary and customs union AND in a fiscal a political union! That's why it works. Federal money flow is net positive into Alabama and net negative out of California, as it's only natural between regions of a country. There's no tax havens inside the US for states to steal tax revenue from one another. There's a congress and a president, elected by all (the European Parliament is a bad joke). The US Treasury emits bonds in the name of the entire country. Can you imagine if each state had to emit it's own bonds, lol! Imagine each state being on its own, and Alabama trying to get finance by selling Alabama t-bills on Alabama credit? But despite this using the same currency and having a single market. That's more or less Europe right now.
>Imagine each state being on its own, and Alabama trying to get finance by selling Alabama t-bills on Alabama credit?
One could argue that this would create a significant incentive for Alabama to improve its structural deficits and be more attractive to investors rather than being one of the largest federal government recipients among the American states.
In fact I think if one looks at Europe overall this is largely what has happened. Being in one monetary union has driven a lot of countries, in particular in Eastern Europe and the Baltics, to clean up their structural deficits. A lot of EE countries have gone from being much poorer to be on par or already richer than SE. I have trouble with this Euro-critical narrative, when a country like Estonia, coming out of the Soviet Union impoverished, is now more prosperous than Portugal.
Some of the more well governed and prosperous Latin American countries have pegged their currency to the US dollar voluntarily in the past.
I see what you are trying to say and the issue of lack of European fiscal solidarity is real, but there's a lot of big whoppers in your post, so you may want to argue somewhat differently. Let's go through them:
> California and Alabama are in a monetary and customs union AND in a fiscal a political union!
Kind of. They are both subordinate states to the Federal government which taxes and spends far more than any state, so that third actor -- the Federal government - is the gorilla in the room, and needs to be included.
> Federal money flow is net positive into Alabama and net negative out of California
No, both California and Alabama are famously receiving states. California used to be a donor state in the past - Governor Schwarzenegger famously complained about getting back 70 cents for every dollar, but that number was rapidly increasing even in his tenure and about 5 years ago it exceeded 100 and it still continues to rapidly rise. So now both California and Alabama are firmly in the receiver bucket. In fact, all states can be in the receiver bucket with the Federal government running large deficits.
> There's no tax havens inside the US for states to steal tax revenue from one another.
This is exactly what the SALT deduction is about as well as tax-free state and local bonds. One of the reasons why states borrow so much is because you do not pay federal income taxes on the interest (in most cases).
But to understand that you need to know about state borrowing, which takes us to the next point:
> Can you imagine if each state had to emit it's own bonds, lol!
States and local governments emit quite a lot of bonds. California owes about 70 Billion in bonds outstanding, but that doesn't even count things like "capital appreciation bonds" and other types of instruments it sells. See here:
Even individual cities and counties sell bonds, as do port authorities, etc.
> Imagine each state being on its own, and Alabama trying to get finance by selling Alabama t-bills on Alabama credit?
Yes, we showed the bonds that California sells and Alabama also sells bonds. Each state has debt, it's various bonds are given a credit rating, etc. FYI Alabama's latest bonds have a credit rating (AA+) that is slightly higher than California's latest issuance (AA), because Alabama's finances are in better shape.
So I think you should revisit your argument because the situation is a lot more complex. It's better to think of the federal government as providing income insurance to the states, rather than just pretending that states do not independently borrow money, that they do not compete with each other, and that they do not have their own credit ratings. A better analogy is to look at individuals in a nation who each borrow, save, and spend, but they are protected with some federal programs like welfare and disability insurance. That's a much better way to view the situation.
Well thank you for the time in writing that, it seems I definitely made a lot of factual mistakes. I had no idea California was now a net receiver of federal money x) But I guess it makes sense due to the enormous debt that the federal government continues to rack up.
But my points regarding bonds is that the states and municipalities do emit bonds, yes, but not only their bonds. As you state, the majority of cash is raised at a federal level with treasury bonds. In fact, one of the Eurobonds proposals was that states use European bonds up to some threshold (60% debt-to-gdp ratio level was proposed), and have to rely on national bonds to cover the rest. This is at once a mechanism of consolidation, allowing weaker states to piggy-back off the bloc's interest rates, BUT at the same an incentive for fiscal discipline, as after 60% your debt has to be financed through more expensive national bonds.
> In fact, one of the Eurobonds proposals was that states use European bonds up to some threshold (60% debt-to-gdp ratio level was proposed), and have to rely on national bonds to cover the rest.
Yes, these are valid points. My impression though, is that a better thing to focus on is not financing but who pays for what. In the U.S. the Federal government pays for social insurance, federal defense and big infrastructure projects. The states pay for education, police, and local infrastructure.
It is because the U.S. states do not pay for social insurance that allows them to weather unequal income distributions and that is why poorer states consistently get more spending. The whole point of social insurance is that poorer people get more and richer get less, so it's the opposite of per GDP spending.
For example, when states like California start trying to take on social insurance roles, that's when they get into a lot of fiscal trouble.
So now the problem with Europe is that the states do need to pay for social insurance, and that's a killer. There is just no amount of Euro bonds that will be able to help because the poorer states have a lower GDP per capita but the bonds will be capped at a share of GDP, which is the exact opposite of how social insurance works.
Therefore you can clean up Europe's finances if there is a central government that pays for social insurance. Defense spending is relatively minor in comparison to social spending, so you can keep that per state if you want. But once you federalize social insurance, then you can still do some GDP ratio debt limits and be OK, and it doesn't matter too much what happens with per-state financing once this burden is taken off states' books.
Of course this requires real solidarity. And it seems that Western Democracies have been doing everything they can to destroy real solidarity. But that's a whole other discussion.
> That kind of thing is simply unimaginable in Brussels.
Probably because power is so federated that it doesn't matter that much who's in charge of the various EU presidencies. And that's a good thing, it doesn't fit well into the Ango-American ideal of a single leader (Washington, Churchill, Lincoln etc) taking on the bad guys, making the speech, and leading from the metaphorical front.
