I may have to write a book called The End Is Near and It’s All Going To Be Reihan’s Fault. Writing in Slate today, Reihan makes an argument (damnably persuasive) for having the federal government pick up certain state liabilities in exchange for getting them to adopt better long-term policies on Medicaid and pensions. I think what Reihan offers is a pretty good tradeoff (and of course we should resist allowing our policy thinking to become distorted by the desire to punish, as much as some of the states deserve a good flogging for their fiscal shenanigans) so far as such things go, but there are limits to what burdens the federal government can bear without bringing serious trouble onto itself and hence onto all of us.
For the record, I do not expect a sudden federal fiscal crisis any time in the near future. I have not seen any reason to. But there is a risk of one: The interest rates we are paying on federal debt are very low by historical standards, and if they should return to something more like their historical average, then debt service goes from being 6 percent of federal spending to something that looks more like a Pentagon-sized hole in the budget or Social Security-sized hole in the budget.
No one seems to take that risk very seriously, and maybe they’re right to discount it.
Maybe not.
The unfunded pension liabilities Reihan is talking about amount to trillions of dollars. One analysis has the unfunded pension liabilities in California alone approaching $1 trillion.
In general, I’m okay with Reihan’s model of bribing state governments to behave more responsibly if the resulting policy changes mean we get a reasonable rate of return on our bribe. But we should do so with the knowledge that there are limits to what can be carried, even by the federal government.