Saturday, May 15, 2010

Can democracy, globalization and the nation state co-exist?

Dani Rodrik has an interesting piece in Project Syndacate, that can be found here. He argues that there is a trilemma involving globalization. Three good things are democracy, globalization, and nation-states. Rodrik says that we can have only two out of the three. He uses the Greek situation to elaborate. For globalization to work, either Greece has to give up democracy so the government doesn't provide the social programs the people want or Greece has to give up independence and follow the lead exactly of the bigger EU countries, Germany in particular.

Rodrik raises some interesting points, including a comparison to the US experience of the federal government wresting power away from the states. But Greece can have globalization and its nation state if it hadn't joined the euro zone. Increasing globalization does not require movement to a single currency. Certainly there is a reduction in sovereignty when nations join international groups or free trade areas, but it is a voluntary reduction and limited to certain areas.

Rodrik may prove to be correct. As yet, I am not convinced.

Sunday, May 9, 2010

A United States of Europe?

I am in Germany to teach a short-course for a college on economic policy. The current Euro crisis should provide some interesting discussion. There is also an election today in one of the German states that may be interpreted as a judgment on Merkel's focus on Europe rather than on Germany. From the start, the euro was a political rather than an economic move, even though there were economic reasons for moving to a common currency. I think the political motive was to force more political integration. Clearly, all of Europe is not an optimum currency area. Greece is demonstrating that.

Krugman had a piece recently in which he reconsidered whether Greece should pull out of the euro. Earlier, he opposed it on grounds articulated by Barry Eichengreen. I also found Eichengrfeen's analysis persuasive, but, like Krugman, am having second thoughts. Recently, Mankiw also entered into discussion on the issue, with some pertinent comments.

On many occasions when I have visited Europe, I have asked people whether they wanted the EU to eventually be a United States of Europe. Uniformly, the response to that suggestion is horror. Yet, the elites in Europe who helped organize the EU in the early years, and still exist in the governments of major members (France and Germany in particular), want a United States of Europe. The current crisis may push things one way or the other, and I am not certain yet which way.

Sunday, May 2, 2010

Basics of a Value-Added Tax

Greg Mankiw's article in today's New York Times provides a good and simple explanation of a value-added tax. He notes that it could be very similar to the flat tax offered by Hall and Rabushka many years ago. However, the flat tax has been offered as a substitute for the current income tax and a value-added tax is usually discussed as a new source of revenue for the government. Any discussion in today's political environment will surely be about extra revenue to reduce the deficit rather than an alternative to the progressive income tax.