Michael Barone’s latest column is a great argument for cutting some public employee unions down to size. This isn’t a surprise to anyone who’s paid attention to California’s, Michigan’s, Illinois’ and New York’s budget crises. It’s time we dealt with these crises. Mr. Barone writes that, whether legislators deal with the crises or not, markets quickly will. Here’s how Mr. Barone thinks these states will ‘get religion’:

The prospect is that the bond market will quit financing California and Illinois long before the federal government. It may already be happening. Earlier this month, California could sell only $6 billion of $10 billion revenue anticipation notes it put on the market.

Individual investors have been selling off state and local municipal bonds this month. Meredith Whitney, the financial expert who first spotted Citigroup’s overexposure to mortgage-backed securities, is now predicting a sell-off in the municipal bond market.

So it’s entirely possible that some state government; California and Illinois, facing $25 billion and $15 billion deficits, are likely suspects; will be coming to Washington some time in the next two years in search of a bailout. The Obama administration may be sympathetic. It’s channeled stimulus money to states and TARP money to General Motors and Chrysler in large part to bail out its labor union allies.

But the Republican House is not likely to share that view, and it’s hard to see how tapped-out state governments can get 60 votes in a 53-47 Democratic Senate.

How to avoid this scenario? University of Pennsylvania law professor David Skeel, writing in The Weekly Standard, suggests that Congress pass a law allowing states to go bankrupt.

Skeel, a bankruptcy expert, notes that a Depression-era statute allows local governments to go into bankruptcy. Some have done so: Orange County, Calif., in 1994, Vallejo, Calif., in 2008. Others, perhaps a dozen small municipalities in Michigan, are headed that way.

Governors like Jerry Brown and Pat Quinn won’t tighten things on unions, even though their states are being ruined by union pensions and out-of-control state spending.

With Brown and Quinn, it’s likely that these corrupt politicians won’t tighten things up because they’re getting substantial political contributions from the public employee unions for their campaigns.

In Nixon’s time, that practice used to be known as setting up a slush fund. Today, it’s just business-as-usual. By either term, it’s a form of corruption.

The reality is that it’s likely that bond markets will prevent states from borrowng money to fuel their spending addiction. The longer the addiction isn’t curtailed, the more painful the remedy will be when it eventually arrives. And it will arrive if we don’t change our spending habits.

The threat of bankruptcy would put a powerful weapon in the hands of governors and legislatures: They can tell their unions that they have to accept cuts now or face a much more dire fate in bankruptcy court.

It’s not clear that governors like California’s Jerry Brown, who first authorized public employee unions in the 1970s, or Illinois’s Pat Quinn will be eager to use such a threat against unions, which have been the Democratic Party’s longtime allies and financiers.

But the bond market could force their hand and seems already to be pushing in that direction. And, as Bowles notes, when the markets come, they will be swift and severe.

The policy arguments for a bailout of California or Illinois public employee union members are incredibly weak. If Congress allows state bankruptcies, it might prevent a crisis that is plainly looming.

With the federal deficits in excess of $1,000,000,000,000, with unemployment almost 10 percent, with a GOP majority in the U.S. House and with bond markets destabilizing, it’s difficult, if not impossible, to picture a scenario under which a federal bailout might pass.

The only conditions under which it might pass is with a tightly-enforced spending cap being included in the legislation. Even then, it’s still an uphill fight at best.

With Speaker Boehner, Budget Committee Chairman Ryan and other fiscal hawks ready to shoot down the Democrats’ extensive wish list, how willing will Democrats be to fight for more union bailouts? I’m not betting they’ll be that excited to fight for another round of unpopular bailouts.

With the American people not being in a spendaholic mood for the foreseeable future, it isn’t likely that Republicans will get hurt by saying yes to sane spending habits. Similarly, it isn’t likely that Democrats will be helped by being spendaholics.

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3 Responses to “Stop the Presses”

  • eric z says:

    For credibility, unlike Pawlenty, Dayton should start by reforming the spoils system for top executive posts.

    Then and only then should the rank and file be attacked.

    Pawlenty was awful with that one woman idealogue who had to be dumped because of the malignant mesothelioma occurrences all over the Iron Range among mine workers that were being withheld from disclosure; and putting Molnau in charge of transportation with the bridge falling on her watch.

    Not that she’s alone at fault, but she had no competence for that job.

    Then, DEED and chief-of-staff musical chairs; all to show that the spoils system under Pawlenty thrived in ways I expect, out of respect, to not see with Dayton.

    In trimming fat, the GOP did almost zero; on payroll; while featherbedding the top cronies and insiders’ nests.

    It’s wrong when either party does it and criticizing Dayton, I am sure you will do that, but far, far too many Republican commentators simply turned a blind eye to how Pawlenty handled things.

    Also, there are contracts, and I am certain the intent of the post is not to undermine freedom of contract. There was bargaining, and there was a result.

    Contracts, undermined, seems inimical to mainstream GOP concerns for orderly conduct of business – even while opposing regulation of financial dealings, the GOP has not wanted to destroy trust in contracts being negotiated and then lived up to. I have seen litigation suggesting it’s a problem, breach of contract, and it should not start with any government breach of labor contracts – directly or insidiously.

  • eric z says:

    Also, in fairness; we cannot forget that the immediate Wall Street bailout after the housing sector was put under during Bush-Cheney years was by Paulson and Bernanke, both GOP appointees.

    Why in the world Obama reappointed Bernanke is a mystery.

    He torpedoed Obama’s congressional majorities by delaying the bond purchase until after the election.

    Good GOP guy that way. And the plunging dollar, see how that works out long term for our citizens.

    I don’t believe you suggest that private sector bailouts are okay but congressional help for the unemployed and those in foreclosure is bad.

    So, the role of the Fed, how does that work into your analysis, along with the main bond market unrest being over Europe and the developing world; with Treasuries being viewed as the safest hedge.

  • Gary Gross says:

    Eric, The Fed’s eternal bailouts are a waste of money. For being a tool of Wall Street, I sure don’t agree with them all that often. As for the unemployment, I’m ok with extending them as long as they’re tied to implementing real capitalist, free market policies, not the failed crap that President Obama’s kept in place the first half of his term.

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