A Different Kind of Union: The Bailouts of Texas and the Eurozone

In a recent post on European policy mistakes, I suggested that the politics of their banking and debt crises are much trickier than ours because a coalition of countries is inherently more intractable than a federation of united states. I wrote:

As one German asked me, “How do you think New Yorkers would feel about bailing out Texans or vice versa?” — an excellent question that we never have to think about.

This sentiment provoked a note from my friend LP, who’s (a) from Texas, and (b) has a better memory than I do. He reminded me of the savings and loan crisis from the late 1980s, when, in fact, Northeastern politicians “gnashed their teeth” as he put it, but ultimately bailed out depositors from about 1,000 failed thrifts, with the largest number of failed banks in Texas. The price tag was ultimately $150 billion (almost twice that in today’s dollars) with Texas the site of the largest losses (Krugman recognized the connection between Texas bailout and the Eurozone crisis a year ago).

Anyway, my friend’s point was that New Yorkers did bail out Texans, and while they squawked about it, there was a sense of “mutual obligation” that is lacking in the Euro crisis.

A few thoughts about that. First off, it’s certainly true that many northern Europeans are not anxious to bail out their southern landsmen. But one troubling thing I’ve seen over there is a lack of “mutual obligation” between governments and their people (you of course see that here these days, too). Political and economic elites have made decisions to cut pensions, layoff public sector workers, restrict capital flows, and even freeze bank deposits, often with no consultation with the public and their representatives.

I understand that in some countries, like Greece or Cyprus, the fiscal and financial realities call for radical steps. But too often those steps are taken in ways that just don’t look democratic and that becomes more of a problem than a solution.

Second, one wonders how such regional bailouts would play out in today’s USA, with our far more polarized nation. I suspect, at the end of the day, that New York would bail out Texas, but a lot more teeth would be gnashed today than in 1989.

Third, I happen to be reading this GAO report about the challenges of setting up the state-based insurance exchanges under the Affordable Care Act. Some of the most conservative states are fighting tooth and nail to block the law’s implementation, including 11 states say that they lack “. . .the authority to enforce or are not otherwise enforcing [the ACA's] insurance market provisions.”

That sounded more like the Eurozone than America.

I’m glad LP reminded me that our union has in the past acted as just that — a union that comes to the aid of those in need. I just wonder if that same union still exists today.

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Jared Bernstein
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