Bankruptcy and Shedding Government Obligations

Many state governments are having financial difficulties - the current California legislature is arguing about how to handle a shortfall of $28 billion, which is more than the total budgets of many smaller states.  The Republicans have taken tax increases off the table, so the entire sum will have to be made up by cutting spending.

The situation is so messy in so many states that various senators and congresscritters are talking about changing the law so that states could go bankrupt.  State governments are supposedly independent sovereign powers so there is currently no provision for them to declare bankruptcy.

Many commentators say that even discussing the possibility that a state could go bankrupt would mean that lenders would want higher interest on their loans to the state, as if lenders don't already read the newspapers and count the vanishing beans for themselves.

Whether a state could go through a formal bankruptcy process or not is somewhat irrelevant.  The key result of a bankruptcy proceeding where individuals or companies are concerned is that when the dust settles, the lawyers take home lots of money and the creditors get stiffed.  In other words, the purpose of bankruptcy is to reduce the obligations of the bankrupt person or company so that, hopefully, they can continue to operate.

In that vein, Scragged has identified a number of obligations which our government has taken on which simply can't be sustained into the future.  The purpose is not to discuss whether the obligation for the government to pay welfare is good or bad, for example; the object is to discuss shedding government obligations so that state spending gets in line with state income.

When taxes go up too far, productive people either stop working or leave the state.  States simply have to cut spending - they've raised taxes far past the point of increasing state revenue.  That leaves only cutting back obligations and letting the chips fall where they may.

When the money's gone, it's gone.

How We Got Here

Our nation started out with the idea that the federal government should be kept small.  Congressman Davy Crockett voted against granting a government pension to the widow of a general; he argued that the Constitution did not permit the government to give away tax money in the form of pensions.

How times have changed!  As a columnist put it,

We gradually moved from an era in which people did not want to use government for anything to today when people use government for almost everything.

 - Robert Samuelson, “Clinton’s Nemesis,” Newsweek, Feb 1, 1993 p. 51

We've let our governments take on far more obligations than we taxpayers can support.  The politicians have been happy to spend our money because they rake off some as it flows through their hands.  The interest groups to whom they give our money lobby fiercely to keep our money coming to them, as the battles over union power in Wisconsin show.

People who receive more tax money than they pay fight to keep benefits flowing as if they were entitled to our money by some from of divine right.  That's what "entitlement" means - people presume the right to receive money from the government just for being members of favored groups such as unmarried mothers.

This situation was predicted long ago.  When Henry Randall was writing his Life of Thomas Jefferson in the 1850's, he sent a copy to Thomas Macaulay, a distinguished British author and Member of Parliament.  Part of Lord Macaulay's reply of May 23, 1857, was printed in American Heritage, February 1974, p 104:

Dear Sir,

... I have long been convinced that institutions purely democratic must, sooner or later, destroy liberty, or civilization, or both.  In Europe, where the population is dense, the effect of such institutions would be almost instantaneous.

What happened lately in France is an example.  In 1848 [after the French revolution - ed] a pure democracy was established there.  During a short time there was reason to expect a general spoliation, a national bankruptcy, a new partition of the soil, a maximum of prices, a ruinous load of taxation laid on the rich for the purpose of supporting the poor in idleness.

Such a system would, in twenty years, have made France as poor and barbarous as the France of the Carloviangians.  Happily, the danger was averted; and now there is a despotism [under Napoleon III - ed], a silent tribune, an enslaved press.  Liberty is gone, but civilization has been saved.

With the goal of avoiding the fate Lord Macaulay predicted for us, we can immediately identify some obligations which government would have to dump in the governance equivalent of the bankruptcy process.

• Welfare - the more money we spend, the more the recipients multiply, the more they cost, and the less they're willing to work.  The reason illegals can get jobs here is that they're willing to work for less money than people who get food, housing, and clothing paid for by the taxpayers.
• Public Education - The Washington DC voucher experiment showed that very poor children could be educated far more effectively for less money than the public schools spend.  Government schools, like all things government, are inefficient and generally ineffective.  It might be OK for government to pay for universal education, so long as it doesn't attempt to provide it or specify where or by whom it must be delivered.
• Pensions - to be fair, the systems were set up when people lived for no more than 5 years after retiring, and worked fine as long as that stayed true.  Now that people routinely live into their nineties, something has to give.
• Child "Protection" - an MIT study has found that on average, abused children still do better when left in biological homes, even if those homes are very far from ideal.  Government makes a lousy parent.
• Mental Hospitals - government-run mental hospitals were closed because patients were being abused and the unionized perpetrators couldn't be fired.  The Times now reports that the community mental health centers which replaced them abuse patients and the unionized perpetrators can't be fired.

The Bottom Line

The bottom line is that we've let our governments take on far more obligations than we taxpayers can support, and indeed, far more duties than any single organization could ever do well.  Any arguments that these programs are good or needed is beside the point - we cannot afford them.

It's good to have a house to live in, too - but if you declare bankruptcy, you're liable to be kicked out on the street regardless because you can't afford to keep paying for where you used to live.

There simply isn't enough tax money available to meet all the spending commitments.  Most state constitutions require that the state budget be balanced, and the states have all just about exhausted their ability to hide the fact that their budgets haven't been balanced for a long time.

As the rubber meets the road, cutting each department by, say, 10% won't be enough.  They'll have to eliminate entire departments and cast off entire obligations to maintain solvency in the future.

One way or another, the budgets will balance.  It will be done the hard way by making harsh cuts, or the very hard way by letting the entire system collapse in a chaotic pile of bounced paychecks, public disorder, and armed recriminations.

Some of our politicians are beginning to realize the starkness of the choices before us and are saying so.  We hope that they prevail - the hard way, as painful as it must be, would be better than the very hard way.