The fiscal cliff, a reader request, and which new states will there be?

Celestus, a loyal MR reader, asks:

A couple suggestions:

(a) The “fiscal cliff.” Whether it should be avoided, and how it should be avoided assuming that politics requires it be so. [I did a search for “fiscal cliff” with no results; apologies if it has been covered using more generic language].

(b) Name the 51st through 55th U.S. states, including Gingrich Moon Colony or N/A as necessary.

The fiscal cliff has a few quite different components, ranging from expiration of the Bush tax cuts to the AMT to automatic spending cuts, and each year you can toss in the Medicare doc fix as well.  Most economists agree the best solution is no fiscal contraction now, but fiscal consolidation later on.  That said, most economists should recognize (but often do not) that “fiscal consolidation later” is very often a myth.  If it were “now or never” should we do fiscal contraction and cause a recession but restore some fiscal sanity?  The correct answer will boil down to your probability forecast for “fiscal contraction later.”  It’s tricky, though, because for a low enough probability of “fiscal contraction later” you end up believing that “fiscal contraction now” isn’t possible either, and then what is the original question about anyway?  The original question appears to be straightforwardly normative, but it embodies hidden assumptions about which counterfactuals one is willing to entertain.  It’s the counterfactuals assumptions which are often doing the work in generating the fiscal policy recommendation.  Many people writing on this topic don’t make that clear.

Ideally we should bring more and more taxpayers under AMT-like rules.  As for the Medicare doc fix, I would cut reimbursement rates whenever I could, and without fear of much fiscal contraction.  The health care sector is growing in any case and full of price discrimination and other price oddities.

I don’t think we will have extra states, but the most likely candidates are the obvious, starting with Puerto Rico (a very clear first choice), Alberta, and the Maritime Provinces.  I would bet against all or any of those becoming states, if only because of the extreme status quo bias when it comes to sovereignty.  Why give it up?  Even bankrupt countries are reluctant to give it up.

Comments

"It’s tricky, though, because for a low enough probability of “fiscal contraction later” you end up believing that “fiscal contraction now” isn’t possible either…"

Agh.. agh.. agh (aghast!). NOW. Get it over with!

Is the definition of advanced development "can't take no pain ever"?

Why do Americans assume Canadians fervently wish to be part of the United States? It's a little bit like thinking everyone person in the bar wants desperately to make out with you; not impossible, but mostly improbable, and somewhat delusional.

Look at it this way: would the U.S. easily welcome millions of people who have strongly defined views on universal health care, defense spending, government support for the arts, minority language rights, centralized authority, appropriate tax rates and reasonable gun control?

Come on people-if anything, places like Alberta would fly solo.

Why do people assume Americans fervently wish Canada were a part of the United States?

People who make predictions that one, or more, or most, or all Canadian provinces are plausible candidates for statehood are responsible for this.

Maybe it's a silly conversation (Name the 51st-55th state) but, if forced to answer this, geographic and cultural proximity are key variables, no?

And saying " I would bet against all or any of those becoming states..." doesn't sound to me like a "fervent wish".

"Maybe it’s a silly conversation (Name the 51st-55th state) but, if forced to answer this, geographic and cultural proximity are key variables, no?"

The other possibility is that the question is itself flawed. If the only candidates for statehood that you can think of, apart from various insular possessions, are constituent units of a country that hasn't shown any signs of cracking up, maybe that country shouldn't be named.

Agreed that the OP was rather more moderate than others. That still doesn't mean that Americans who favour territorial expansion at the expense of other nation-states won't get a lot of press.

Americans look at Canadians at like us, only more sane.

I've been told the maritimes have a law stating that if Quebec seceded, then the maritimes would apply for US statehood. I'll leave it to the more interested to verify.

So there's always someone at the bar who wants to make out with you. It's just a matter of whether you are willing to lower your standards.

For starters, the Maritime provinces are each three separate provinces, not half-cantons or anything like that. There is no central legislative body of any kind that can pass legislation. At most, there are intergovernmental agreements.

There is no law regarding American statehood in the event of Quebec separation that I've heard of. (I'm from the Maritime Provinces, incidentally, from the very smallest.) There is little interest in becoming politically American, as opposed to engaging with Americans. Yes, this might change if Quebec secedes and Atlantic Canadian membership in Canada becomes problematic. ("Might": exclaves can be quite viable even when small if the people involved want it, as Kaliningrad demonstrates.)

Newfoundland, granted not a Maritime province though pretty close, seriously considered joining the US in living memory. And given its wealth relative to the rest of Canada, its history of somewhat poor relations with Ottawa (which seems to think Ontario+Quebec=Canada), it might be willing to take a better deal and would be quite a prize.

The problem with these predictions is that they're contingent on a messy breakup of Canada, which is pretty darn unlikely even with the Quebec situation.

True, but the Newfoundland interest in statehood belonged to the pre-Confederation era, to the 1930s and 1940s when Newfoundland was politically altogether separate from Canada within the Commonwealth, with a failing economy, and ultimately looking for some larger richer nation to attach itself to. Since the United Kingdom was unable to subsidize an autonomous Newfoundland, the United States wasn't very interested, and the idea of becoming a province of a Canada that already had close economic and cultural ties to Newfoundland appealed, the latter is the option that took off.

The situation a human lifetime later is different: the Newfoundlanders I seem to know identify as Canadians (alongside being Newfoundlanders).

I'm not sure that even a messy breakup of Canada would work, if it is very possible to start with. If Quebec became a separate nation-state, the remainder of Canada would still be viable on its own; analogies with Austria-Hungary, the Soviet Union, or other multinational states which broke up overlook the homogeneity of the remainder of Canada.

Why do you assume Canada would have a choice about being US territory?

Conservatives want to take the US back to before the New Deal, but part of the problem with the Great Depression is that last land rush handed out dry prairie which blew away when plowed, so the traditional economic stimulus spending of removing Indians to give away their land couldn't be used in the 30s (and it didn't work in the 20s). No place left for gold rushes either.

So, the Romney stimulus will be to declare war on Canada and invade, using a claim like Reagan when he invaded the British Commonwealth of Grenada. Then the Canuck Removal Act will herd the occupants to New England and Florida, to allow for land rushes instead of unemployment and welfare.

Back to the 19th century invade and expand economic stimulus.

And I'm sure someone is still harboring a grudge over 1812 and the failure to march all the way to Montreal, instead of stopping to let Canadians do regime change and petition to join the USA.

I spend about 9 months of the year in the Bahamas. I have told many, visitors and locals, that the Bahamas is better qualified to be the 51st star than Puerto Rico. It is geographically, culturally, and economically much closer to the US. Becoming a US state would bring significant benefits to Bahamian citizens.

The barriers to Bahamian statehood are (1) being a "foreign country" is a significant part of their tourist appeal strategy (2) the political and business elites profit from the tax and trade overhead of nationhood and (3) Bahamians are very conservative and slow to change.

Youth unemployment, infrastructure decay, lack of education funding, etc., are real problems today that are causing present suffering and will reduce the productive capacity of this country for an extended period.

The markets are willing to lend us vast sums for 30 years at a nominal rate of 2.75% and a real rate of 0.5%. What does this tell us about the market's fears of fiscal problems.

So, we have an existing disaster that will make our future worse (including by reducing our capacity to pay debts) and the possibility of having a future problem of paying debts (with the market giving us signals about its level of concern). Which problem should we focus on?

By the way, I'm old enough to remember when Clinton was president and we ran surpluses.

With spending around four trillion surely there is room to finance this amazing projects without getting into debt even deeper?

"What does this tell us about the market’s fears of fiscal problems."

I think not what you think. It is telling us that a large part of the rest of the world is screwed. So, we should definitely borrow long so we can retire our short borrowing. And if you have ideas that are public goods and not cash transfers I'd listen because we should definitely move away from the cash transfers toward projects that have long-term ROI instead of the cash transfers that are choking out ROI and have negative returns by themselves without even considering the opportunity costs.

Can the US borrow long at low rates?

Relatively or absolutely? I'll start with what I know for sure: I don't know. If they can, we should, if they can't perhaps we are already screwed.It seems we have low absolute rates, but a higher than historically average spread due to rate uncertainty, but if rates go up in the future then that's fine. If they go down then that's fine too, we have a long way to go before we run out of bonds to sell.
http://www.reuters.com/article/2011/09/01/us-bonds-debt-extension-idUSTRE7803QD20110901

"The markets are willing to lend us vast sums for 30 years at a nominal rate of 2.75% and a real rate of 0.5%. What does this tell us about the market’s fears of fiscal problems."

Under present conditions, it tells us very little. For one thing, how much of those "vast sums" was either purchased or financed at even lower rates by the Fed? On John Taylor's blog, he calculates that 77% of the increase in public debt in FY11 was bought by the Fed. Which as we know was buying at very high prices to drive rates down. What does that say about the market? It tells me that the market is highly unlikely to finance $1.1T of US govt debt at these rates without Fed subsidy. That a free market rate is probably a lot higher.

Do you ask the question "The Fed is willing to lend to banks at a nominal rate of 0.5% and a real rate of negative 2.75% What does that tell us about the Fed's fear or bank insolvency?"

Other technical factors are at work. European banks are buying Treasuries using similar low rates from the ECB. There is a significant currency-that-will-still-be-there premium in the USD now that may not be there in 30 years. The number of governments whose debt will be taken as collateral is dropping. Also so much cheap money is being created that there are hardly any markets liquid enough to hold it. Do you view any of these as permanent multi generation conditions? I don't.

Lack of education funding! Surely you jest?

At some point I would think "fiscal consolidation later" becomes "fiscal consolidation now" and won't get done either, for the same reasons we don't do it now.

Maybe we need the Bugs Bunny approach to fiscal policy:

Sorry, here's the link:

http://youtu.be/LyPFQKpRnd0

" Even bankrupt countries are reluctant to give [sovereignty] up."

Then again, how many bankrupt countries have neighbors with the same main language, a stronger economy than their own and a history of admitting new states to the union? ;-)

Are you suggesting that California become part of Mexico?

No I think he is suggesting that Michigan become part of Ontario. :) Check out the economic stats of each.

I'd be willing to trade Michigan and Maine for British Columbia. Think of it this way, Michigan has already had a Canadian governor, and Steven King might be able to get some new material.

Would statehood for Puerto Rico be an decrease or an increase in it's sovreignty? I had always assumed the statehood debate there was more about pragmatic, economic issues, but I know hardly anything about it.

I suppose you could say that statehood would cut off any realistic chance of eventual independence. But the very fact that the place is not already independent is presumably because the status quo bias is working *against* the desire for sovreignty.

If I were to guess, I'd say either the District of Columbia, or the division of California would result in the next US state.

My fantasy has always been to split California at least 2-ways, New York into NYC and NYS, Illinois into Chicagoland and downstate, maybe Florida into 2 or 3. Not sure how to split Texas, but at least 2. Possibly throw Penn into the mix. Roughly in that order of priority (Texas may move up).

Would like to divide DC into the federal part (roughly State Dept to White House to Union Station down to the Anacostia--minimize the residential component) and everything else is New Columbia.

There is some basis to the idea Texas can be split into five states. As for what those would be, Dan Jenkins identified five distinct regions for the state in his novel, "Baja Oklahoma."

The most logical split for Florida would be

1) South-East Florida/Greater Miami: This would contain the Florida keys, the everglades, the entire Miami area and the East Coast metros going from Ft. Lauderdale up to West Palm Beach. This would contain approx. 7 million people, voting preferences would probably be most similar to present-day California.

2) West-Central Florida/Orl-ampa: This would contain the West Coast starting at Naples and going up to the armpit. In the latitudes that overlap with Greater Miami this would contain most of the width of the state (approx anything West of Lake Okeechobee). Most importantly this contains the entire Tampa and Orlando area and extends North to Gainesville and Ocala. Would contain probably 8 million people, voting preferences would be most similar to present-day Texas.

3) North Florida/Panhandle: This would contain the entire panhandle from the Pensacola to Jacksonville (including the existing state capital of Tallahassee). East coast holdings would extend slightly south to include St. Augustine and Daytona Beach. Population would be about 6 million, voting preferences would most closely allign with Georgia.

Having lived in Florida I'd just split it in two: everything from the I-4 corridor (including suburbs north of the actual freeway) south into one state, and everything to the north in another.

And central Florida most certainly would not vote like Texas-- it would be much more like Ohio, a true swing state (which is hardly surprising since much of the population is Great Lakes transplants)

"New Columbia" would far and away be the smallest state by both area and population, which means residents there would have the greatest voting power per vote of all US Citizens. Given that DC already contains a super-high concentration of powerful political elites, DC statehood would basically result in handing even more power to the already powerful. It makes no sense.

It makes much more sense just to give the non-federal portion of DC back to the State of Maryland, where DC residents could vote for Maryland Senators, and where they would represent just one of many Congressional districts in an already not-that-large state.

It's population would be larger than wyomings

I stand corrected. I believe this is a fairly recent development. Still, it is hardly an argument for DC statehood that their population is now slightly higher than our least populated state.

DC has always had a larger population than Wyoming. And at times has been larger than other states.

BTW, I love how population was relevant when you thought DC was so much smaller. But now that they're not, it isn't. Don't let a change in facts change your position.

Also, DC does have some wealthy people, but it also has some very poor people. And sicne when is being wealthy a reason for political disenfranchisement?

Northern California and southern Oregon would be carved into the state of Jefferson. Eastern Washington and the Idaho Panhandle have long wanted separation from Olympia and Boise respectively. Columbia would be a good name.

So true about status quo and sovereignty.

I felt that the US should have offered to bail out Iceland and offer Iceland statehood (yes, it's instantly the least populous state... That's okay.) In response, Iceland gets a huge amount of investment, and the US is perfectly positioned to monopolize the Northwest Passage as Arctic ice melts.

Given the track record of the indigenous populations of previous small island nations annexed by the United States, why would Iceland have even considered such an offer?

I'm not saying that they would have seriously considered it, but the fact that there was not even an offer should have been addressed.

You understand that Iceland is culturally rather different from the US, no? I can't really imagine either Icelanders tolerating being part of the US or the US tolerating Iceland as a state.

Of course. So what?

Besides, the desire to have cultural differences causes so much economic loss across the entire planet, it's horrific.

What are you talking about, "culturally rather different"??? There are parts of Minnesota that like hot blonde women, bad heavy metal, iceberg lettuce and pickled fish.

Joining the European Union as a member-state is problematic enough. Being annexed into another, much larger federation is another.

Offering to help Iceland out in exchange for ending Icelandic statehood would look _really_ bad,

The treaty that admitted TX to the union provides TX a right to split into multiple states. I think up to 5. I have never understood why its political class has not availed themselves of the option as it would give them all many more career opportunities.

I believe they lost that option when they were readmited to the Union post civil war

That treaty is something of a myth-- and would have no force at all since one of the nations that signed ceased to exist. However large parts of the original Republic of Texas were calved off from the state of Texas and are now part of New Mexico, Oklahoma, Kansas, Colorado and (a tiny bit of) Wyoming.

However any state can subdivide into new states provided Congress admits them to the union. Maine and Massachusetts are the result of such a split.

It's not a myth. Here is a decent summary.

http://www.snopes.com/history/american/texas.asp

What would you say is the relative likelihood of adding states vs. losing states? I lean toward the latter, say 40/60.

Come to think of it, going over the fiscal cliff may be the trigger for successions.

I think you mean "secessions," not "successions."

Damn you, autocorrect!

I'm with you. My specific story is that with the depopulating and drying Great Plains as a buffer, West and East decide it's better to go their separate ways. No sooner than 25 years; no later than 50 years. Assorted issues hold the 11 Western states together.

I am also amused by the rural red portions of various states that think they would somehow be better off if they could secede from their urban/suburban neighbors. My first question in such cases is simply, "Have you looked at the size of the hole that will exist in your education, transportation, and other infrastructure budgets when the subsidies you get from the urban/suburban areas disappears? Have you discussed the necessary tax rates to fill those holes, or the cuts in services that would be necessary, with your neighbors?"

Oregon seems ripe for breaking up into three or more states: Willamette Valley, Eastern Oregon, State of Jefferson and possibly a coastal strip. The areas have deeply different economies, and the state itself routinely faces the highest per capita budget deficits — and every region is convinced it's subsidizing the other regions.

It worked for West Virginia, although there were other things going on at the time.

Perhaps Tyler could enlighten us as to why he believes that Alberta, or the Maritime Provinces are likely candidates for American statehood? As a former Maritimer who vacations annually there and has many friends and family there I have never heard such sentiments from residents.

Finch, as for "Newfoundland's wealth relative to the rest of Canada" maybe you can enlighten me. Has the net outflow of people stopped? Is the unemployment rate lower than other provinces? Young college graduates in Canada that I know of go to Toronto or Calgary (Alberta). I don't know of any that have gone to Newfoundland.

Newfoundland is second only to Alberta in GDP per-capita for Canadian provinces, right? It's all oil money and hydro power money. Yes, my understanding is that the population flow is in the other direction now, stemming what was going on in the wake of the fishery collapse.

For what it's worth, I think the probability of part of Canada leaving for the US is extremely low.

I don't know about GDP per-capita but I know that won't get you a job. :)
http://en.wikipedia.org/wiki/List_of_Canadian_provinces_by_unemployment_rate lists unemployment by province as of April 2012. Newfoundland has the highest rate of any province at 12.3% vs 7.8% in Ontario and 4.9% in Alberta while the rate for the nation is 7.3%, lower than the current US rate I believe.

The actual substantive reason no new states are forthcoming: no one divulges their plans for accommodating more white stars on the flag's blue field.

Also, there are too few states. Please add five. I am not a crackpot.

(If the Democrats were ever in real danger of actually controlling Congress, I suspect we'd be looking at South Utah and East Wyoming in pretty short order. But I don't expect to see it myself.)

Divide Idaho into two states by carving out Ada and Canyon Counties (the cities of Boise-Nampa-Caldwell) to form the new state of "Canada." (Note: this may require the country of Canada to change its name to avoid confusion.)

Sumner Critique, Sumner Critique, Sumner Sumner Sumner Critique...

I actually think Gingrich Moon Colony is likely to beat any Canadian province to American statehood. The status quo is quite powerful, as Tyler noted, but if enough Americans landed on the Moon they'd either have to join the US as a territory or declare their independence. I don't know which way they'd go, but "new territory" seems more likely to create a State than inheriting any from another country.

A dark horse candidate could be Cuba though. If the Castro brothers finally throw in the towel, and enough Cubans return to the island from their exile in the USA, it might happen democratically. There's 1.5 million Cuban-Americans according to the census, and they would have disproportionate economic impact (due to wealth created in America) if they returned to the island en masse.

As I understand it, any moon colony joining the US or declaring independence, would both be prohibited by the Outer Space Treaty of 1967:

"The exploration and use of outer space shall be carried out for the benefit and in the interests of all countries and shall be the province of all mankind.

"Outer space shall be free for exploration and use by all States.

"Outer space is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means."

I can't find it right now, but I recall reading a lengthy and thorough legal analysis of how this treaty and similar international law make space colonization and long-term off-Earth habitation legally and politically impractical, if not impossible. Barring major changes in space travel, the value of space resources, and outer space law (all highly unlikely within the next century, and probably never going to happen ever), we humans are stuck on Earth. Space colonization as means of creating new political units is even more absurd than seasteading (which also will never work).

At some point there will be actual people living on the moon, and they might take a pointedly different view of the Outer Space Treaty of 1967.

"At some point there will be actual people living on the moon"

But will there be, really? Or will the legal barriers from treaties like the above, and the goverments involved, combine on top of the already immense physical and economic barriers to prevent any real off-world settlement? That's the question.

do they define outer space? I would assume it refers to the actual space (like a right of way) and not the moons, planets, asteroids. Why would anyone cede rights to rich resources?

Yes, it does include planets, moons, and asteroids; everything outside the Earth is part of "the common heritage of mankind", which was, in fact, first specifically enunciated as a principle in that 1967 treaty. More specifically, Article One reads:

The exploration and use of outer space, including the moon and other celestial bodies, shall be carried out for the benefit and in the interests of all countries, irrespective of their degree of economic or scientific development, and shall be the province of all mankind. Outer space, including the moon and other celestial bodies, shall be free for exploration and use by all States without discrimination of any kind, on a basis of equality and in accordance with international law, and there shall be free access to all areas of celestial bodies.There shall be freedom of scientific investigation in outer space, including the moon and other celestial bodies, and States shall facilitate and encourage international co-operation in such investigation.

Treaties like this will be junked the minute there is economic or political benefit to doing so.

That said, I agree there may well not come a time in any of our lives when there would be any economic benefit to colonizing places outside earth. It took millions of pounds of rocket propellant to get a relatively small capsule to the moon and back and technology in this area has sadly not progressed much since the late 1960s. But if blasting out of earth orbit ever becomes cheap and if people discover valuable resources outside of earth, the outer space treaty will go the way of Spain's claim to the Western Hemisphere or Kellogg-Briand Pact.

"But if blasting out of earth orbit ever becomes cheap and if people discover valuable resources outside of earth…"

The problem isn't getting "out of Earth orbit", it's getting to Earth orbit from the ground. As someone (it might have been Heinlein) once put it, "Low Earth Orbit is halfway to the universe," at least in terms of energy to overcome gravity. And basic physics ensures that leaving the surface of the earth will never be "cheap." It will always require approximately 62.5 megajoules of energy per kilogram lifted to escape completely the gravity of Earth.

62.5 megajoules is worth about $0.20 if you buy it in the form of coal.

The problem isn't a basic physics requiring vast amounts of energy, it's that we lack the technology to efficiently and cheaply transfer that energy to high velocity launch vehicles.

Would Cubans want to be taken over by Cuban-Americans and annexed to the Union, though?

The only country that has willingly given up its independence to another country is East Germany to West Germany, there for the reason that there wasn't a separate East German identity.

There are other examples:
Newfoundland
Texas
Scotland
Arguably Austria in 1938
The various historical states that now make up Germany and Italy

I'm sure there must be many more

On the new state issue: the best answer is that the union is now 'complete' and has reached its final form, and any changes to makeup of the states would be part of a parcel of massive constitutional, political and social changes, such that would mark it as the end of the 'ancien regime' of US political life.

I doubt Puerto Rico will become a state. Fundamentally, most Puerto Ricans are conceive themselves as a nation, and Americans perceive statehood has become part of the American nation. Once both of these view are widely accknowledged, mutual interest in statehood will decline.

I could see California splitting into two or more different states:

it could be Coastal California looking something like an American equivalent of Chile with the inland keeping the California name. I would suggest Coastal secure water rights prior to the split.

It could be Southern California and Northern California in the shape of a ying and yang stretched north / south. The south would be comprised of the more conservative coastal Orange County and San Diego with the inland Imperial, San Joaquin and Sierra Nevada regions to I-80. The North being LA, central coast and Bay Area and and all California north of I-80.

Ukraine. They've got a better chance at making it into the US than into the EU -- the EU has clear admission standards and the US doesn't.

The way things are going the EU may end up trying to join as part of the Ukraine.

How about a split in California to North California and South California? Seems more likely than any part for Canada. Splitting some of our larger states seems like a sensible idea.

"Name the 51st-55th states..."

Perhaps it's more likely for territory to secede from the Union before another state joins. Potential candidates are Alaska, Hawaii, some combination of parts of California / Oregon / Washington (Cascadia), Lakotah,

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