Talk of introducing legislation allowing states to declare bankruptcy began in earnest in November. A speech by Newt Gingrich was followed up by a big Weekly Standard piece on the subject by David Skeel, and soon the meme filtered into the blogosphere. Unlike most political chatter, this kind of talk isn’t cheap at all: it’s very expensive. As the subject has refused to go away—which means, as House Republicans have continued to work on drafting some kind of bill—the municipal debt market has plunged.
Now, with a massive front-page story in the NYT, the stakes have got even higher. Mary Williams Walsh is well aware of what she’s doing: she talks explicitly about “the fear of destabilizing the municipal bond market with the words ‘state bankruptcy’”; while at the same time splashing those very words across the most influential public real estate in the world. She frets that the mere introduction of a state bankruptcy bill could lead to some kind of market penalty, even if it never passed—but the fact is that her own article, in and of itself, is almost certain to drive up borrowing costs and uncertainty.
Walsh’s piece comes on the heels of an important report from the Center on Budget and Policy Priorities, which makes a compelling case that state bankruptcy is neither necessary nor desirable:
It would be unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute. States have adequate tools and means to meet their obligations. The potential for bankruptcy would just increase the political difficulty of using these other tools to balance their budgets, delaying the enactment of appropriate solutions. In addition, it could push up the cost of borrowing for all states, undermining efforts to invest in infrastructure.
But the message isn’t sinking in. James Pethokoukis is a reliable guide to what the GOP is thinking:
The NYT article raises the specter that states would be shut out of credit markets if allowed to declare bankruptcy, or if one should actually take that step if federal law is changed. That seems unlikely, although some may have to pay higher interest rates. Municipalities and even countries repudiate debt and yet continue to borrow. And even investor apprehension would be balanced by states getting their finances in order, which should appeal to potential lenders.
This is completely bonkers. If states are allowed to file for bankruptcy, then Illinois, for one, would be shut out of credit markets. And if Illinois or any other state were to actually go ahead and file, then many other states, including New York, would be shut out of credit markets. That’s not “unlikely,” it’s certain.
As for Jim’s idea that “municipalities and even countries repudiate debt and yet continue to borrow,” he’s just plain wrong about that. A country which repudiates debt has no access to private credit markets: the only borrowing ever available to such a state is from official-sector institutions. I defy Jim to name a single municipality or country which has repudiated its debt and yet continued to borrow money in the private markets.
That said, it’s pretty unthinkable, even if a state were to declare bankruptcy, that it would go so far as to repudiate its debts. Indeed, bankruptcy is a formal recognition that a borrower is sinking under the weight of far too many legitimate debts; it seeks to restructure some of those debts to make them manageable, rather than repudiating them outright.
On the other hand, Jim’s utterly wrong that somehow bankruptcy is costless to the states, and that the downside of forcing a haircut on lenders would be fully counteracted by the upside of putting the states on a solid fiscal footing. Lenders really don’t much care about fiscal sustainability: all they care about is that they get their money back, as contracted, in full and on time.
Good work, but I'd respectfully suggest it misses the elephant in the room. That elephant isn't just the Republican party, but it's worth noting that it's only conservative GOP members who are suggesting state bankruptcies.
There's only one real reason for that. They want to kill government-employee unions. Bankruptcy allows for the voiding of contracts with unionized government employees. The Gingrich & Company theory is that those contracts would then be re-negotiated and the states could choose to not bargain with the unions.
Since government employees comprise a very large portion of the remaining unionized workforce in the country, destroying government unions would, they believe, deal a crushing blow to organized labor, overall.
As the article correctly points out states don't need to declare bankruptcy, particularly now. Though the recovery is slow, the recession is over and tax receipts will be -- again, slowly -- increasing.
State bankruptcy is a sledgehammer poised over the heads of those least able to afford it. Government spending has damn little to do with it.
And in the interests of full disclosure, neither I or any member of my family has ever been a member of a union. I'm a proud capitalist.
#1 Posted by Jeff Bushman, CJR on Sun 23 Jan 2011 at 11:37 AM