11 May 2013

Let's Meet at Six Corners

My hometown, Springfield, MA was the subject of a good news/bad news piece on "60 Minutes" last Sunday. The bad news: it's a city with assault rifle toting drug dealers. The good news: a counter-insurgency program appears to be working. Social Darwinism meets police with a clue. One of the better known areas of the city was/is Six Corners, home (in my youth) of the "Six Corners Cafe". Six Corners is named for the fact that three streets intersect, with no traffic island (roundabout, in Brit speak). Well, the last couple of days have revealed a three-way confluence of quant/econ issues.

First, Texas remains antediluvian, happy in its brand of social Darwinism in the wake of exploding fertilizer.
Texas has always prided itself on its free-market posture. It is the only state that does not require companies to contribute to workers' compensation coverage. It boasts the largest city in the country, Houston, with no zoning laws. It does not have a state fire code, and it prohibits smaller counties from having such codes. Some Texas counties even cite the lack of local fire codes as a reason for companies to move there.

Next, reports that Germany recovers much better than the US or the rest of EU (follow the link for the text).
The euro zone's troubles have helped Germany's export-oriented economy. The weak euro has made Germany's exports more competitive against those of countries with which it competes, most notably the United States and Japan. Since the end of 2007, the euro is down about 10 percent against the dollar and about 20 percent against the yen.
Were the euro zone to break up, there is little question that the value of a new German mark would rise sharply, while the currencies of many other members of the zone would fall relative both to the mark and other international currencies. That would depress German exports.

Finally, a Wall Street Fat Cat argues that more social Darwinism is the key to EU recovery.
Take autos. The European automobiles industry resembles that of the United States, circa 2009: too many factories employing too many workers, able to make more cars than the market can absorb. And, doing it too inefficiently. A Fiat autoworker in Poland produces three times as many cars as a Fiat employee in Italy and is paid one-third as much.

This is an intellectual Large Hadron Collider: three (seemingly) separate avenues of stupidity running head on at Six Corners.

Let's start with the Fat Cat's argument. By cheapening Italian labour, Germany will have a smaller market for its goods in Italy. And by reducing wages in a significant sector of the EU economy, there isn't any hope that this will, ceteris paribus, increase demand for automobiles. This is the classic deflationary spiral, writ specific. Recovery requires that income be distributed to those who don't currently have the means to pay for goods. Sending lots of moolah to those who've no need does nothing, except bid up stock prices, which is what we have here in the US.

So, what's Texas got to do with it? Just Germany exploits a common currency among disparate nations, Texas exploits a common currency among disparate states. Without the support of the dollar (and excessive in-flows of Federal dollars, fur sure), Texas wouldn't be able to freely arbitrage against higher wage states. The problem is that this gag can only work for awhile. Germany has been exploiting its weaker cousins, just as Texas does to its citizens here.

Germany, it seems, is beginning to figure out that it can't have its cake and eat it too: it depends on exports, both to other EU countries and the US. Export based economies tend toward draconian monetary policy, for other countries of course, since exchange rates impact profits ex-nation.

In the end, Germany and Texas are utterly dependent on other states (upper case and lower case). Texas, in particular, exports poverty, but can only get away with this because it's in the dollar and gets a substantial amount from DC. Or, in Romney-speak the 47%. One of the measures commonly used is the ratio of taxes to DC by expenditures from DC. The more accurate measure is per capita DC flows. Texas wins, in a sense, because it can exploit a common currency and Federal dollars. Fat cats do well, but the average Texan, not so much.

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