The Confederation of American States We propose the materialization of the Bolivarian dream of a Confederation of American States including the United States and Canada. That is, to include all the countries of the American hemisphere from Tierra de Fuego to Alaska. The capital of the Confederation of Bolivarian States that we are proposing could be placed in the Dominican Republic or Puerto Rico, not only because it is in these two countries where born the first two political parties who propose the Confederation of the Bolivarian States and which are Partido Bolivariano Dominicano and Partido Bolivariano de Puerto Rico, but because their geographical positions located them in the heart of the Confederacy. Other places with central location would be Venezuela, Colombia, Mexico and Florida. The Confederation of American States, in contrast to the European Union would be based on an agreement between all the Member States so that each State keep their national currency. The Central Bank of the Confederation of American States would have two important tasks: 1. maintain the rates of exchange between the different currencies so that balance of current account Bcc be in equilibrium in each country with the rest of the members of the Confederation, with special interest in the trade balance and the balance of services. 2. keep tax rates in each State country of the Confederation on interest from bank deposits belonging to persons who are not residents of the country where they have their bank deposits. What is the reason for the two previous measures? The purpose of the first measure, consisting of fixed exchange rates that keep in balance the balance current account of every country, is the achieve the maximum benefit of the productivity gains generated when each country specializing in the production of those goods where they have absolute advantages or comparative advantages. The purpose of the second measurement is twofold. On the one hand, avoid countries with strong currencies to increase their level of savings above the economy's capacity to absorb the savings CEAA and to bring about the recession. On the other hand, the other purpose is to avoid that countries with strong currencies remain overvalued their currency, hamper so that each country generates maximum productivity as a result of the specialization of each country in the production of goods and services where they have absolute or comparative advantages. While more overvalued is the currency of a country, most moves that country and others who traded with him to achieve the maximum of specialization, and therefore productivity, in the production of goods where they have comparative advantages. As a result, Neofisiocratica theory tells us that fail to create the two previous measures generate that part of the benefit derived from the creation of the Confederation of American States and its consequent expansion of markets is lost. These loss of part of the benefits consist that increases in productivity generated by each country specializing in the production of those goods where they have absolute advantage and comparative advantage do not reach their maximum level. That is, the productivity gains generated by the expansion of markets as a result of the absolute and comparative advantages, do not reach their maximum level due to problems of economic imbalances that occur as a result of the differences between the countries of the Confederation in the level of economic development, labor productivity and income distribution (real wages of the workers or the economy average profit margin) etc. The Neofisiocratic Theory from which is extracted the above findings can be seen in the book written in Spanish "Las Causas de la Recesión en los Estados Unidos Alternativas de Acción y Teoría: La Teoría Neofisiocrática". This book can be downloaded by clicking here. The European Union vs. The Confederation of American States The Neofisiocratic theory can explain the problem of the external debt of Greece as a result of the creation of the common currency created by the European Union, that is, as a result of the creation of the euro. The same problem is faced by other countries in the EU such as Spain and Portugal and everything has its origin in the creation of the euro as a common currency. For this reason, the Confederation of American States proposed must be based on an agreement which must have two essential elements 1. Each State must retain its own currency and 2. Each State must commit themselves to maintain their balance of current account in equilibrium. To achieve this second purpose each State will give the Central Bank of the Confederation fixing its exchange rate with the currencies of the other States of the Confederation and the faculty to establish a tax that penalizes the interests of bank deposits belonging to persons who do not reside or are not of that State in each State. The European Union could solve the problems of economic imbalances that now faces if they take the same measure and ends with the existence of the euro as a common currency. That is, each State of the European Union should retain its own currency and give the Central Bank of the European Union the determination of the exchange rate of its currency with other currencies to other States of the European Union. In addition each State must give the Central Bank the power to impose taxes on the interest of bank deposits in each State that belong to people from other countries within the European Union. In this way, each State will keep its balance current account in equilibrium, generating at the same time the rate of change that fosters the exchange of goods and services (equilibrium of trade balance and the balance of services) to the maximum. These two measures will help solve the current problems of Greece, Spain, Portugal, Ukraine, etc. The explanation of the above reasoning is located in the Neofisiocratic theory. According to this theory, every recession has its origin in inequality between saving and spending financed. So several States have a coin in common there should be perfect mobility of resources or factors of production between States and, in particular, the work factor. But there are political, economic and especially cultural aspects that can obstruct the mobility. These obstacles are minimized in the Federation of the United States and that is why the work and capital mobility factor is large. As a result, for a United States citizen living in the State of Arizona or Arkansas or Nevada or Colorado, etc., where the levels of production and employment are low, It is not very difficult to move to los Angeles or San Francisco in the State of California or Chicago in the State of Illinois or Dallas in the State of Texas or New York in the State of New York or Boston in the Commonwealth of Massachusetts, etc. They can move with relative ease because they are politically one country where you can cross the borders of the States without the need for visas, passports or any paperwork, economically the wages and living conditions are similar, culturally in all these States of the territory of the United States is spoken the same language, have ties of kinship, have similar religious beliefs, they dress in the same way, the discrimination on ethnic grounds are similar, etc. That is the reason why in the United States do not exist the unemployment conditions that lead a State to borrow to attend a destitute population. The work and capital mobility factor have to act as compensating mechanisms before the imbalances between one State versus another State production levels. The same goes for the Mexican or Russian Federation. They may have a common currency as it has the United States because the political, economic and cultural factors are similar, which facilitates the mobility of factors of production between States of different regions of the country. States or countries of the European Union do not have the characteristics previously mentioned. As a result, the creation of a currency in common generates economic imbalances between States or countries of the union, depending on the level of economic development (productivity) of each State and depending on the level of income distribution that exists in each country measured in terms of the average profit margin in the economy (MG). For a detailed explanation of MG see chapters 12, section 12.3 of the Neofisiocratic theory which can be downloaded by clicking here. These imbalances between States with different levels of development and or distribution of income can be avoided when each State maintains its own currency and is committed to maintaining its balance of current account in equilibrium with the other States of the Confederation as the case may be. The factors that made possible the Federation of the United States are not present in Europe. The conquest of the American West, through the doctrine of manifest destiny, was overwhelming in terms of imposing their language, religion, customs, etc. to the natives or Hispanics inhabitants in those regions. Currently, no State of Europe have the capacity to impose their language to the other States or the Christian religion on the Mohammedan. While in Switzerland, the Federation has been successful by keeping the official three languages (German, French and Italian) that would not be the case of the European Union with more than one dozen different languages. Germany Greece Debt If a State of the European Union have high wages as Germany and France and other States have low wages as Greece, the reason for the wage difference, when you have a coin in common, can have two causes 1. The productivity of labor in Germany or France is higher than in Greece. 2. the distribution of income in Germany and France is better than in Greece, that is, the average margin of the economy MG in German and France goods prices is lower than in Greece. In the first case, if the labor productivity is higher in Germany and France, then it is supposed that labor and capital emigrate to Germany and France. But if in contrast to the United States, there are cultural barriers that hinder such immigration, then, according to neoliberal theory, wages in Greece should be further reduced until the goods where Greece has comparative advantages be cheaper in Greece than in Germany. This form is intended to replace the mechanism of the exchange rate between two countries with different currencies by the mechanism of wage differences between the two countries with the same currency. If the European Union wants to do that, the most efficient way of doing so is that each country of the European Union give the Central Bank of the European Union the authority to determine the average salary in euros for each country in the European Union. But that would be a very key decision from the political point of view because it would bring big protests against the Central Bank of the European Union when it have to take the decisions of lower even more the salaries of EU countries that already have low wages. To avoid the protests, the best is that each country of the European Union have their own currency and give the Central Bank of the European Union the authority to determine the rates of change that keep in equilibrium the balance of current account of each country's. In this way the problems that each country has in terms of low levels of productivity, economic development and income distribution would not have any effect on other countries of the European Union. Now consider the second situation in which the lowest wage in Greece is due to that the distribution of income in Greece is worse than in Germany. According to the Neofisiocratic theory, Greek businessmen would end up generating a treasured excess of savings Aea as a result of a higher than that of Germany and France average profit margin MG, as shown in the graphic M2. As result that there is a single currency (the euro) Greek employers don't necessarily have their savings, that is, its treasured excess of saving Aea, on CD from Greek banks if they can have them in the German and French banks where the economy is stronger and, therefore, offers better guarantees to depositors (risk reduction). Treasured excess of savings Aea by Greek entrepreneurs will cause aggregate demand in Greece decreases and therefore that the recession arise. To combat the recession, the Greek Government does what any government would do under the same circumstances when there is recession, expand financial public spending which is what any government does in a capitalist economic system of market. Loans that the Greek Government take from Germany and France appear as an increase of the Greek debt with Germany and France but are funded with the treasured excess of savings Aea generated by the higher average profit margin MG in Greece and that is deposited in the German and French banks by Greek entrepreneurs. To combat the deficiency in aggregate demand in Greece the Government should borrow and spend the treasured excess of savings generated by Greek entrepreneurs. If the European Union were a single country with the same language, culture, religious beliefs, etc. the immigration of the population of Greece towards Germany and France would be a factor that tends to increase the salary of the Greeks who remain in Greece as well as it tends to reduce the average profit margin MG in Greece and to reduce the treasured excess saving Aea and with it the recession. The level of production and employment in Greece would be less but is because the population of Greece will be reduced. However, the real wage of the Greeks who will remain will increase, improving the distribution of income, or what is the same, reducing the average profit margin of the economy of Greece MG. But as the reality is that there are impediments obstructing immigration, then the region of Greece will accumulate debt with the regions of Germany and France as a result of the treasured excess of savings Aea generate by Greek entrepreneurs. The same reasoning made for Greece applies for Spain, Portugal, Ukraine and all State of the Union with lower wages. But the recession not only affects Greece and countries with low wages. The reduction in aggregate demand of Greece product of a higher average profit margin MG (worsening of income distribution) brought recession, not only in Greece but in Germany and France also. This is so because we can expect that a portion of the treasured excess of savings Aea generate by Greek entrepreneurs and that it generates in turn recession in Greece is not absorbed entirely by loans to the Greek Government. Accordingly, that part of the treasured excess of savings Aea of Greek entrepreneurs that the Greek Government does not borrow has to be loaned to be spent in German or French Government or consumers in Germany or France. Insofar as it is not done it will have a recessive impact on the Greek economy as well as the German and French. If we observe the rates of growth of the European economy, we will see that while Greece, Spain and Portugal are negative, those of Germany and France are very low. However, the economy of England which is the only member of the European Union which did not accept the euro as its currency and kept its national currency is the country of the European Union with the highest growth rate. Note that England maintained a balance of current account in surplus with the rest countries of the European Union which is to say that his Government manipulated its exchange rate to keep the pound depreciated against the euro. For this reason do not allow that the foreign exchange market functions so could reach the equilibrium of the balance of current account. Country 2011 2012 2013 2014 Greece -8.9 -6.6 -3.9 0.8 Spain -0.6 -2.1 -1.2 1.4 Portugal -1.8 -4.0 -1.6 0.9 Germany 3.6 0.4 0.1 1.6 France 2.1 0.2 0.7 0.2 UK 1.6 0.7 1.7 3.0 The solution for Greece and the other countries of the European Union has two steps. 1 remove the euro as common currency, keeping different monetary systems among the members of the European Union. 2. establish a monetary authority for all members of the Union whose main task would be to determine the exchange rates between the currencies of the States of the European Union in such a way to keep in equilibrium the balance of current account of each State of the European Union. Another alternative that has the European Union is the proposal by Germany in the sense of to make the European Union a Federation of States with a central Government that can tax the different States that make up the Union. For reasons of cultural differences previously mentioned this alternative is not very promising because it would be politically very neuralgic the decisions that such Government could do about countries with a lower level of economic development or worse income distribution. The confederation of American States that we propose must have this same feature to make it successful and not suffer the problems that has the European Union at the moment. Large differences of countries in America with respect to the levels of economic development, productivity, real wages and income distribution, would bring the same problems of the European Union if it is established a common currency between the countries of the America. The Neo-Liberal Solution to the Economic Problem of Greece In the circumstance of relative immobility of factors of production and especially the labor within the European Union, what is the solution proposed by the neoliberal model? The neoliberal model proposes decreases in the wage of the Greeks so they lower their price and increase their exports to Germany. It also proposes to increase taxes to the Greeks so that they pay the debt. But if wage reduction does not solve the problem of low labor productivity in Greece or the bad distribution of income in Greece, then this increase in taxes will lead in the long term to continue to expand the financed government spending and keep raising taxes to repay the loans. The Competitiveness of Prices Abroad and the Level of Wages To combat the economic crisis in Greece and the countries of the European Union, the Neofisiocratic theory states that it must finished with the common currency the euro and allow each country to have its own currency. To this approach, German entrepreneurs could argue that if remains a different currency for each country, instead of the euro as currency in common, their products would not compete in prices with the products of a country where real wages are low and, therefore, the labor is cheap. This is a mistake. Neofisiocratic theory, as well as the classical economics theory, establishes that the real wage of a country does not determine the prices of their products in other countries, but that is determined by the exchange rate that is determined at the same time in the foreign exchange market. If a country import more than it exports its currency depreciate and exports will increase until it is establish the exchange rate in which the balance of trade is in balance. According to the Neofisiocratic theory which determines the actual wage in a country is the distribution of income between workers and employers in this country and not the prices of their goods abroad. That is, what determines the real wage that is paying to the workers in a country is the average of profit margin MG in the economy of that country and, accordingly, the internal distribution of income in that country. The benefit that two States can be obtained from the trade between the two lies in the productivity gains generated when each State specializes in the production of those goods where there is absolute or comparative advantages. Consequently, the maximum benefit that both States can be obtained from the trade between them is that obtained when equilibrium is reached in the balance of current account. Therefore, it is a mistake to think that a State which exports more than what it import get advantage of it. When exporting more than what it import, it not make possible that the other State maximize productivity in goods which has absolute or comparative advantages and, therefore, prevents that both countries can achieve the maximum benefit from international trade. The economic structure on which the Confederation of American States that we propose will be organized is discussed in the brief titled: Proposals for a New Bretton Woods Conference and a Redefinition of the International Monetary Fund and the World Bank (Theory of Comparative Advantages of Ricardo and Mill Completed) Walter H. Bruckman Department of Social Sciences University of Puerto Rico Cayey Campus February 2017 The paper presents the theoretical arguments on which to organize international trade between countries and on which to establish banking institutions in charge of regulating international trade. The writing can be downloaded for free by clicking here.