Ask the Wonks: What would happen if the blue states seceded?

May 7, 2013

Last week, we asked you to submit any burning questions you had for us. This week, we try to answer. Topics include the economics of blue-state secession, the recent apparent slowdown in global warming, boxers vs. briefs, a counterfactual history of Henry A. Wallace, and which Avengers character each of us would be.

Feel free to submit more questions in comments — the plan is do a post like this once a week or so. And don’t feel the need to make them all wonky, as the Avengers question should make clear.

Q: I read an article on The Daily Beast advocating for secession by the blue states. What would the financial results be of such a secession?

A: Maybe I'm just lacking imagination here, but it seems like the results would be terrible. Let's assume that the United States were to break into two countries, one composed of all the red states that voted for Mitt Romney in 2012, the other made up of all the blue states that voted for Barack Obama.

The first big question is what happens to the dollar. Do Red America and Blue America decide to keep a common currency and central bank but disentangle their budgets and issue separate debt? If so, then a split would look a lot like the euro zone — we'd have a currency union but not the ability to do big fiscal transfers. That's worked out miserably in Europe, but who knows? Maybe Red America and Blue America could make it work.

Even in a currency union, there would be major adjustments to make. Back in 2006, the Tax Foundation estimated (pdf) that every single red state except for Georgia, Texas, and Indiana receives more in federal benefits than they pay in federal taxes. If that's still true today, then the federal government of the newly independent Red America would either have to hike taxes significantly, cut benefits, or rack up new debt. That's a lot of austerity all at once.

Alternatively, the two countries could sever all ties and adopt two different currencies. (Maybe the red states want to go back to the gold standard.) Trouble is, that could get very, very messy in a hurry, given the potential for financial chaos and the dollar's importance to the global economy.

There aren't really any good precedents here. Back in 1993, the Czech Republic and Slovakia managed to amicably split into two currencies without too much damage, but that was a vastly different situation — these were two developing countries with little economic integration, and they had strict capital and border controls to limit money flows. A U.S. breakup would be infinitely trickier, and it's easy to imagine catastrophe. --Brad

Q: What would happen if the largest buyers of U.S. Treasury notes, such as institutional investors and foreign governments, decided that the United States was in danger of default?

A: This is going to seem really weird, but it is, in my reporting, the most common opinion: The yield on Treasuries might fall, at least temporarily. That is to say, demand for Treasuries would rise, even as the U.S. was in the midst of not paying off its Treasuries. It's good to be the global-reserve currency.

This assumes, of course, that the default is believed to be temporary. Obviously if the U.S. swore to never pay its debts again, no one would lend to us. But a treasury-market disruption stemming from temporary political gridlock would cause havoc in global markets. The storm would quickly envelope riskier assets ranging from other sovereigns to equities. Millions of people would be thrown out of work, deficits would skyrocket, economic growth would drop off a cliff, etc.

There would, as always happens, be a flight to safety, and that flight to safety would mean more people buying treasuries, as they'd be safer than the world they just destabilized. A miniature version of this effect can be seen in the aftermath of 2011's debt-crisis idiocy, when S&P downgraded the United States because we'd acted so irresponsibly and demand for treasuries instantly ticked up. The U.S.'s global financial position is such that we get rewarded for our irresponsibility, at least in the short-term. 

In the long-term, after things calmed a bit, our borrowing costs would likely rise sharply, and we'd send the world searching for both a new bedrock asset for the global financial system and a more diverse set of reserve currencies. It'd be a really dumb thing to do. -- Ezra

Q: Boxers or briefs? An economic, social and ecological analysis.

A: As with all of life's great mysteries, this question is best answered in chart form. Here's one from James Proszek:

Sadly, the chart doesn't give any guidance as to what to do if you're over the age of 51, but presumably by then you're just supposed to know. -- Brad

Q: The Economist recently ran an article noting that the world has not gotten warmer since 1998. Do we have reason to hope that climate change may not be the crisis we have feared?

A: Here's the Economist article in question, and to my eye, it makes two interesting points. First, surface temperatures haven't risen as much as expected in the past decade, even as carbon emissions have risen fast, and that's a bit of a mystery to climatologists. Second, a few recent studies have suggested that Earth's climate sensitivity — how much the planet heats up in response to a doubling of carbon-dioxide in the atmosphere — might be at the lower end of consensus estimates (currently between 2°C to 4.5°C).

Let's take those in order. The slowdown in surface temperatures is curious, but it doesn't disprove global warming. The science of greenhouse gases is very well established, and all 12 years of this century have been among the 14 hottest since records began in 1880. So the planet is certainly heating up, even if 1998 was an exceptionally hot year:

What the slowdown does suggest is that there may be other short-term processes at work that aren't fully understood.

As Fred Pearce explains here, one popular theory is that all the extra heat being trapped on Earth is currently being absorbed by the ocean — recent measurements have found that the warming of the oceans has accelerated in the past 15 years. If that's the reason for the pause, it's not comforting news, since that extra heat should eventually rise to the Earth's surface in the years ahead, possibly during El Niño events.

Next is the argument about climate sensitivity. Estimates of Earth's climate sensitivity are derived from a wide variety of sources — observational studies, studies of volcanic eruptions, historical paleoclimate data, and modeling. The rough consensus from combining all this research is that the Earth will heat up somewhere between 2°C to 4.5°C every time the amount of carbon-dioxide in the atmosphere doubles. But note that there's always been a range. Studies on the low end of this range add to this work, but they don't overturn it.

In any case, these arguments about climate sensitivity miss a key point. We're on pace to do a lot more than simply double the amount of carbon in the atmosphere by the end of the century (compared with preindustrial levels). Doubling means going up to 560 parts per million. We're currently at about 400 ppm and rising fast. So we're still on pace to blow past that 2°C threshold even if climate sensitivity turns out to be on the lower end of the consensus. --Brad

Q: If Henry Wallace had been nominated Vice President in 1944 instead of Harry Truman, what do you think the country would look like today?

A: Good one! Wallace, who was FDR's VP from 1941 to 1945, was, infamously, not particularly concerned about the threat of Communism, a position for which he would later apologize at some length. As editor of The New Republic (his job after a brief stint as Commerce Secretary following the vice presidency), and during his third-party presidential run in 1948, he was openly dismissive of the idea that the Soviet Union constituted a threat. "Today an ugly fear is spread across America - the fear of communism," he said a campaign rally. "I say those who fear communism lack faith in democracy. I am not afraid of communism."

He was openly supported by the Communist Party in that run, though he ran under the Progressive Party banner. That's hardly a surprise, as he actively advocated the end of the Cold War. But he also gained significant support from civil rights activists for calling for the total end of segregation, not to mention openly campaigning with African-Americans and staying in the homes of black supporters on the campaign trail.

The rest of the Progressive platform was pretty far-reaching, as Wallace biographers John Culver and John Hyde write in "American Dreamer":

It called for the desegregation of public schools, an end to Jim Crow laws, open housing, national health insurance, equal rights for women, public day-care facilities, the minimum wage for farm workers, free trade, immigration reform, the direct election of presidents, home rule for the District of Columbia, indemnity for Japanese-Americans, collective bargaining for federal employees, new soil conservation programs, the vote for eighteen-year-olds, full taxation of capital gains, creation of a federal education department, and admission of Alaska and Hawaii to the Union. It also supported a minimum national pension of $100 a month at age sixty.

Wallace didn't like its call for public ownership of large banks, railroads, the merchant marine, electric power and gas utilites, and several industries dependent upon public funding such as the aircraft and synthetic rubber sectors

Many of those (DC home rule, reparations for Japanese internment, desegregation, federal employee collective bargaining, vote for 18-year-olds, ed department, Alaska/Hawaii statehood, minimum wage for farm workers) are now official policy. We still have a long way to go on equal rights for women but there's been progress since. National health insurance (of a single payer variety) is pretty far to the left by today's standards but it's worth noting Truman backed it as well. We briefly taxed capital gains as normal income after 1986 but that didn't last. Nationalizing industries is another matter, but it's doubtful that if Wallace became president in 1945 he would have pursued that.

So yeah, Wallace would have been a pretty left-wing president. Whether he could have gotten a lot of that stuff passed is another matter, though. He probably would have been a more marked change from Truman on foreign policy, where he would have been freer to pursue rapprochement with the Soviets. Whether that would have worked is a matter of considerable historical controversy, of course. H.W. Brands has argued, somewhat convincingly, that less aggressive policies by Truman could have prevented the Cold War, but plenty of historians disagree. Who knows?

An even more interesting question, at least I think, is how different a President William O. Douglas would be. Grace Tully, FDR's secretary, writes in her memoirs that he agreed that either Douglas or Truman would be acceptable and sent the convention a note saying "either Bill Douglas or Harry Truman." He then sent another missive to switch the order, with the clear intent of biasing it for Truman.

Douglas, of course, spent the ensuing three decades as perhaps the most liberal and civil libertarian Supreme Court justice we've ever had. Whether he would have done more as president is an interesting question. In particular it's easy to imagine Douglas would have been less hostile to Communists, especially domestically. He was the justice who stayed the Rosenbergs' execution and dissented in Dennis v. United States, which established that Communist Party USA members, as advocates of a violent overthrow of the U.S. government, don't have First Amendment speech, assembly, and press rights.

Douglas thought it was ridiculous that owning a copy of Das Kapital was legal but, by the prosecutors' lights, teaching it in a positive light (which is what Dennis and his comrades were charged with) wasn't. "Communism in the world scene is no bogeyman; but Communism as a political faction or party in this country plainly is," he wrote. "Communism has been so thoroughly exposed in this country that it has been crippled as a political force. Free speech has destroyed it as an effective political party."

So I think Douglas would have been more hostile to Joseph McCarthy and the House Un-American Activities Committee (HUAC) than Truman was. He was also far more sympathetic to the Civil Rights Movement than Truman was, having already amassed a strong anti-segregation record on the Court by 1944. His views on the social welfare state are less clear, though he served on FDR's Securities and Exchange Commission and was generally viewed as a New Dealer.

While we're talking could-have-been vice presidents, an even crazier story is the 1980 Republican VP nomination. According to Richard V. Allen, who would become Reagan's first National Security Advisor, there were serious talks at the last minute about naming Gerald Ford as Reagan's running mate, with the two of them functioning as "co-presidents."

Ford, for example, would get to name Alan Greenspan as Secretary of the Treasury and have Henry Kissinger return as Secretary of State under one version of the plan. Another gave Ford the ability to pick the National Security Advisor (presumably Kissinger) and OMB director, and Reagan the ability to pick Treasury and State, but gave each vetoes on the others' picks. However, the deal fell apart at the last minute and Reagan picked George H.W. Bush.James Mann's "The Rise of the Vulcans" has a longer version of the story. Apparently Donald Rumsfeld was miffed that Bush got picked over him, and asked Allen why that happened. Allen replied, "Because I didn't happen to have your phone number handy, and I did have Bush's." That wasn't totally true, as Allen also thought Bush was better politically. But still, what a hypothetical! -- Dylan

Q: If the Wonkblog team were the Avengers, which superhero would each of you be?

A: Um, I'm pretty sure Dylan just claimed the Hulk for himself. -- Brad

I think Dylan is Vision -- Ezra.

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Brad Plumer | May 7, 2013