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We already know this: a lot of states are in deep fiscal trouble. From Politico:
Many states, including those with the country’s largest population centers, are now on a path to insolvency. This is primarily due to fiscally promiscuous lawmakers, skyrocketing Medicaid costs and unsustainable gold-plated government employee pension plans that most Americans could never dream of.
These states’ ballooning obligations simply cannot be met without either soaking state taxpayers or federal assistance — read: taking taxpayer dollars from properly managed states.
Heading into 2011, states are facing an overspending-generated budget shortfall of $72 billion, according to the National Conference of State Legislatures. Coupled with unfunded state and local pension obligations estimated in excess of $3 trillion — a half-trillion in California alone — one understands the concern that states are the next “too big to fail.”
And so are a lot of cities, too. Brandon Greife writes in Redtstate:
A recent study of the 77 largest municipal pension systems found that the total unfunded liabilities of America’s municipal pension systems is more than $500 billion. That’s just in pensions! Of course, they also owe billions upon billions of dollars for other types of debt – the result of ridiculous spending coupled with a massive decline in tax revenue. Veronique de Rugy, a researcher and economist for the Mercatus Center, estimates that total outstanding municipal bond debt is now $2.8 trillion – doubling in just the past decade.
And today’s WSJ offers an historical parallel to ponder. This is just like 1841:
Land values soared. States splurged on new programs. Then it all went bust, bringing down banks and state governments with them. This wasn’t America in 2011, it was America in 1841, when a now-forgotten depression pushed eight states and a desolate territory called Florida into the unthinkable: They defaulted on debts.
This was an incredible step, even then. Fledgling U.S. states like Indiana and Illinois were still building credibility on global debt markets. They rightly feared “a prejudice so deep and wide” that they could never sell bonds in Europe again, said one banker.
Their paranoia would be familiar to the shell-shocked California and Illinois of 2011. Each is beset by budget problems so great that some have begun debating default or bankruptcy. These worriers may draw comfort from the state crises that raged and retreated long ago. Most of the states eventually paid off their debts, and changed their laws to safeguard their finances, helping make U.S. states some of the world’s best credits.
But first, they raised taxes:
“People didn’t want to raise taxes but they did,” says John J. Wallis, a University of Maryland economic historian. He traces our current states crises back to those defaults in 1841, after which legislators amended constitutions to clamp down on new borrowing. Over time, these rules have been perverted by politicians, meaning that “constitutional rules have made it harder to raise taxes than to raise expenditures,” he says.
Does anybody doubt that in, say, six to nine months we’ll be talking — at least in the defaulting states — about major tax hikes? And probably at the federal level, too? Is it worth it if, as in 1841, we get a renewed “clamp down” on public borrowing?
It isn’t to me, of course. But maybe someone sees some silver lining here?
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