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How do Capital Markets ease the difference between red state and blue state economies?

18 viewed last edited 1 year ago
Mahesh Godavarti
0

I found the following blog that explains the differences between red state and blue state economies. It makes a claim that Capital Markets ease the differences. I want to understand what capital markets are and what role they play in reducing the differences between the two economies?


https://blogs.cfainstitute.org/investor/2018/03/13/red-states-blue-states-two-economies-one-nation/

Karthikeyan Madathil
1

"Economically speaking, the red states benefit from the blue states through government redistribution and transfers of capital from blue state savers to red state investments via capital markets."


In a closed economy, capital comes from savings. This is why economists like countries with high savings rate - they can generate more capital, hence increasing the productivity of labor and wages.


Countries with lower savings rates (or needs for capital unfulfilled by their savings rate) must attract capital from outside, by providing incentives. India is an example of a decent savings rate, but unsatisfied need for capital. Foreign capital investing in India is incentivized by lower tax rates and other sops.


The blog you quoted seems to be making the following claims

  1 "Red" states have lower growth rates than "Blue" states

  2 This should lead to a consumption deficit in "Red" states, compared to "Blue"

  3  The actual consumption deficit is less than expected due to two reasons

      a. Fiscal (government spending) transfers, where the Federal Government directly spends (or transfers to state governments) money that it receives in terms of tax from another state

      b. Capital market transfers, where money that is saved in one state, and invested in the capital market is actually spent by companies in another state.

Mahesh Godavarti
0
Thanks! I am guessing the following: Capital investment by companies transfers to consumers in the form of salaries and therefore, higher consumption. Why would companies invest in red states? What is their incentive? Cheaper labor and tax incentives? Fiscal transfers also are transferred to consumers in the form of salaries whenever the govt spends on infrastructure etc. Is that correct?
Karthikeyan Madathil
0
@Mahesh As long as the "Red" state is part of a supply chain, it will get benefits of spending anywhere. For example, if Uber puts up a datacenter in a "Red" state, the state gets a consumption boost, irrespective of where the data is coming from. Low growth states do have economic opportunity that's not being met (including future opportunity) for want of capital, which is another reason to invest there. Yes, Fiscal transfers work the way you indicated. In fact, any spending at all eventually ends up as money in someone's pocket.
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