On the GOP, bankrupt states and government unions

January 21, 2011

The NYTimes finally picked up on a story I had six weeks ago:

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers. … For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

And from my post on Dec. 7:

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds. Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations.

But it’s about more than just openness. Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy. Indeed, legislation  amending federal bankruptcy law is currently being prepared by congressional Republicans.

A few additional thoughts:

1) 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.

2) Republicans aren’t afraid of bankruptcies — though not on the national level — believing they restore market discipline and reduce moral hazard. Lehman is a good example. While the common narrative is that its failure caused a market panic and financial crisis in 2008, many conservative GOPers think the real problem was that Bear Stearns was bailed out, distorting investor expectations. They also believe it was Hank Paulson’s rushed TARP proposal that sent markets reeling, a hypothesis  pushed by economist John “Taylor Rule” Taylor of Stanford.

3)  Republicans have seen the debt problems in places such as Greece and New Jersey and believe government unions undermine long-term fiscal soundness. They want to spread the Chris Christie’s battle against them nationwide. And of course it also doesn’t hurt that unions are a key Democrat constituency. But Rs think it is possible to pit public and private unions against each other by making the case that plumbers and construction workers are paying higher taxes to support cushy benefits and jobs security for teachers and bureaucrats.

4) Don’t be surprised to next hear some Republicans question whether state and local bonds should remain tax exempt, arguing it only encourages fiscal profligacy.

4 comments

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[...] This post was mentioned on Twitter by Edward Harrison, WHIII, SQOX.com, Linda Zumpano, James Pethokoukis and others. James Pethokoukis said: GOP wants to let states declare bankruptcy? I update the story I scooped NYTimes on six weeks ago http://reut.rs/i6H9gI [...]

Let them go bankrupt. Revert back to territories. Appoint Territorial Governors. Dissolve the public employee unions. Let the State reorganize out of bankruptcy.

Posted by Dandapani | Report as abusive

[...] Times — and Jim Pethokoukis, who can rightly claim that he had this story six weeks ago — explain that there would be a number of glaring problems with allowing banks to [...]

How about forcing farmers into bankruptcy to wean them off their annual bailouts? States come in for a bailout at most once every century. Farmers come in every single year, decade after decade, generation after generation. To kill the GOP attack on public employee unions, Dem Senators need only attach an amendment ending farm welfare. The farm lobby would never let this see the light of day.

Dem Senators could also stop this bill by attaching an amendment that would require clawback of all C-level and board of directors compensation paid withing 5 years of filing for bankruptcy. Big Business would never let this happen.

Or Senate Dems could attach an amendment repealing the 2005 bankruptcy code amendments that shafted consumer, and attach one allowing primary residence mortgage cramdown. The banks and Wall St would never let this happen.

Or if the Senate Dems really, really, really want to play hardball with the House teahadists, they could attach amendments giving undocumented workers instant amnesty and repealing the gun show loophole.

Thus, the Senate Dems have numerous poison pills to offer.

Posted by Gaius_Baltar | Report as abusive

I say good luck to the Republicans! Government unions here in Canada, especially at the provincial level, are strangling the economy and impoverishing the taxpayer. It always seems governments here, at all levels, are more interested in the welfare of their employees than that of the lowly taxpayers.

Posted by Gotthardbahn | Report as abusive

[...] States’ Debt Trip With a push by some policy makers to allow states to file for bankruptcy, what else could come next? James Pethokoukis – Jimmy P to his friends at DealBook – says, “Don’t be surprised to next hear some Republicans question whether state and local bonds should remain tax exempt, arguing it only encourages fiscal profligacy.” Reuters [...]

[...] a push by some policy makers to allow states to declare bankruptcy, what other steps are possible? James Pethokoukis says, “Don’t be surprised to next hear some Republicans question [...]

[...] a push by some policy makers to allow states to declare bankruptcy, what other steps are possible? James Pethokoukis says, “Don’t be surprised to next hear some Republicans question [...]

[...] GOP Would Go for This, guesses James Pethokoukis during Reuters. “Republicans aren’t fearful of bankruptcies… desiring they revive [...]

All levels of government in the USA have more money than the rhetoric from both sides of the isle would have us believe; no theory here folks, just hard facts. Read on:

Dear Reader, please consider what Walter Burien is doing over at http://www.cafr1.com .He traded in derivatives for 30 years, has a gift for comprehending the big numbers in government financial statements, and is educating people about the fact that collective “government” now literally owns controlling interests in all the Fortune 500 companies and more through thousands of investment accounts held at the municipal, county, state and federal levels.

The proof is revealed in the “Comprehensive Annual Financial Reports” in the public domain. Thus when government bails out various corporate entities, taxpayers are unknowingly simply rescuing government investment portfolios. Naturally, no one explains this to the public; they only get the usual half-truths, lies and obfuscation from New York and Washington D.C.. The profits from these government investments are not shared with the very taxpayers whose money was used to create them.

Fascism, American style.

According to Walter, “taxes” account for a mere third of the money collective government takes in; the rest is obscene levels of profit from investments, carefully not talked about in the mainstream media. All the talk of “budget deficits” does not take into account the “profits from investment” revealed only in the CAFRs that every level of government issues as required by law, and are in the public domain for anyone to look at.

States “going broke” is only partly true; yes, they are usually spending more than their budget funds. However, the profits outlined above are carefully not mentioned to the public. The purpose? To scare the public into putting up with their present tax burden, and to prepare for more because, after all, “the government is going broke and needs our money”.

It is identical to me pulling my empty pocket inside-out and saying to you “See? I’m broke! Please give me money!” while every other pocket is stuffed full with one hundred dollar bills.

Walter Burien explains what I’ve stated here in a new 1 hour 14 minute online documentary he created called “The Only Game In Town”. A 48-hour pass costs $3.00 available here:

http://cafr1.com/ViewNow.html

I watched it twice. Walter ends his video proposing a smart simple way to address the issue of taxes: create “Tax Retirement Funds” (“TRFs”) that are financed by a small percentage of the profit that every level of government is already making.

Example: Wisconsin’s Real Financial Situation taking into account the above facts:

http://realitybloger.wordpress.com/2011/ 03/01/wisconsins-real-financial-situatio n-explained/

May truth and compassion prevail….

Posted by Bhaktidev | Report as abusive