Please oh please oh please
Gahhhh, economics, my greatest pleasure but the source of all my frustrations. Today I am mostly being irritated by the theory of optimal currency areas.
Look guys. It is true that the USA has somewhat higher internal labour mobility than the Euro area. It is not true!!!!!1! that this internal labour mobility equilibrates regional economic differences to any economically significant extent. The Rust Belt happened. Michigan is how it is. The oil states have oil booms and oil busts. Florida is procyclical because of tourism. California had a tech boom and bust.
In actual fact, regional fluctuations in the USA are smoothed out by transfers from central government and by countercyclical monetary policy at the federal level. The USA is NOT an optimal currency area, or even close to being one.
Also not an optimal currency area: Canada. And Germany.
or England.
ReplyDeleteWhat, then, is an optimal currency area, O Socrates?
ReplyDeleteSwitzerland's probably one. And Austria, and the Czech Republic (although this is actually hurting them at the moment - Slovakia isn't part of a euro zone OCA, but is doing better than Czech by being in the Euro). The point is that the economic theory of optimal currency areas is just really not very useful. People who agree with me on this subject: Robert Mundell, who has on occasion ruefully claimed that he'd be happy to give the Nobel back and pretend never to have invented the bloody things if he'd known how much bullshit would result.
ReplyDeleteIt is not true!!!!!1! that this internal labour mobility equilibrates regional economic differences to any economically significant extent.
ReplyDeleteSurely this isn't quite the claim you need to refute? It isn't the regions that are the measure of this, but the people who used to live there and now live somewhere else where prospects are better.
In particular, how Detroit is is notoriously deserted on account of everyone having buggered off.
A child of five might reasonably figure that if Thatcher has just done for your career as a coal miner then you may struggle to get a gig as an investment banker, but I have yet to see much evidence that economic orthodoxy has transcended unreconstructed Tebbitisme. (I admit I haven't looked very hard: overexposure to the optimal currency area stuff when studying an OU course on EU governance left me prematurely jaded.)
Are you sure the US has only "somewhat" higher labour mobility:
ReplyDeletehttp://www.investoralist.com/labour-mobility-still-much-higher-in-the-us-than-europe/
?
Depends on whether you consider the difference between 1% and 2% to be "double the labour mobility" or "they're both way too small to be a material effect on wage equilibrium over the monetary policy period".
ReplyDelete(also, I never really understand how those relative mobility studies deal with the effect of New York City; this is a metropolitan area accounting for about >5% of the USA's population and it's spread over "the tri-state area". The nearest equivalent I can think of in Europe is Belgium-Netherlands-Luxembourg, but that's much smaller.
In actual fact, regional fluctuations in the USA are smoothed out by transfers from central government . . .
ReplyDeleteIf only.
Well, they are a bit, aren't they, Max? The poorer states in the south get quite a lot more federal spending than they pay in federal taxes.
ReplyDeleteI'm not sure what any of the above means, but living here in Florida basically I have no job prospects whatsoever.
ReplyDeleteI can a) go back to work doing website shit (=webshite?)
and or b) be bilingual, and apparently not in the sense of being able to speak fluent Dutch, they're pretty extreme it turns out in what they mean by bilingual
Okay, I sort of see your point, although I'll say this: if you're going to simultaneously criticize the theory of optimal currency areas while giving examples of countries that aren't optimal currency areas, then surely you should specify your alternative working definition/theory?
ReplyDeleteI'd start with Jane Jacob's theory - the optimal currency area is a single metropolitan region. If a smaller metro is forced to use the same currency as a stronger one, it eventually gets swallowed up into that region's economic cycles and loses all economic vitality. See the midwest for an example.
ReplyDeleteajay -- most money is pushed out on an equal per capita basis without regard to regional business cycles or local fiscal capacity. There is no sensitivity to fluctuations.
ReplyDeleteMundell himself believes that the whole world is an optimal currency area (he's a gold standard enthusiast). Personally, I would just unask the question - I don't believe that there are any interesting questions of international monetary economics on which useful light is shed by the theory of optimal currency areas.
ReplyDeleteWell, whether the question is "interesting" or not is surely separate from whether the question and answer has public policy implications.
ReplyDeleteBut I note you found OCA theory sufficiently interesting to write a post saying that Germany wasn't an OCA.
Well, I find it interesting because so many other people (including people I rate and respect) are trying to use OCA as a tool of analysis and getting to really quite serious policy conclusions from it - that's interesting!
ReplyDeleteMaybe I should have used "practical" instead of "interesting" above - it is interesting to know that there's an optimisation problem with respect to the size of currency areas and that it can be solved in principle. But in practice, it's the epitome of a theoretical argument of minimal relevance to the real world.
Second thoughts!
ReplyDeleteActually, my first comment above about the Czech Republic bears some expansion and makes me think that OCA might be a bit more useful than that.
I have a scunner against OCA theory because 99% of the time you see it quoted in policy debates in contexts of some chin-scratcher or other saying that an existing currency area is not OCA, and therefore, because cough mumble we ought to do what I was suggesting anyway.
But actually, I'm implicitly making an OCA argument in that comment and on reflection it's one that I think it's valid - I do actually think that it's probably a bad idea for a country like CR which is effectively a maquilador for Volkswagen to have a different currency from Germany (that was the point of the comparison with Slovakia). It's also clearly a debate that takes place within the boundaries of Mundell's theory, in that whether it's beneficial or not for the Czech crown to exist is entirely going to depend on the benefits of an independent monetary policy versus the costs of exchange rate uncertainty. So - Optimal Currency Areas - useful after all! Thanks Alex.
(note that it wasn't this Alex.)
ReplyDeleteWoohoo! Credit for something that had very little to do with me!
ReplyDeleteRight, so let's say that the eurozone gets a proper fiscal authority. And let's say that the Britons have a Damascene conversion and become eurosexual. Gordon Brown and Ed Balls came up with their five economic tests for joining the euro in the back of a taxi. David Cameron wants to know whether we should join the euro or not. He asks you to give him a set of economic tests on which to help judge this decision. What do tests to do you come up with?
You can imagine you're working this out in any location you might want.
Stuff an OCA. The USA isnt even a national market.
ReplyDelete