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For a solution to the euro crisis, look to the states May 18, 2010

Posted by tkcollier in Economy & Business, philosophy & politics.
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Although the 50 states share a currency and each sets its own spending and tax policies, state deficits remain very low. Even California has a deficit of only about 1 percent of the state’s GDP and total general obligation debt of less than 4 percent of state GDP. The basic reason for these small deficits is that each state’s constitution prohibits borrowing for operating purposes. States can issue debt to finance infrastructure but not salaries, services, transfer payments or other operating expenses.

In some states, these self-imposed restrictions go back to the 19th century, a time when excessive borrowing led to state defaults. Those states wanted to assure potential lenders that such excess borrowing would not happen again. Over time, all states adopted such rules to help make the bonds they issued for capital expenditures attractive to investors. Although the states’  balanced-budget rules differ in detail, with some using rainy-day funds to offset cyclical declines in revenue, they all succeed in preventing persistent operating deficits. If the EMU governments were to adopt similar constitutional rules, the interest rates on their bonds would fall.

via Martin Feldstein – For a solution to the euro crisis, look to the states.

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