Political Delusion

Political Delusion is the idea that distribution of wealth over regions only counts if they are separate nations. Otherwise, who cares. Scott Sumner suffers the problem, and here Karl Smith demonstrates it:

This is why having your own currency is a really big deal. You can sell Greek bonds for Euros and then use those Euros to buy German output. Its entirely possible for Euros to be drained out of the Greek economy by a Sovereign Debt Crisis. This means that a crisis of confidence in Greece could create a monetary shock to the Greek economy and a monetary boom to Germany at the same time. They use the same money.

For the US this is not really possible. You could sell out of Treasuries and into Dollars and then hold the dollars. However, its not really clear what that gives you. Moreover, by pulling dollars out of the US economy and holding them, it gives the Fed room to print more dollars and buy up the US debt.

In other words, if California is drained of dollars that go back to the Eastern Coast, then it doesn't matter, because California is not a national boundary.

This problem is deep. For example, economic studies of mal-distribution in the USA should be based on the Congressional district, that is the closest match we have to a fair sampling. But economists cannot get that data because state governments aggregate it.

In California we four Greeces with no sampling boundaries, we have zero data, except anecdotal, to measure comparative distributions. Even the Tax Foundations 2005 data on the relative return to states for each federal tax dollar is a skewed result because sample sizes are so variable.

Think of DC as Germany, and Los Angeles as Greece. Los Angeles is forced to purchase 40% of its government services from a nation 3,000 miles distance. Los Angeles is so seriously underrepresented in DC that they are almost assured that dollars are drained continually back to the Eastern Seaboard.