Bankruptcy for States?

Bankruptcy for States?

This WSJ article proposes an amendment to the federal bankruptcy law expressly extending to states the right (which municipalities already have) to declare bankruptcy. The idea is that several of our state governments are in such dire straits that the only other options are a chaotic default or a federal bailout, because the states' constitutions may prohibit them from making the deep cuts to public pension and bond obligations that would be required to avert a crisis.

Another option, I suppose, would be amendments to the state constitutions to give them the power to do what they need to do. That would have the advantage of not requiring the federal government to interfere in the state's duty to clean up their own houses. If it seems unrealistic to expect a state's leaders to take such a drastic step regarding its own constitution, what makes us think it's realistic to expect a state to take the step of declaring bankruptcy under a new law? One commenter to the piece pointed out that existing bankruptcy law provides for both voluntary and involuntary bankruptcy. Under certain conditions, that is, creditors can force a company into bankruptcy against its will. A similar right might be extended to a state's voters via a referendum. These are the same voters, however, who keep electing the governors and legislators who won't face up to the need to limit the appetite of government.

Other commenters objected that a state bankruptcy would resemble the GM chapter 11 case, in which bondholders took greater hits than were strictly compatible with what we had previously understood to be settled bankruptcy law, while unions were coddled. Still others suggested that it was inconsistent to turn a cold eye on the pitiable prospect of public union retirees for whom it was too late to build up other security for their old age, unless we were willing to treat military pensioners the same way. That argument gives me pause, because my natural sympathy for the military and antipathy to public sector unions lays me open the temptation of invidious distinctions. On reflection, though, I'm not impressed. Only a few public union employees, such as police and firemen, can make any claim to special treatment as a result of having risked life and limb. The military justifiably is extended special treatment in all sorts of ways. Also, I'm not aware of any mechanism by which the military leadership extorts money from its ranks to fund lobbying efforts to increase military benefits, or otherwise abuses its public position to alter public policy towards its own members.

Finally, a number of commenters expressed a wish to force the national experiment to its logical conclusion, in which the states with bloated budgets would fail and, by so doing, expose the intellectual bankruptcy of their ideologies. That's a good reason for opposing a federal bailout, but I suppose either bankruptcy or chaotic default would equally serve to expose the results of electing generations of local leaders who could neither face facts nor stand up to pressure from public sector unions.