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California and Greece

by Elaine Schwartz    •    Feb 23, 2010    •    274 Views

An SAT question:
California: US = Greece: EU.

California and Greece are similar because…
1. California and Greece have debt problems.
2. Both have government employees with salaries and massive pension liabilities that they have to cover.
3. Both would benefit from a central authority guaranteeing any future borrowing.

When California asked the Obama administration for guarantees in order to borrow more money, they said no. As a result, last July, California had to issue IOUs temporarily to pay some of its obligations.

Similarly, Greece would benefit from financial assistance. Most expect Greece will receive support from other EU countries.

Saying that, “we already share: our Mediterranean climate, our spectacular wines and our Austrian-born governor,” the LA Times suggested that California try to join the EU.

The Economic Life
The dilemma is timeless. The questions are the same. How can we enforce central monetary power when fiscal authority is decentralized?

In 1787, functioning under the Articles of Confederation, we had thirteen states with individual currencies and governments and taxing authority. If a state wanted to borrow more than it could afford, no one could stop it. If a state did not want to collect its federal taxes, no one could make them. If they did not want to contribute to payments on the national debt (from the Revolutionary War) they did not have to. And yet, the actions of individual states affected everyone else. Believing we needed a stronger central government, Alexander Hamilton and others like him convened a constitutional convention during a very hot summer in Philadelphia. We wound up with our Constitution and a powerful central government.
Now when California has a major debt problem, central monetary and fiscal power can be used. As a result, on an SAT, while we probably should not equate California and Greece, the issues are similar.

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