What the US can teach Europe about supporting less productive states

One of the fascinating aspects of the growing debt crisis in Europe is that the solutions being pursued by leaders in France and Germany are, by almost every measure, fiercely conservative.

Much of the commentary in the US gets this horribly wrong, suggesting that the Europeans are flagrantly libertine when it comes to fiscal matters.  They are a continent of wine-sippers, dominated by bloated unions.

But especially when contrasted with the approach here in America, the European treatment of countries like Greece and Portugal is downright severe.

It’s not just that the Europeans are demanding harsh austerity measures from their member states.  In that respect, we’re more or less on par.

Many US states are also cutting back sharply, laying off hundreds of thousands of workers and curtailing social programs.

No, the place where the Continent is more conservative comes in their fiscal treatment of poorer, less productive states.

In our country, it has been the tradition for decades for big, urban, highly productive states — California, Florida, New York, Texas — to subsidize smaller, more rural, less developed states, helping to build their infrastructure, developing their industries.

According to the most recent available statistics (for 2005), Kansas was receiving $1.50 in Federal spending for every $1 that Kansas taxpayers paid in Federal income taxes.

Alaska receives more than $1.80 back for every $1 paid to the IRS.

These massive subsidies aren’t viewed as a “bailout” or a “loan” or a “subsidy.”  This didn’t just happen once, as a “stimulus.”  It happens every year, year after year.

And small, less prosperous American states aren’t expected to pay that money back, as poorer states in Europe are required to do.

Indeed, if forced to “borrow” that money, states like Mississippi (which in some years receives back twice as much money from the treasury as its citizens pay in Federal income taxes) would have collapsed long ago.

Just as Greece is on the verge of collapse now.

Here in the US, this steady transfer of wealth between members states has been internalized as a standard part of American political life.

Indeed, much of the American West and South — interstate highways, hydro dams, vast military bases, the education infrastructure around Silicon Valley, and on and on — was built with wealth generated in the Northeast and the Upper Midwest.

Taken in sum, I think it’s arguable that this “liberal” American approach — wealthy states helping poorer states — has proven itself to be the wiser and more sustainable than the one being pursued in Europe.

While France and Germany demand that their less productive member-states shoulder massive loans, relegating them permanently to the status of debtor-partners, the United States has pursued a policy of building up all fifty states.

Imagine if we had pursued a European model.

If forced to go it alone, in fiscal terms, Alaska and Kansas would be far less stable.  During the recent Great Recession, any number of American states would have toppled into insolvency without huge amounts if aid from Washington.

They would likely have been forced to withdraw from the “dollar union.”

And economic downturns aren’t the only threat.  Imagine if Louisiana had been forced to recover from Hurricane Katrina solo.

Or if the drought-stricken states of the Southwest lacked a massive Federal reservoir system, built to sustain their cities and their farms.

Obviously, there are weaknesses to the American system. Big urban states grumble mightily as dollars flow away year-after-year, decade after decade. But in the long run, it has proved to be a great investment.

Following this model, America emerged in a single century as the biggest, most productive, and most stable economy on earth.

In Europe, by contrast, fiscal conservatives who feel that they’re being hoodwinked by their lazy, bumbling neighbors insist that member states must sink or swim separately — while also trying to use the same currency.

As a result, the whole experiment of a European Union is imperiled.

As the technocrats in Bonn and Paris squeeze Greece and pummel Portugal and Spain, they would be wise to look at the relative success, prosperity, and stability of America’s member states, places like Alabama and and Arizona and Louisiana.

(NOTE:  This essay was first published in February 2012)

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38 Comments on “What the US can teach Europe about supporting less productive states”

  1. mervel says:

    What they need to do is build large military basses in Greece, so the per-capita expenditure goes way up, it is how we subsidize the smaller rural states, that plus farm subsidies.

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  2. knuckleheadedliberal says:

    “Taken in sum, I think it’s arguable that this “liberal” American approach — wealthy states helping poorer states — has proven itself to be the wiser and more sustainable than the one being pursued in Europe.”

    Thank you; and you’re welcome!

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  3. Newt says:

    Of course, the great irony here is that all those states who benefit from Federal largesse reliably vote for members of Congress and Presidents who pledge to bring in European-style austerity, while most of the big, productive states, (excluding the Lone Star State and, usually, Florida), vote for those who support sharing of national wealth.

    Not having national common laws on government expenditures makes wealthier European nations less incline to want to help the poorer. How would we feel if Louisiana residents could start collecting Social Security and Medicare around age 55, and demanded New Yorkers support them, while New Yorkers themselves had to keep working until 65?

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  4. Kathy says:

    As the technocrats in Bonn and Paris squeeze Greece and pummel Portugal and Spain, they would be wise to look at the relative success, prosperity, and stability of America’s member states, places like Alabama and and Arizona and Louisiana.

    Can we use our US model with states in comparison to European countries?

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  5. Terence says:

    I was about to make the exact same point as Kathy: the analogy is inaccurate. The Eurozone is only 17 countries out of the total membership of the EU, and is more analogous to a club. The Greek gov’t lied for years about the true state of its finances, and their widespread tax non-compliance (both corporate and individual) would be treated as the crime of the century by our IRS.

    Not only that, the poorer countries of the Eurozone (Greece, Ireland, Portugal and to some extent Spain) have received subsidies on a scale that would turn the hair gray of any conservative in this country: from infrastructure development to direct payments from various rescue funds… you name it.

    I agree that the average middle-class citizens of these countries are suffering the most, and that much injustice has been done in resolving the crisis. But it’s simply inaccurate to compare European and US models.

    The

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  6. Walker says:

    I think Brian’s point goes the other way– the EU would be better if it were more like the US, as a tighter confederation with a central budget that distributed funds from more successful nations to poorer ones, rather than just lending funds. Though as Newt points out, they would need some EU-wide laws to (dare I say it) level the playing field between countries.

    But it would take an incredible amount of fixing, to the point where it’s safe to say it will never happen.

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  7. Walker says:

    “…the poorer countries of the Eurozone (Greece, Ireland, Portugal and to some extent Spain) have received subsidies on a scale that would turn the hair gray of any conservative in this country…”

    But Terrence, I think in the EU they are not subsidies, they are loans, that must be repaid. In the U.S., federal tax dollars are flowing from wealthier states to poorer ones as outright grants of various forms. And as Newt notes, it is, weirdly, mostly residents of the recipient states that are the first to complain about high taxes and income redistribution.

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  8. Brian M: one of your problems is that you keep interjecting reality in such a way that it undermines people’s easy, thoughtless, pre-conceived notions. People like their prejudices and don’t want them disturbed. That’s why posts like this get so much pushback.

    Though there is one significant difference. EU countries are NATIONAL entities. US states are SUB-NATIONAL entities and thus have a different level of autonomy and a different relationship with Washington than EU members do with Brussels. A more apt comparison would be the EU with the Organization of American States, but that is essentially a toothless pawn of a single country’s foreign policy objectives.

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  9. Really, the closest analogy to the EU is ECOWAS, the West African regional body. It has a customs union, a common currency and even a peace-keeping/-making force. The main difference is that the CFA franc is directly tied to the Euro and does not float on the market directly.

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  10. Peter Hahn says:

    It is truly ironic that the red states – the ones whose populations are most stridently demanding fiscal austerity are precisely the ones that under a European type monetary union would be the Greeces and Irelands.

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  11. Pete Klein says:

    I think we need to pass a law that requires states voting for Republicans to get no more from the federal government than they pay into the federal government.

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  12. mervel says:

    The reason the smaller red states have high per-capita federal spending is largely related to the military, federally owned land which in some of these states is 75% of the state, and farm subsidies.

    The states themselves are in great fiscal shape. These are not loans or transfers made to these states as some sort of fiscal stimulus or floating the boat type of deal. If you want to shut down bases and reduce farm subsidies I think that is fine and it would reduce the per-capita federal spending. But these little states do not rely on federal spending, with only 500,000-600,000 people living in Wyoming and South Dakota, the total amount of federal spending is just not that much.

    South Dakota is running about 4% unemployment and has a balanced state budget and no income tax. It is not because of federal spending that this is happening.

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  13. mervel says:

    Pretty good schools to.

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  14. Brian Mann says:

    Mervel –

    Your description is only partially accurate.

    Rural states like South Dakota rely heavily on Federal funding, and are generally a net drain on the Federal treasury.

    Military spending and farm subsidies are a big part of the picture.

    But these states also generally rely on government for investment capital, to subsidize their rapidly growing elderly population, and to pay for expensive public works projects that their small industrial bases can’t afford.

    The bottom line is that these states are generally low productivity-high cost.

    What that means is that the residents generally have low incomes, and rely on industries that produce relatively little wealth (farming, for example).

    But because they are so spread out, infrastructure and public service costs tend to be extremely high.

    They also tend to have high public employee-to-private sector worker ratios.

    To return to your example, North Dakota may have low unemployment, but it also ranks 47th in terms of American states and their contribution to US GDP.

    –Brian, NCPR

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  15. oa says:

    Exactly, Brian. In road funding alone, places like North Dakota are the actual proverbial (wait, what?) Cadillac-driving welfare queens Ronald Reagan warned us about. If they had to their fair share for their roads, they’d have no money for those good schools.

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  16. Brian Mann says:

    OA – That’s not accurate either. These states have been incredibly good for the US, investment-wise. They provide much of our food, they provide much of our environmental quality, and they provide a growing amount of our energy.

    While Europeans grinch about every dollar that they send to Greece or the new eastern states that have joined, the US reaps the rewards of having built up the economies in places like Alaska.

    And remember: California, Florida and Texas were underdeveloped hinterlands only a short while ago, with little population and few assets.

    Now those states drive the US economy.

    –Brian, NCPR

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  17. Walker says:

    Brian, the farm states have also been quite successful at lobbying to keeping agribiz subsidies high, which is not necessarily a good thing for the nation as a whole. This is true in part because of the disproportionate representation of small population states in the US Senate.

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  18. knuckleheadedliberal says:

    North Dakota has had a pretty stable economy for a long time because it avoids the boom and bust cycles of states like Nevada, Arizona, Florida or even Texas. But without the INVESTMENT of tax dollars by states that pay in more than they get back North Dakota wouldn’t have the road system to efficiently access the wide open plains that grow subsidized crops.

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  19. oa says:

    Brian said: “These states have been incredibly good for the US, investment-wise.”
    Don’t disagree, Brian. But as knuck says, they don’t pay for themselves, if you go by a strict dollars-and-sense accounting. And the New York state dollars in food and road subsidies that go to North Dakota farmers are dollars that don’t support the North Country dairy farmers.
    Also, a quibble, but I wouldn’t say California was only a short while ago a hinterland.

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  20. Terence says:

    I can’t believe my comment above was disliked! “Guys, stop it!”

    Look, I’m a total bleeding-heart liberal and massively in favor of gov’t spending in poor areas. What I’m saying, though, is that the Eurozone doesn’t bear comparison — structurally, legally — to the states making up the USA. By far the greatest amount of direct aid to the poorer countries that use the Euro has been one-way, not loans. Really, there are facts to prove this. Look at the massive EU investment in Ireland that transformed it into the short-lived Celtic Tiger — remember?

    The problem is that many of the countries in the Eurozone should never have been allowed/encouraged/coerced into joining. That doesn’t mean I think the Greeks ‘had it coming’. But you have to look at the pattern of deception in their gov’t bookkeeping — even as they were asking for bailout funds.

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  21. Brian Mann says:

    Terence –

    I disagree. When the US was expanding westward, a lot of people on the East Coast — Boston, New York City, Atlanta — made the same arguments you’re making here.

    Why should we allow Arizona or California or Alaska to join the US? What do they have to offer?

    But it turns out they do have enormous amounts to offer — as would Greece and Spain and Portugal in a future, unified Europe.

    –Brian, NCPR

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  22. mervel says:

    Well North Dakota now looks like it has possibly as much oil as Saudi Arabia, I think that will likely change the GDP calculations.

    But whenever you are dealing with this small of numbers, these states just don’t matter that much in the grand scheme of federal spending.

    But as brian points out, you can’t build ANY roads in North or South Dakota that cover the state without a large impact on the per dollar spent for the population.

    They do have their fiscal house in order though and they have less poverty than NYS for example. This is not caused by federal spending, which indeed is a little higher per-capita, but is very small as a total amount. Anything you do is going to be high per-capita when you have a whole state larger than New York with fewer people living in it than Syracuse.

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  23. mervel says:

    However I don’t think the Eurozone looks at Greece the same way we look at some of our smaller states.

    Just out of curiosity and laziness, how does Greece stack up against Mississippi, our poorest state, when it comes to poverty? I mean sure we help these states, but is it really working?

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  24. oa says:

    Mervel, I don’t think they count the Native American reservations in those poverty calculations. The Dakotas are not the paradise you’re painting them as.
    Brian, the EuroZone is a pretty idiotic idea beyond France and Germany, the lowlands and Scandinavia.
    The income levels and economies are all too different to unite under one currency. And that’s really been the problem all along. Spain and Greece couldn’t just devalue their money against the mark or the franc or the pound, get their exports competitive again, and help re-set their economies when their bubbles popped. Now they’re trapped. But so are the Germans.

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  25. Captain Marvel says:

    Some of the statistics supporting the premise of this article/posting are misleading. While it is likely true that Alaska receives $1.80 for every $1.00 put into Federal coffers, I think the intended implication is that they get way more than their “fair share”, and this justifies the idea that “richer” states should support/subsidize “poorer” areas.

    Part of the problem is there is an assumption that money in by all states = money out by all states, whereas much of what is given out by the feds is not collected in any fashion.

    More to the point tough, this is misleading because (according to census.gov quick facts) Alaska accounted for $11.9 million in Federal spending in 2009, which translates to roughly $16.45 for each Alaskan. Whereas, Federal spending totaled $195 million in New York in 2009, which translates to $10.09 for each New Yorker.

    But, wait! Californians received $8.78 per citizen! What’s the deal? Why should New Yorkers get more money? Is New York some kind of “backwards”, underdeveloped state in comparison to California?

    No. It comes down to certain members of Congress working for their constituents harder than others and associated costs with completing certain projects in regional areas (exact copies of bridges in Alaska and California would be more expensive in Alaska because it costs a lot more to get things there to build).

    So, doling out the Federal dollars really comes down to this question: If New York gets a bridge on federal coin, why shouldn’t Alaska?

    It’s not that we need to subsidize and develop and “prop up” Alaska.

    This argument does not support a basis for “necessary” subsidization.

    Further, the important question is never even considered: Should the Federal Government get to call the shots on which area receives what money or should The Invisible Hand?

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  26. Pete Klein says:

    I don’t think you can compare the so called Euro Zone to the USA in any way, shape or form. They speak different languages and have different cultures. The only thing they have in common is a currency.
    The European Union was a mistake to begin with. Unless, unless you consider it to be an experiment that has proven the idea of a One-Word-Government would be an even bigger mistake.

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  27. mervel says:

    Oa, I am not trying to paint them a paradise they are NOT. The poverty statistics do include the reservations, however you have to realize that the poorest county in the US is in South Dakota, it has a population of 5000 people, total, mainly all Native Americans (smaller than the village of Canton). But even in a small state of 600,000 people, 5000 is not many people.

    My point was simply that I am not sure these federal comparisons are valid to the Euro situation, in that much of the federal spending is direct capital investment by the military or infrastructure. If Germany could build a giant dam such as the US did at Hoover dam in Nevada or build a giant air force base like Ellsworth in SD, in Greece, yes it would help some, but it is not exactly the same as bailing them out. Or look at Alaska or Nevada, the federal government owns 80% of the land in the state, it has to maintain it and so forth. So if Greece would allow Germany to buy half the country that would be more of a comparison.

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  28. mervel says:

    However, if they DID look at Greece as more of a state within a Republic such as we have, then I think it would be better for everyone. But to do that Greece and all of the Euro zone would have to give up some autonomy that they now enjoy.

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  29. Terence says:

    Brian, just to make sure I’m not being unclear: I didn’t say they shouldn’t have been allowed into the European Union — rather, that they shouldn’t have been made part of the Eurozone itself. The Eurozone is a subset of the European Union, and is exclusively a shared currency. There are other EU countries that don’t use the Euro.

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  30. Walker says:

    Brian, comparing California and Arizona in the 1800s to Greece, Spain and Portugal is not apt. The former territories were literally gold-mines, with vast untapped agricultural resources; Greece, Spain and Portugal not so much. I’m not saying they shouldn’t have been taken into the EU, though it’s not at all clear that they should. But it begins to seem clear that the entire conception of the EU was inadequately thought through, quite possibly because people were seeing it as being more analogous to the US than they were prepared to make it.

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  31. Peter Hahn says:

    Spain and Ireland had their (public) financial houses in order. Their problem is their private banks loaned too much money for a housing bubble – just like here in the USA. We didnt ask which banks were in which states and expect the individual state governments to deal with it (including deposit insurance to make sure their are no runs on the banks.)

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  32. Walker says:

    Good points, Peter. Incidentally, the similarity the housing bubbles in Spain and Ireland to the one in the US would seem to suggest that Fannie and Freddy are not the root cause of our bubble. Just sayin’.

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  33. Peter Hahn says:

    Walker – seems to me the problem was those “toxic assets” – the bonds made of all the mortgages sliced up in different ways. Creative financial products that no one understood (but bought as investment grade products). Im not sure what the argument against Fannie and Freddy is other than that they are “government run”.

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  34. Walker says:

    Marvel, thanks for an interesting post. Some points, though:

    “…much of [the money that is] is given out by the feds is not collected in any fashion.” Well, OK, but it’s still owed by us all, so what difference does that make?

    “It comes down to certain members of Congress working for their constituents harder than others…” Working harder and/or having more clout, mostly the latter. “Clout” is mostly determined by longevity– that’s what gets you committee chairmanships. And it’s easier (as in cheaper) to get re-elected in a small state, and that gets self-reinforcing once you get a lucrative chairmanship and start bringing home the pork. The result is anything but fair, making for even more unequal representation. Big states, the ones generating most of the money, get shortchanged on a per dollar basis and on a per capita basis.

    “So, doling out the Federal dollars really comes down to this question: If New York gets a bridge on federal coin, why shouldn’t Alaska?” Why should Alaska get one? There’s a whole lot more driving going on in New York than in Alaska. This is how we ended up building the famous Alaskan Bridge to Nowhere. You should see all of the nearly empty rural roads in Georgia that are built to Interstate highway standards– they have mailboxes on them– really weird! Pork at work.

    The doling out of Federal funds ought to be based on demonstrated need, or at least be proportional to total population. Instead, it’s based on influence.

    “Should the Federal Government get to call the shots on which area receives what money or should The Invisible Hand?” We haven’t much tried private highway construction in this country. Off hand, it sounds like a nightmare. Can you imagine a private highway initiative in the NYC area? And if we had relied on the Invisible Hand back to build our highways rather than the feds, it’s a sure thing there would be no fast roads into the Adirondacks, maybe not even in the North Country generally.

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  35. mervel says:

    No doubt that federal investment has been directed through interest seeking into these smaller states. So for example a Senator from Nebraska can make a deal with a Senator from California that if you support me on this bridge, I will support you on something you care about. Well the guy from California sees a small bridge in the big budget picture and says sure, the guy from Nebraska makes a BIG splash with the bridge because in a small state with a small relative economy that money IS alot of money. So you end up with all of this investment in these less populated states and that investment does make a big per-capita impact just because of the small population, but in the grand scheme of our budget is not that much money.

    In absolute terms the amount of money spent in the big states, NY, CA are vastly vastly larger than is spent in less populated states.

    Greece needs to get better representation in the EURO boards so they can send some pork home! They actually could use a lesson from us.

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  36. Pete Klein says:

    I wonder if all the Tea Party Conservatives would be happy if the federal government stopped giving any money to any of the states for anything and just used the taxes collected to pay for the military and law enforcement.
    This no money to the states policy would mean no money for roads, bridges, airports, farm subsidies, grants of any sort for anything. It would also, in all fairness, mean no money to any foreign country, including Israel, for anything. And if any country wants our help fighting anyone or anything to include their war on drugs, well they would just have to pay the cost of our military, plus a small surcharge for us to get a profit.
    The no money for anything other than the military and law enforcement would also mean no money for any research into anything, including no money for any drug research.
    I imagine such a policy would really bring down our federal income taxes, which should make Grover Norquist and all those who hate paying income taxes very happy.

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  37. mervel says:

    I don’t think they know what they want, well some do and those are the scary ones.

    Most of them seem to have this vision that someone else is getting government money, but the reality is we all get government money, either through social security, public schools, hospitals, the police, employment and so forth. The grass roots people I have seen being interviewed are often actually direct recipients of government money. One was a fireman, another women I saw lived on her husbands navy pension, I don’t get it?

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  38. gerald says:

    Do you allow your less competitive member states to run a deficit way overspending their income including the transfers? Because this is what happened here, there is a not to repay transfer system helping less competitive regions of EU but periferial states wanted more.

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