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January 25, 2011

Cantor re-iterates: no bailouts for the states

Story here (via Insty).

Pull quote:

“I don’t think that that [bankruptcy] is necessary, because state governments have at their disposal the requisite tools to address their fiscal ills,” the majority leader said, before going a step further.

“I think some ... have mentioned this Chapter 9 equivalent for states is somehow going to stave off some kind of federal bailout — we don’t need that to stave off a federal bailout. There will be no bailout of the states,” Cantor said. “States can deal with this and have the ability to do so on their own.”

I don't share Cantor's belief that states have the "requisite tools" to solve their fiscal problems, or at least not states like California, Illinois, New York, and New Jersey. The level of austerity and new taxation required to crawl out of the holes they've dug themselves would impoverish the citizenry and degrade their day-to-day life. At the same time, states would have less incentive to deal with the problem of public-employee pensions and benefits, and less leverage with the public-employee unions.

Remember that "bankruptcy" is not simply a legal definition; it is a state of nature. Whether we allow states to formally declare bankruptcy or not, the fact is that many of them are now or soon will be insolvent. Structurally insolvent -- deep in a fiscal hole out of which their tax and fee-assessment power cannot retrieve them. States cannot print money, but they can issue new debt...which they will do until the bond markets force them to stop.

I've often thought that the real economic downturn, the one that will most affect an American citizen's day-to-day life, is when their city or state loses the ability to maintain services. The roads degrade, the streetlights go out, the trash goes uncollected, parks close -- all the appurtenances of civic life disappear, but the taxes keep on going up. At some point, people will simply stop paying. Why continue shoveling money into a hole that has no bottom? States will be desperate to repay bondholders lest they default, but not by beggaring their own citizens. (This is, if you recall, the same scenario playing out in Greece and Ireland right now, and their debts are unlikely to be paid in full for the same reason: the citizens will not stand to be beggared to pay off bondholders.)

The answer is not a federal bailout, certainly. Nor is the answer a grinding decade-long period of stagnant growth and declining quality of life as the various cities and states slowly grind to a halt, their backs broken by pension and healthcare obligations. The answer, whether anyone wants to hear it or not, is a way to repudiate and/or restructure state debt and get out from under the onerous union contracts: legal bankruptcy.

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posted by Monty at 09:36 AM

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