Here’s the question I put to Sen. Jim DeMint during a brief telephone interview last night:
Chances are pretty good that Illinois, California, and New Jersey, and maybe a dozen or more other states, are going to go broke — because they cannot meet their pension expenses. All told, the states are about $3 trillion short, and they’re going to come looking to Congress for a bailout. Are you going to write that check, or are you going to let them hang and watch the municipal-bond market collapse? Which angry mob do you want to face?
Senator DeMint did not exactly say, “We’re going to let the municipal-bond market collapse,” but it sure sounded a lot like that. Republicans have a three-part plan for the states’ fiscal crises:
First, create a legal process to allow states to renegotiate debts and union contracts in something akin to bankruptcy.
Second, forbid a congressional bailout of the states.
Third, forbid the Fed to buy states’ debt as part of a freelance Ben Bernanke bailout.
In other words, prepare a site for crash-landing state finances and then forcibly guide them to it.
That third part is interesting, no? Republicans are looking askew at the Fed’s new career as at-large bailout-maker.
The Republicans’ plan looks pretty ugly, but I do not see any plausible alternatives. And I see one big opportunity: This is the chance to pry the parasitic government-employee unions off the body politic. They have bankrupted the states, and the resulting crisis gives us the means and the opportunity to put an end to their plunder. When those contracts get renegotiated, Republicans should insist that they address more than pensions.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.
That sounds like a great plan, but the Rs need help from the Ds to implement the first and third parts.
Reply to this commentLinkReport AbuseSpot on Kevin. I don't think fiscally responsible North Dakota should be shouldering California's debt. Just like I, being fiscally prudent, should pay my neighbor's mortgage.
Reply to this commentLinkReport AbuseThese "municipal bonds", they're commodities, interchangeable as water molecules?
Because if they aren't - if it's possible for some municipalities to be frugal and capable of repaying their debts while others aren't - then we don't have to worry about collapsing the entire market for them, do we? We just have to worry about investors suddenly exercising judgement about whom they should and whom they shouldn't trust with their money... which is probably something worth doing regardless.
Reply to this commentLinkReport AbuseThen Demint had better get the PR machine cranked up fast. The unions, the Dems and their media allies, plus all tha 'activists', will blow their communal gaskets on this, and that will sway public opinion, even though most of that 'public' actually live in the private sector not the public one, and even though it is them (the private sector ones) who are getting screwed under the status quo.
Reply to this commentLinkReport AbuseYes, explicitly create a process to re-negotiate debts and contracts AND pensions.
The default bankruptcy resolution should be that all state gov't employees get some 80% of the median income, plus a "surplus" payment, if any, pro-rata from (tax collection - other payments).
The default pension should be 110% of Social Security, with a maximum payment of 2 times median income (excluding optional savings and other defined contributions). All new pensions would be defined contributions, only. Double gov't pensions should be eliminated (only the largest kept).
I don't know how one Congress can "forbid" a Congress bailout, that is binding for later Congresses or even itself -- any such law could just be repealed. But it would require the repeal step, which allows more time to oppose it, so that's not nothing.
And forbidding the Fed bailout is excellent.
The problem in every state is non-honest promises of prior elected officials, especially big-gov't Democrats, but also big-spending Reps.
Reply to this commentLinkReport AbuseShow us where the money will come from to pay for a bailout? Which of the states that have managed their money should be forced to pay for and subsidise the states that don't know when to stop paying?
If I exceed my credit balance I get cut off. If I keep writing checks without money in the bank I'll go to Jail.
Reply to this commentLinkReport AbuseBut... but... but.. if Republicans prevent the bailouts of California, New York, Illinois, Massachusetts, they'll have no chance of taking those electoral votes in 2012!
Reply to this commentLinkReport AbuseRoystgnr:
You're right, of course, with an important exception: The irresponsible states and municipalities are those that issue the most bonds. As one knowledgeable guy recently put it to me: "The bonds you can get, you don't want. The debt you'd want, you can't get."
I do not know the ins and the outs of the muni market, and so don't want to overreach on this one, but that's my impression.
Reply to this commentLinkReport AbuseAlong the same lines, Republicans have another potential oppportunity to take on the pension/benefit crisis.
Sometime soon they're going to have to get around to entitlement reform. Probably means testing Medicare and Social Security as well as raising the retirement age. And there's the rub.
When they propose that, they should say: "And, with these sacrifices being asked of those in the private sector, now is the time for public workers to come to the table. WE CANNOT HAVE THE PRIVATE SECTOR WORKING TIL AGE 69 TO PAY FOR PUBLIC WORKERS WHO RETIRED AT AGE 55 WITH A GENEROUS PENSION! Public worker benefits must be brought in line with the private sector."
It would be good PR and good fiscal policy. Public workers' excessive pensions should be cut. Those with the higher pensions should pay for their health benefits, etc. And---most importantly---they should get their pensions no earlier than we do. Raise all their retirement ages.
People say we can "no longer" afford them. The fact is: we never could. The bill has now come due.
Reply to this commentLinkReport AbuseWhen is someone on the R side of the aisle going to get the nads to say "no more collective bargaining for public employees"? Or, at a minimum, say "no more defined benefit pensions, only defined contribution"? This would take us a long ways towards ending the madness, someone just needs to start saying it out loud.
Reply to this commentLinkReport AbuseALL municipal bond debt, good and bad states and local governments alike, is priced assuming some probability of a government bailout if and when it becomes necessary. If we let California and Illinois go bust, this then affects the rate at which even good governments can borrow because it lowers (perhaps to zero) this perceived probability. This is not necessarily a bad effect - even good state and local governments shouldn't get a lower rate because of an implicit federal government guarantee -- but there will be an effect on even good state and local governments, and this will affect their lobbying. Even good state and local governments may push hard for bailouts.
Reply to this commentLinkReport AbuseI'm confused. We want to inject reality into the financial markets? government funding? local, state and federal politics?
Reply to this commentLinkReport Abuse"That third part is interesting, no? Republicans are looking askew at the Fed’s new career as at-large bailout-maker."
channeling WFB, would not a better phrasing be "...looking askance.."?
Reply to this commentLinkReport Abuse"In other words, prepare a site for crash-landing state finances and then forcibly guide them to it."
I'd probably liken it to funneling the states in distress into one of these.
Reply to this commentLinkReport AbuseMWB:
I stand corrected.
Reply to this commentLinkReport AbuseThis plan sounds great, until Congress learns about all of the banks and insurance companies that have municipal bonds on their already balance sheets. Republicans may not want to protect the blue states, but they sure do like to protect the financial sector.
But it won't even need to get to Congress. The Fed will be there to bail out the states by purchasing their bonds, and there is nothing that will stop this Fed until 2012 at least. I don't see a scenario where QE3 (the muni version) does not happen.
Reply to this commentLinkReport Abuse"This is the chance to pry the parasitic government-employee unions off the body politic. They have bankrupted the states..."
The unions did not bankrupt anybody. The voters of those states elected their representatives who made all the promises to the unions.
Don't let voters off the hook. The voters, either by active voting or willful ignorance, made their own mess.
Reply to this commentLinkReport AbuseI just moved $15,000 out of a muni fund into a gold fund.
Reply to this commentLinkReport AbuseAny state that requires a bailout should be placed in territorial status ... Which means no congressional representatives and an appointed governor.
We do have something of a precedent. The South was occupied ...
Reply to this commentLinkReport AbuseSean in NYC:
Absolutely true. But we can't fire the voters. Unfortunately.
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