A Forum on State Bankruptcy

My colleague at Economics 21 organized a panel — a genuinely fascinating panel, though I’m obviously biased — on the virtues and pitfalls of David Skeel’s proposal for allowing state governments to declare bankruptcy. You can watch the panel here.

Clayton Gillette, a professor at NYU Law School, raised what I see as a key issue:

The core question is how bankruptcy for fiscally distressed states compares to the alternatives of a federal bailout or of allowing states to use their internal political and legal processes to deal with the situation. Bankruptcy has the potential benefits of bringing all stakeholders to the table to create an orderly disposition of claims and to allow consideration of which burdensome obligations might be rejected. Bankruptcy law, as federal law, could also overcome difficulties that arise from state constitutional and federal constitutional provisions that limit state capacity to alter existing arrangements. But bankruptcy plausibly could create contagion that spills over to other states and to the federal government, and thus that would justify or require a federal bailout. Because the federal government cannot credibly commit against bailouts, state bankruptcy cannot easily be seen as avoiding the moral hazard related to federal bailouts. Indeed, the availability of a bankruptcy option could create incentives for strategic behavior in negotiations about the terms of a bailout.

All that said, David Skeel has drawn our attention to the dire fiscal condition of state governments, and the political paralysis that is the ultimate source of the problem.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

Most Popular


Romney Is a Misfit for America

Mitt’s back. The former governor of Massachusetts and occasional native son of Michigan has a new persona: Mr. Utah. He’s going to bring Utah conservatism to the whole Republican party and to the country at large. Wholesome, efficient, industrious, faithful. “Utah has a lot to teach the politicians in ... Read More

Fire the FBI Chief

American government is supposed to look and sound like George Washington. What it actually looks and sounds like is Henry Hill from Goodfellas: bad suit, hand out, intoning the eternal mantra: “F*** you, pay me.” American government mostly works by interposition, standing between us, the free people at ... Read More
Film & TV

Black Panther’s Circle of Hype

The Marvel Cinematic Universe (MCU) first infantilizes its audience, then banalizes it, and, finally, controls it through marketing. This commercial strategy, geared toward adolescents of all ages, resembles the Democratic party’s political manipulation of black Americans, targeting that audience through its ... Read More