James Pethokoukis

Politics and policy from inside Washington

Secret GOP plan: Push states to declare bankruptcy and smash unions

Dec 7, 2010 18:42 UTC

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 program.  BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31.  And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

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. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds

Greater transparency on these obligations can’t be bad. In fact, the federal government itself would do well to report deficit numbers not just on the current cash-in, cash-out basis but also incorporating the underfunding of promised pension and healthcare benefits to retirees.

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. Local municipalities do declare bankruptcy from time to time, most famously California’s Orange County in 1994. But states can’t. Allowing them the same ability to renegotiate obligations could enable them to slash public employees’ lavish benefits, a big factor in their financial woes. In a recent issue of the The Weekly Standard, bankruptcy expert David Skeel of the University of Pennsylvania walks through the implications:

With liquidation off the table, the effectiveness of state bankruptcy would depend a great deal on the state’s willingness to play hardball with its creditors. The principal candidates for restructuring in states like California or Illinois are the state’s bonds and its contracts with public employees. Ideally, bondholders would vote to approve a restructuring. But if they dug in their heels and resisted proposals to restructure their debt, a bankruptcy chapter for states should allow (as municipal bankruptcy already does) for a proposal to be “crammed down” over their objections under certain circumstances. This eliminates the hold-out problem—the refusal of a minority of bondholders to agree to the terms of a restructuring—that can foil efforts to restructure outside of bankruptcy.

The bankruptcy law should give debtor states even more power to rewrite union contracts, if the court approves. Interestingly, it is easier to renegotiate a burdensome union contract in municipal bankruptcy than in a corporate bankruptcy. Vallejo has used this power in its bankruptcy case, which was filed in 2008. It is possible that a state could even renegotiate existing pension benefits in bankruptcy, although this is much less clear and less likely than the power to renegotiate an ongoing contract.

It wouldn’t be easy to change the law. Public employee unions have traditionally carried great influence with Democrats, even if President Barack Obama’s willingness to freeze their pay on the federal level suggests their clout may be waning.  From the Republican perspective, the fiscal crisis on the state level provides a golden opportunity to defund a key Democratic interest group. For the GOP, it’s an economic and political win.


“Here, the ‘take’ for public-employee union entitlements is projected to DOUBLE in 5 years, and it is already HIGH! The old contracts MUST be broken.”

I’d love to know where this garbage came from – do you even have any evidence to back this assertion up? I think not. In fact, don’t bother – by actually showing you the errors used in cherry-picking such an arbitrary figure, I’d just upset you and you clearly aren’t likely to be changing your mind based on the facts.

“Look at the gulf that is widening between public and private sector jobs. This has to stop. It is unsustainable.”

Look to the gulf that is widening between the personal tax burden and concentration of wealth into the polutocratic top 2% in the USA. THAT is what is unsustainable.

“Sounds like a good plan as far as this Red Stater is concerned because we can see the Blue States circling the drain and we know what’s next…federal handout. The liberal test beds have run their economies into the ground. They shouldn’t expect flyover country to bail out their bad policies. Did you see the way CA voted in the last election for heaven’s sake? These people are clueless…drop the guillotine.”

Take a look at how much your ‘red state’ gets in Federal funding vs. the ‘blue states’ – or should I say, engines of the economy, and then edit out your outrageous comments about blue states needing federal handouts. Red states are generally the highest recipients and lowest contributors to Federal funds – and oddly enough its exactly those welfare states that hold the strongest views on these issues. Don’t kill your golden goose.

for more information here is a good place to start:
http://en.wikipedia.org/wiki/Federal_spe nding_and_taxation_across_states

The American Dream used to be that you can build a life from scratch here, that you can come here with nothing and end up with a business, a house, even wealth that you can leave to the next generation.

Guaranteed wages and social security for some mean less opportunity for the rest of us. That is why I left Europe; I saw that I was going to have to pay for the babyboomers retirements and healthcare for the rest of my life. America is now worse than Europe.

Home values should fall! They are inflated. The entire Obama agenda is about keeping the bubbles inflated, bailing out the rich, the babyboomers, the too big to fail companies, union/government workers.
- Posted by peterverkooijen”

So you swallowed the conservative agenda hook, line and sinker, then you found out that it’s exactly the same over here, in a country where all they’ve managed to achieve is a quarter of the population without health care – and yet you are still unable to admit this ideology is fundamentally flawed.

Why are you blaming public and union workers for something as functionally disconnected as prices in the housing market?? Since Unionized and public workers together account for less than 7% of the United States’ work force, and under 33% of them are unionized. It doesn’t seem that the influence they could exert on the market could be the reason for high property prices.

The republican party and their allies are playing a negative-sum game in order to win. The problem is, they will destroy their prize by playing this way.

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How to make sure Uncle Sam doesn’t bail out states

Dec 6, 2010 22:08 UTC

Here is a bit from latest Reuters Breakingviews column (more on this topic to come):

Republicans in the U.S. House of Representatives want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about future obligations. The effort may pave the way for a more radical one: changing the law so that states are allowed to go bankrupt and stiff their creditors. .. 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. Local municipalities do this from time to time, most famously California’s Orange County in 1994. But states can’t. Allowing them the same ability to renegotiate obligations could enable them to slash public employees’ lavish benefits, a big factor in their financial woes.

Even Obama’s debt panel doesn’t buy Obamacare

Dec 6, 2010 03:43 UTC

President Barack Obama’s debt reduction commission defined tough fiscal choices for Washington, though its members weren’t unanimous enough to force the ideas on lawmakers. But even if they had, the panel pulled punches on healthcare cuts. Reducing that burden may be central to the next presidential election.

The 18-member panel needed 14 votes in support of its recommendations to trigger concrete action in Congress. Few if any members ever thought it was possible to clear such a high bar. Still, half of the 12 commission members drawn from Congress backed the final plan, with the recommendations getting the support of 11 members altogether.

That was a pleasantly surprising result for deficit hawks because any decent political consultant would tell clients to flee most of the ideas in the blueprint. It would, for instance, sharply limit the tax deductibility of mortgage interest. The plan would also cut Social Security benefits for higher-income retirees and accelerate the rise in the eligibility age. Three conservative Republicans on the panel even supported a package that included higher taxes.

Many elements of the commission plan may resurface over the next two years. House Republican leaders hint they will include the majority of the panel’s suggestions in their official budget plan next spring. There could be compromises over Social Security and corporate tax reform.

Yet the biggest stumbling block remains healthcare, which accounts for three-quarters of the U.S. government’s long-term budget woes. A presentation from Medicare’s chief actuary persuaded many panel members that Obama’s recently-passed reform law does less than estimated to reduce future government outlays. Despite this and the legacy of successive administrations’ overgenerous commitments on health spending, the panel danced around the issue in its recommendations.

Democrats in Congress have little desire to revisit the issue anytime soon. Republicans, on the other hand, want to make it a central issue of the 2012 White House campaign so that a positive electoral outcome, if they achieve one, would be a mandate for their plan — whatever it turns out to be. Though Obama’s commission provides useful direction, the endgame for healthcare spending could be more significant for America’s fiscal future.

Freeze the (pay)day!

Dec 1, 2010 19:40 UTC

Here is a bit from my Reuters Breakingviews column on the Obama federal pay freeze:

Americans are unlikely to accept austerity of any sort as long as they think Washington remains fat and happy. That’s why President Barack Obama needs to go beyond the token two-year government pay freeze he suggested this week. To get the rest of the country to committed belt-tightening more hacking and slashing is necessary.

On the face of it, U.S. federal workers seem insanely overpaid compared to their private sector counterparts. The typical federal employee in 2008 received total compensation of roughly $119,000, including $79,000 in salary. By contrast, the typical private sector worker was paid around $50,000 for total compensation of $60,000.

But those numbers are misleading since the government workforce is older and more educated. Once those differences are adjusted for, according to the American Enterprise Institute, annual compensation overpayment is more like $14,000 per worker, totaling a nearly $40 billion per year premium.

So there is room for deeper reductions than what Obama proposed, which would save $2 billion in the current 2011 fiscal year and $28 billion over five years. Just a five percent pay cut, if combined with a 10 percent reduction in the size of the federal workforce, would save some $25 billion a year.

Even that still wouldn’t make much of a dent in a budget deficit that could average a trillion bucks a year for the next ten. But it would show voters that Washington is willing to take the first hit – even if it enrages a powerful interest group in the process. It would also demonstrate a measure of governing competence to Americans before ambitious attempts are made to restructure the social insurance and tax systems.

Unfortunately, the timing of the president’s pay freeze announcement – two days before the final meeting of Obama’s debt commission – stokes speculation that panel may come up shorthanded. If that’s the case, the pay proposal, though welcome, will amount to a poor consolation prize.

The Obama debt commission also tackles this issue in its final report. It would freeze pay for three years and trim the workforce by 10 percent. How about a 10 and 10 plan, a ten percent pay cut and a ten percent workforce reduction. That could cut discretionary spending by $50 billion a year.

The Obama debt panel’s vision in one chart

Dec 1, 2010 18:59 UTC

As you can see from the chart below, this plan — if you exclude interest savings — actually depends quite a bit on revenue as opposed to spending cuts — 45 percent to 55 percent. The UK austerity plan is more like 3-to-1 spending over tax increases. Of course, when healthcare is basically off limits, it kind of limits your options:


Final report of Obama debt panel

Dec 1, 2010 14:38 UTC

The final report, which won’t get the 14 “yes” votes needed to nudge Congress to consider it, from the Obama debt panel is here. And here is  the chart which shows what it would do:


Just how much defense spending can be cut?

Nov 23, 2010 15:38 UTC

This chart from the Committee for a Responsible Federal Budget shows that while there may be some room to reduce defense spending, the instrument of choice should be a scalpel rather than a hatchet:



Seems like 1% of GDP (from your chart) is going to war spending… so that’s $150B savings once the wars stop. Plus, pulling down troop numbers in Germany, Japan, South Korea are probably worth another $50B/yr. That’s an easy $200B a year savings. Seems worth it and easy to me… Maybe cutting back on building new/more aircraft carriers and submarines would knock off another big chunk of change too.

Also, I find it more than slightly disingenuous to compare current defense spending to Reagan-era defense spending, when the govt was actively and purposefully increasing military spending to intimidate Russia. I’d be curious to see how that chart looks going back to the 30s, through the depression, through post-Korea/pre-Vietnam decade, etc.

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Should Republicans refuse any tax increases?

Nov 22, 2010 17:40 UTC

Steve Moore and Richard Vedder think raising tax revenue in exchange for spending cuts is a mug’s game (via WSJ):

In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.

We’ve updated the research. Using standard statistical analyses that introduce variables to control for business-cycle fluctuations, wars and inflation, we found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.

We also looked at different time periods (e.g., 1947-2009 vs. 1959-2009), different financial data (fiscal year federal budget data, as well as calendar year National Income and Product Account data from the Bureau of Economic Analysis), different lag structures (e.g., relating taxes one year to spending change the following year to allow for the time it takes bureaucracies to spend money), different control variables, etc. The alternative models produce different estimates of the tax-spend relationship—between $1.05 and $1.81. But no matter how we configured the data and no matter what variables we examined, higher tax collections never resulted in less spending.

Well, certainly the budget can be brought into balance without tax increases. Americans for Tax Reform does it over the short term (5-7 years) by pretty much freezing spending (at 2008 levels) for everything but Medicare and Social Security. So, too, Rep. Paul Ryan with his Roadmap for America’s Future. But what about the politics? Does this assume no compromise with Democrats? If compromise is needed, what do the Rs offer? Defense cuts? But perhaps the solution is to offer a more pro-growth tax system with restructured entitlements. More revenue from more growth + less social insurance spending.


I (and I think many others) have no problems with tax breaks for small business because they really do drive jobs in America. What really rubs a lot of people the wrong way is tax breaks for multi-national mega-corps that have no interest in supporting America or growing in America – to them the grass is greener in emerging markets like BRIC countries and they want to put their profits to work there. Maybe some kind of tax-credit for healthcare on new employees (and partial for existing employees) could be worked out?… that would help stem the big complaint I hear from small businesses.

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Paul Ryan’s pro-market healthcare reform

Nov 19, 2010 16:41 UTC

Rep. Paul Ryan, along with fellow Obama deficit panel member Alice Rivlin, has put together a plan to cut the growth of government healthcare spending. This is the heart of it:

A new Medicare program should be created for future retirees (those who first become eligible by turning 65 on or after January 1, 2021). The new Medicare program would provide a payment – based on what the average annual per-capita expenditure is in 2021 – to purchase health insurance. The payment would grow annually at a rate of GDP +1 percent.

The annual payment would be adjusted by income, with high-income seniors receiving a reduced payment and low-income seniors receiving extra support. The payment would also be geographically rated and adjusted for health risk. In addition to a higher Medicare payment amount, low-income “dual-eligibles” would also receive a fully funded account from which to pay out-of-pocket expenses.

In order to receive the Medicare payment, a beneficiary would select a plan from a newly created Medicare Exchange. Health plans which choose to participate in the Medicare Exchange must agree to offer insurance to all Medicare beneficiaries, thereby preventing cherry picking and ensuring that Medicare’s sickest and highest cost beneficiaries receive coverage.

For those now enrolled in Medicare, or becoming eligible before 2021, the traditional fee-for-service Medicare program would continue. Premiums for the current program would be held harmless from the effects of the creation of the new Medicare program.

This plan is based on the Medicare fix outlined in Ryan’s fantastic Roadmap for America (as translated by the Congressional Budget Office).

Starting in 2021, new enrollees would no longer receive coverage through the current program but, instead, would be given a voucher with which to purchase private health insurance. In 2021, when enrollees would first receive the voucher, the average voucher for 65-year-olds would be worth $5,900 (in 2010 dollars). The voucher would be adjusted to reflect the age and health status of enrollees. If all Medicare beneficiaries (including older people with higher average expenditures) were to receive a voucher in 2021, the average voucher amount would be $11,000 (in 2010 dollars). …  The amount of the Medicare voucher … would be indexed to grow at a rate halfway between the general inflation rate, as measured by the consumer price index for all urban consumers (CPI-U), and the rate of price inflation for medical care, as measured by the consumer price index for medical care (CPI-M). Using that blended rate, CBO estimates that those amounts would increase at an average annual rate of 2.7 percent for the next 75 years, in comparison with the average annual growth rate of nearly 5 percent that CBO expects for per capita national spending for health care under current law.

So one big difference between the Ryan Roadmap and Ryan-Rivlin is that the growth rate for the Medicare payment/voucher is higher under Ryan-Rivlin. Also, the  Ryan Roadmap is more aggressive on raising the age for Medicare eligibility. Compare the two. First, the Roadmap:

The age of eligibility for Medicare would increase incrementally from 65 (for people born before 1956), as it is under current law, to 69 years and 6 months for people born in 2022 and later.

Now Ryan-Rivlin:

In 2021, begin raising the Medicare eligibility age to correspond to OASDI normal retirement age (2 months per year beginning in 2021 and stopping at age 67).

Now both the Ryan Roadmap and Ryan-Rivlin are far preferable to Obamacare and the modified-Obamacare plan outlined in Bowles-Simpson which relies on government technocrats to lower costs rather than market forces. Here is how Ryan-Rivlin compares to the status quo:


A huge improvement, but the Ryan Roadmap would lower health spending to roughly 5 percent of GDP in 2050 — half of Ryan-Rivlin –which is why the Roadamap’s long-term budget chart looks like this:



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Now it’s the Domenici-Rivlin plan to cut the deficit

Nov 17, 2010 15:54 UTC

Alice Rivlin (who is on the Obama deficit commission) and former Senator Peter Domenici have cooked up their own plan to restore America’s long-term fiscal solvency. But first, a chart from the plan itself that says a lot:


Liberals hated the Bowles-Simpson plan because it used some of the savings from eliminating tax breaks to lower tax rates. Well, this plan does the same thing — but it also tacks on a national sales that will raise nearly $20 trillion (for a net $6 trillion tax increase) between 2012 and 2040. Conservatives will not be happy: