Tao Economics Forum

Full Version: Republicns: Just Declare Bankruptcy
You're currently viewing a stripped down version of our content. View the full version with proper formatting.
Cool  Moscow Mitch thinks the states should declare bankruptcy so they can ditch their pensioners.

https://www.theatlantic.com/ideas/archiv...pt/610714/

Why Mitch McConnell Wants States to Go Bankrupt

The Senate majority leader is prioritizing the Republican Party rather than the American people during this crisis.


by David Frum


"American states are abruptly facing their worst fiscal crisis since the Great Depression. The Center on Budget and Policy Priorities estimates that more than 25 percent of state revenues have evaporated because of the pandemic. Demands on state health-care budgets, state unemployment systems, and state social-welfare benefits are surging. By the summer of 2022, the state budget gap could total half a trillion dollars.

States need help. Senate Majority Leader Mitch McConnell does not want to provide it. On The Hugh Hewitt Show on April 23, McConnell proposed another idea. Instead of more federal aid, states should cut their spending by declaring bankruptcy:

I would certainly be in favor of allowing states to use the bankruptcy route. It saves some cities. And there’s no good reason for it not to be available. My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don’t have to do that. That’s not something I’m going to be in favor of.”

McConnell expanded on the state-bankruptcy concept later that same day in a phone interview with Fox News’s Bill Hemmer:


Quote:We’re not interested in solving their pension problems for them. We’re not interested in rescuing them from bad decisions they've made in the past, we’re not going to let them take advantage of this pandemic to solve a lot of problems that they created themselves [with] bad decisions in the past.
McConnell’s words instantly attracted attention, criticism, even some derision. New York Governor Andrew Cuomo blasted the idea as “dumb,” “irresponsible,” and “petty”:
Quote:How do you think this is going to work? And then to suggest we’re concerned about the economy, states should declare bankruptcy. That’s how you’re going to bring this national economy back? By states declaring bankruptcy? You want to see that market fall through the cellar? … I mean, if there’s ever a time for humanity and decency, now is the time.
Cuomo’s fervent rebuttal grabbed the cameras. It did not settle the issue. State bankruptcy is not some passing fancy. Republicans have been advancing the idea for more than a decade. Back in 2011, Jeb Bush and Newt Gingrich published a jointly bylined op-ed advocating state bankruptcy as a solution for the state of California. The Tea Party Congress elected in 2010 explored the idea of state bankruptcy in House hearings and Senate debates. Newt Gingrich promoted it in his run for the 2012 Republican presidential nomination.

.To understand why Republicans want state bankruptcy, it’s necessary to understand what bankruptcy is—and what it is not.


A bankruptcy is not a default. States have defaulted on their debts before; that is not new. Arkansas defaulted in the depression year of 1933. Eight states defaulted on canal and railway debt within a single year, 1841. The Fourteenth Amendment required former Confederate states to repudiate their Civil War debts.

A default is a sovereign act. A defaulting sovereign can decide for itself which—if any—debts to pay in full, which to repay in part, which debts to not pay at all.

Bankruptcy, by contrast, is a legal process in which a judge decides which debts will be paid, in what order, and in what amount. Under the Constitution, bankruptcy is a power entirely reserved to the federal government. An American bankruptcy is overseen in federal court, by a federal judge, according to federal law.


Understand that, and you begin to understand the appeal of state bankruptcy to Republican legislators in the post-2010 era.

Since 2010, American fiscal federalism has been defined by three overwhelming facts.

First, the country’s wealthiest and most productive states are overwhelmingly blue. Of the 15 states least reliant on federal transfers, 11 are led by Democratic governors. Of the 15 states most reliant on federal transfers, 11 have Republican governors.

Second, Congress is dominated by Republicans. Republicans controlled the House for eight of the last 10 years; the Senate for six. Because of the Republican hold on the Senate, the federal judiciary has likewise shifted in conservative and Republican directions.



A state bankruptcy process would thus enable a Republican Party based in the poorer states to use its federal ascendancy to impose its priorities upon the budgets of the richer states.


Read: It pays to be rich during a pandemic

When Cuomo protested McConnell’s bankruptcy idea, the New York governor raised the risk of chaos in financial markets. But McConnell does not advocate state bankruptcy in order to subject state bondholders to hardship. Obviously not! When McConnell spoke to Hewitt about fiscally troubled states, he did not address their bond debt. He addressed their pension debt. State bankruptcy is a project to shift hardship onto pensioners while protecting bondholders—and, even more than bondholders, taxpayers.


Republican plans for state bankruptcy sedulously protect state taxpayers. The Bush-Gingrich op-ed of 2011 was explicit on this point. A federal law of state bankruptcy “must explicitly forbid any federal judge from mandating a tax hike,” they wrote. You might wonder: Why? If a Republican Senate majority leader from Kentucky is willing to squeeze Illinois state pensioners, why would he care about shielding Illinois state taxpayers? The answer is found in the third of the three facts of American fiscal federalism:


Quote:United States senators from smaller, poorer red states do not only represent their states. Often, they do not even primarily represent their states. They represent, more often, the richest people in bigger, richer blue States who find it more economical to invest in less expensive small-state races. The biggest contributor to Mitch McConnell’s 2020 campaign and leadership committee is a PAC headquartered in Englewood, New Jersey. The second is a conduit for funds from real-estate investors. The third is the tobacco company Altria. The fourth is the parcel delivery service UPS. The fifth is the Eli Lilly pharmaceutical corporation. The sixth is the home health-care company, LHC Group. The seventh is the Blackstone hedge fund. And so on and on.
A federal bankruptcy process for state finances could thus enable wealthy individuals and interest groups in rich states to leverage their clout in the anti-majoritarian federal system to reverse political defeats in the more majoritarian political systems of big, rich states like California, New York, and Illinois.

No question, many states face serious problems with their unfunded liabilities to state retirees. Illinois’s liability nears $140 billion, and its municipalities are liable for additional billions. California’s state and local unfunded liabilities amount to $1.5 trillion....."
Democrat states and counties bankrupt?

Who'd have thought?
I really don't see the issue.

When an individual/entity is in a position where it is not possible to service its incurred debts, then there are three possible paths forward.

  1. Bailout. Pretty well always a really bad idea. Those who incurred the debt do not suffer for their poor decisions. Those who foolishly loaned money to fiscally imprudent people do not suffer. Those who bail out take money from those who operated prudently and give it to those who did not. So neither of the "guilty" parties suffer, and the independent third parties pick up the tab. And yes, I believe that bailing out businesses is a bad idea as well.
  2. Default. Those who incurred the debt suffer a bit, mainly in the way of increased costs of future borrowing. Those who lent the money suffer entirely. While the pain is at least distributed amongst the "guilty" parties, it allows the "guiltier" - the imprudent spender - to incur less pain.
  3. Bankruptcy/negotiated settlement. At least with this path the pain is distributed among the parties directly affected, and unrelated third parties are not harmed.
So sure, whine about what a bad deal bankruptcy is, but by no means suggest a better alternative. It's a great plan for a group of people who form the opposition, not the government.

It is always easy to say what should not be done. It is altogether another to say what should be done.