Question for any economists reading this.

[randomness]

Are these numbers comparable?

General government consolidated gross debt as a percentage of GDP, from Eurostat.

versus

State and Local Government Spending and Debt in the United States, Amounts in percent GDP, from usgovernmentspending.com.

If they are not, can you suggest sources with comparable numbers, or explain why this isn't the right comparison to be making, etc.?

The basic point is that I'm trying to do direct comparisons of debt/GDP ratios between EU member states on the one hand and US states on the other.

Thanks in advance for any suggestions!

Comments

[cerebralpaladin.livejournal.com]

I'm obviously not an economist, but I would be hesitant comparing debt that consolidates debt from spending that in the US would be national spending with debt that in the US would be state spending (in the European case, where I believe that the EU wide budget is still relatively small), with only considering the state/local spending in the US case. Wikipedia says that the EU's budget is on the order of 120 billion Euros, compared to budgets of roughly 800 billion Euros for France and the UK (each). I wonder if it would be useful to include a pro rata share of the federal debt in considering state indebtedness--after all, California has to pay for its state debt and spending after its people pay federal taxes as well. The more I think about it, the more I think that there probably isn't an apples to apples comparison available--you probably have to do an apple to pear comparison on the one hand, and a quince to apple comparison on the other, and hope to make something out of the two.

[r-ness.livejournal.com]

Yeah. I'm totally with you about the issues of comparing the debts; mostly I'm trying to come up with a clear refutation of the (mostly European) commenters who whine about how it's unfair that the bond vigilantes are after Greece, Ireland, Portugal, Spain, Italy, Belgium, etc. and ignoring California, Illinois, New York, etc.

The point I was going for was that when your country's debt/GDP is up above 100%, as it is for some of the European countries, it is a whole different scale of problem from California, whose debt/GDP ratio is below 25%. It strikes me that the former is more a problem of "we can't pay" whereas the latter is more "we won't pay".

But your point is well taken, and it seems to me it's another argument in favor of treating the eurozone countries differently from the states. The point is that the US Federal government has both the capacity and will to act as backup for the states, and the markets recognize this. The eurozone may have the capacity or may not, and it's also unclear it has the will. Or even if it's reasonable to say whether there's an "it" rather than a "they".

The fact that most of the US debt problem is federal and not state, and the EU debt problem is entirely national, and not Europe-wide, seems like the key issue.

The balance of power between the member states of the EU and the American federal government on the one hand, and the concentration of decision making on the other, makes a comparison of these two situations quite misleading, I think. Europeans who darkly mutter about Anglo-Saxon conspiracies against the eurozone causing unfair attention to their debt problem seem to me to be missing some very clear differences between the two situations.

At any rate, thanks for the comment. It's helping me think this through, even if I can't really figure out a cohesive post yet.

[achinhibitor.livejournal.com]

As I read somewhere, the federal government aggregates revenue from across the country and hands out money across the country in a way that automatically redistributes from the richer areas to the poorer. In particular, the welfare-state obligations (or promises) by individual states are considerably backed by the federal government. Not to mention the implication that the federal government will back the states or even municipalities if they get into serious financial trouble.

So one can hardly view California as being in financial trouble "on its own", whereas the current behavior of the EU member states is that the richer ones are completely unwilling to explicitly pay money to bail out the poorer ones, and the EU budget system does not automatically redistribute much between the member states.

Also, the US federal debt/GDP is about 50% (according to Wikipedia), which added to California's 25% gives a gross ratio of about 75% for California.

It also helps that the bond market believes that the US is culturally willing to tighten its belt if it becomes unavoidable. Compare with European countries that respond to austerity with violent rioting. And in this regard, it's helpful to the US to have a highly visible political movement that detests the federal deficit -- nothing helps us borrow money to try to get out of the recession like the belief that the deficit hawks are just about to gain power and balance the budget. In addition, we're such a large buyer of Chinese goods that China is forced to lend us unlimited money to keep their factories humming.

In terms of quantity, the federal government mobilized something over 1 trillion dollars during the pit of the financial crisis. California's debt is somewhat under 100 billion dollars at the moment.

In the long run, what is killing many of these countries is the perception that their populations aren't willing to suffer increasing their productivity. Money is available in unlimited supply; human capital is not and its distribution determines who wins and who loses.

[r-ness.livejournal.com]

So, I think we're saying the same thing with regard to the relationship between the federal authorities and their constituent sub-units on the other.

An outside observer--say, a bond vigilante--can reasonably conclude that there's a meaningful amount of daylight between the European Union and its member states with regard to policies on debt and default. How much distance there is depends...and is thus uncertain.

On the other hand, there's much less daylight between the US Federal authorities and those of the state and municipal governments, if only because those sub-units retain much less freedom of action under the American system.

I think your second point on willingness to tighten is much less compelling. It's pretty clear that Germany, the Netherlands, and Austria, to take three examples, are even more culturally willing than the United States, in aggregate, to institute austerity measures; in fact some of the people most critical of American policy in recent months have been the Germans. But Europe does not speak with one voice, and so the markets do not look at Europe as a whole, but at individual countries in particular when they make decisions on the likelihood of default. Again, this is because the EU member states retain greater freedom of action.

All of this means it makes less sense to compare Illinois to Ireland when it comes to default, or California to Greece.

[r-ness.livejournal.com]

Money is available in unlimited supply; human capital is not and its distribution determines who wins and who loses.

If this is true a winning strategy would be to offer some of that unlimited supply of money to human capital as an inducement to move.

[achinhibitor.livejournal.com]

We've gotten ourselves into a couple of unusual binds and we haven't adapted to them yet:

- People who cannot move due to underwater mortgages. Though most of these people could mail the keys to the bank because the banks don't have effective recourse. But many people aren't comfortable doing that.

- The bubble has caused people to train for jobs (mostly in construction) that really weren't needed.

So there's an unusually high mismatch right now between the skills of American workers and the needs of American employers. Unfortunately, spending money isn't a particularly effective way of fixing these problems.

[r-ness.livejournal.com]

Oh, I was thinking more along the lines of paying people to move from country to country. That brain drain has been going on for centuries, though it may or may not need any pushing along.

As for the two problems you mention, both can be fixed by spending money--in the first case you could simply pay off their mortgages so they can move, and in the second you can pay for them to retrain--but it's an open question as to whether the cost is worth the benefit. And because the answer depends on the case, it's difficult to come up with an efficient global solution; individual answers won't scale.

Pushing along and guiding the global flow of talent into one's own country is another issue where there's a question as to cost vs. benefit, but then so many things are.

One of the issues I see in the American political system is that there's no particular incentive for acting when the cost is immediate but the benefit is long-term. In fact, there's usually a pretty big disincentive against action in those cases.

[achinhibitor.livejournal.com]

It's easy to direct the flow of talent (human capital) into your country -- just ensure that the differential return on human capital is unusually high. That is, that income inequality is above the world average...

[achinhibitor.livejournal.com]

Thinking more about the Ireland situation: In a similar situation in the US, there would be redistributive effects: 1. the natural redistribution of federal taxes and benefits, 2. the FDIC would protect small depositors who are disproportionately local, and it is funded from across the country, 3. the large depositors, bondholders, and stockholders would lose money, and many of them are distributed across the country.

Ireland's problems have been magnified by the government's decision to guarantee all debs of the banks, rather than just an FDIC-like guarantee for small depositors. That doesn't make a lot of sense, really. It seems as if the Irish government's action was designed to prevent the burdens from falling on anyone outside the country. (E.g., many of the bondholders are German and French banks, and the guarantee saves their a**es.)