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Why the euro is NOT the dollar

Nope, it's not because the ECB will not do the equivalent of quantitative easing, and because it allows the interest rates of euro denominated bonds in the periphery to go to the stratosphere, even though those things don't really help.  It is because intra-european fiscal transfers are not large enough. The Economist has an interesting article in the last issue that shows intra-state transfers in the US.

Delaware transfers to the Union more than 200% of its own GDP, while New Mexico receives more than 250% of its own GDP in federal transfers (the difference of taxes paid to federal spending within the respective States).  That is fiscal federalism.


  1. Nice graph in the Economist article.

    Nicholas Kaldor and his fans have been saying such things for long but others wouldn't know this or understand the significance.

    As Wynne Godley used to say nobody notices the fiscal transfers! Finally the Economist magazine has noticed it.

  2. Yes indeed. That is a nice graph. We may have more fiscal federalism, but it doesn't always work the way it should. The whole principle of intra-state transfers has been contentious since the Articles of Confederation. Hamilton avoided state defaults by adopting state debt, which was essentially a fiscal transfer. However, a few years later Jackson refused to help states in the early 1840's crisis and let them default. Even with the political structure in place, it took a long time for the US to do these transfers in a somewhat reasonable way. Even today the transfers are controversial, as can be seen from California (which should be on the negative side of that graph).

  3. In the 19th century also the size of the federal and state govs was much smaller. This structure is more the result of the New Deal changes, it would be my guess.

  4. Definitely. Equally important was the 16th Amendment (1913) that allowed an income tax without apportionment among the states. Those damn progressives!


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