Bankruptcy for States? A Defining Moment for America

BY Glen Tschirgi
5 years, 4 months ago

There is quite a bit of buzz lately over the possibility of allowing States to file petitions under the U.S. Bankruptcy Code.   An article by Mary Williams Walsh in The New York Times yesterday, “Path Is Sought For States To Escape Debt Burdens,” lays out pretty well the gathering storm.

The article begins with reference to the,”crushing debts, including the pensions they have promised to retired public workers.”  This is, indeed, a real problem.   California, one of the worst offenders, is projected to have a budget deficit in 2011 of over $25 Billion.  New York and Illinois are in equally dire straits.

The article points out, ever so helpfully, that:

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

Pardon me while I laugh out loud at this one.  Suddenly The New York Times cares about “high constitutional hurdles” and state sovereignty.  This is the paper that has published secrets about the federal efforts to track terrorists and cared nothing about the Constitution when it came to Obamacare.   Nor did the NYT seem to care about state sovereignty when it was Arizona’s sovereign right to enforce its borders.

The article goes on to report that several members of Congress and experts outside of Congress are debating the merits of a change to the Bankruptcy Code that would allow States to file for federal bankruptcy protection.

As a substantive matter, there are so many things wrong with the idea of allowing States to file a bankruptcy petition that several posts could be devoted to the subject (and perhaps someone will…).  Suffice it to say that: (A) any shred of States’ rights left in this country will be completely and finally buried if the federal government is allowed into State finances in anything like the way the usual debtor is governed under the Bankruptcy Code, and; (B) the moral hazard of allowing States, particularly the spendthrift ones like California, to wipe away debt will indelibly scar all State finances, and; (C) the ability of States to finance necessary capital projects will be severely restricted.   In short, this is Fall of the Roman Empire stuff, folks.

The Panic Sets In

What is more interesting is the underlying tone: panic.

Liberals who have adored the big welfare state are suddenly waking up to the fact that: (A) the gushers of money that always seemed to be there, no matter how high the tax rates were set, have suddenly stopped, and; (B) the voters are finally aware of the problem and actually demanding something other than the usual bailouts and tax increases.

If liberals cannot find new sources of other peoples’ money (0r undo the debts that they have run up), this fiscal crisis threatens to collapse much, if not all, of the liberal policies and programs of the last 75 years by revealing the socialist model as one, big Ponzi scheme that only lasted this long because of the incredible strength and resilience of the American economy.  No more.

So, as this panic sets in, liberals are doing what every spendthrift does when he is finally out of money: he asks his responsible family members for help.  Afterall, it worked last time with the massive, $800 Billion bailout in 2009 that was cynically touted as “stimulus.”   States were allowed to postpone the day of reckoning because Uncle Harry and Aunt Nancy were only too willing to give up the cash.  Amazingly, in just two years’ time, things have changed and Aunt Nancy has been cut off from the checking account.   Liberals know this time will be different.   Liberal bastions like California, New York and Illinois are not going to get a dime from the current Congress.

This is the impetus for Ms. Williams’ article.  Rather than face the utter repudiation and dismantling of their bloated, top-heavy, welfare states, Liberals are opting for wiping out the debts that politicians foolishly promised to their union supporters for decades.   Yes, unbelievably enough, Liberals are so desperate that they are ready to throw the public unions under the proverbial Bus.

The Usual Shock and Awe

Next, note that the call for bankruptcy protection for States comes in a vacuum, as if the enormous budget shortfalls arose magically overnight without warning.  (This seems to be the common, liberal posture:  abject, jaw-dropping, head-scratching surprise when confronted with the real-life consequences of liberal policy).

Should anyone be surprised when a never-ending policy of enlarging State government brings about “crushing” debt?  Was it somehow unforeseeable that adding tens of thousands of State employees each year with ever-increasing pay and benefits, would not, eventually bankrupt the State?  Yet this has been the liberal prescription since Franklin Roosevelt: ever greater involvement and control by Government which, by necessity, requires ever greater Government employment.

A Cancer We Can’t Ignore

Why are the politicians and political class talking about radical ideas like bankruptcy for the States?  To read the NYT article by Ms. Williams it would appear that States are helpless to control their budgets, as if some freak force of nature has descended.  (This, by the way, seems to be part of the same, recurring liberal tactic:  declare a crisis which compels radical solutions which the People are too stupid to understand).  Even if we assume that pension funding is a real and immediate problem, and we further assume that States cannot, as a unilateral budget matter, change pension obligations due to State constitutions, there is an obvious solution which no one seems to see.

It is called the Voter.

The State constitution can be amended to allow for necessary changes.  Go to the voting public and pass laws that will reduce budget obligations for benefits and salaries.  But, for some, strange reason, the politicians do not want to face the voting public.  Why is that?

Could it be that voters are finally starting to see that politicians are largely in the pocket of small but powerful interest groups with policies that run counter to public welfare at large?

So long as the general, voting public turned out in low numbers for state/local elections, public employee groups, while relatively small compared to the registered voting public, have commanded disproportionate power due to their greater focus and energy in mobilizing votes and donations.   They own the politicians and, hence, the political process.

This has led to a growing tyranny of sorts where the majority of Americans are increasingly subject to the whims of small but highly focused, highly energetic special interest groups that work through the political process to manipulate policies to their own, distinct advantage.

This cancer is self-perpetuating.  As the special interest groups, such as teacher unions, capture ever-better benefits vis a vis the private sector, increasing numbers of people are attracted to the group, swelling its numbers with more dues-paying, voting members.   This ever-growing cancer on the body politic will have fatal results for our republic if left unchecked.

California is a textbook example of this cancer of special interests transforming a one-time economic dynamo, blessed with every resource God can bestow, into a pitiful charity case.  This should unnerve every one of us, for if it can happen to California, it can certainly happen to the country as a whole.

And, by all appearances, it is.

If we are going to avoid a terrible fate, we will need political leaders at the State and Federal level that can confront and overcome the special interests.   Chris Christie in New Jersey may be the best example of this.  So far he has taken his message– and not a popular message at that of fiscal restraint– directly to the voters.   He has directly challenged the teachers union, among others, to help right the ship of State.   Note that this can only happen when the average voter gets so disgusted with the state of affairs that they are willing to vote in sufficient numbers to overwhelm the special interest groups.

Let us hope that there is a responsible majority in Congress that will not fall for the panicked calls to bail out failed social policies of Big Government.   And, in the meantime, it would be wise if ordinary Americans who believe in limited government get involved however they can in electing responsible leaders.

  • bob sykes

    The problem in California, Illinois, Massachusetts et al is not special interests, it is the voters themselves. A large majority of the voters in those states want full bore socialism; they just don’t want to pay for it. In the last election, California voters lurched sharply left, and the Republicans became an irrelevant remnant. The Californian budget problems cannot be solved with those voters.

    Residents of our socialist states will resist any attempt to reduce benefits and/or raise taxes. Extending bankruptcy to those states will not solve their problems. Only actual state governmental collapse and the federal impostion of a territorial government will end the problem.

  • Glen Tschirgi

    Agree, Bob, that state bankruptcy will not solve the problem. What I find interesting, however, is the fact that such a preposterous idea is being floated at all.

    As far as a territorial government being imposed by the feds, I would want to know more about how it would be imposed and what it would look like. Is this akin to revoking statehood? I don’t think we want to go there. Also, the federal government has far too much power over the States as it is. If we allow the feds to impose a territorial government on California for fiscal malfeasance, who is to say they will not impose one on, say, Texas, for ideological non-conformity?

    I would say (and hopefully will develop this into a post at some point) that we need to let the voters in States like California feel the pain they have brought upon themselves. The behavior you describe is childish and, unfortunately, they need to be treated as such. No more bailouts from Uncle Sam. I am all in favor of devolving power back to the States and reducing the federal government to its historically and constitutionally limited roles. But it may take a lot more pain before voters are willing to go there.

  • Dave

    Well-written and insightful! Assuming each state’s sovereignty, the logic of the left will eventually lead them to the Fed’s doorstep, which could shoehorn itself into the matter by buying California’s sovereign debt to fulfill its Dodd-Frank provision of being a ‘guarantor of systematic financial stability’. Then the punch bowl returns and the party resumes!

  • bartel pritchard

    “… if the federal government is allowed into State finances in anything like the way the usual debtor is governed under the Bankruptcy Code …” Interesting point – I vaguely knew bankruptcy was subject to federal law, but hadn’t realized the congressional power was provided in the Constitution (Art 1, Sec 8, Clause 4).

  • Herschel Smith

    Sid, both the voters and Brown are in complete denial. You’re far too gracious, and California is undeserving of your contratulations.

    The cuts that must be made go two orders of magnitude beyond what they are willing to sustain. Further, the policies in the state are so business and utility (energy) unfriendly that high taxes and lack of affordable electricity (and the lack of electricity for the foreseeable future given the PUC perspective) is driving businesses away. No new power plants are on the horizon, and neighboring states are not interested in helping Ca.

    California is headed for unmitigated disaster. Nothing Brown can do will stop it.

  • Herschel Smith


    Somehow my spam filter is gobbling up your comments. Don’t know why. I think I have recovered most of them.

    I repeat. Brown and the enviro-nuts in Ca are in complete denial. They can cut the budget to zero and it won’t make any difference unless they build power plants and get industry to return. They won’t do that, and thus they will go down in flames.

You are currently reading "Bankruptcy for States? A Defining Moment for America", entry #6027 on The Captain's Journal.

This article is filed under the category(s) Monetary Policy,Politics and was published January 21st, 2011 by Glen Tschirgi.

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