The Mother Of All Bailouts

Conservatives have a special reverence for the Tenth Amendment to the Constitution, which says “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”  Besides this impeccable Constitutional pedigree, one of the arguments in favor of states’ rights is that devolving power to the several states would make them “laboratories” for innovation, where ideas could be tested… and citizens could vote with their feet, if they found those ideas unworkable.

One problem with that concept: some of those state “laboratories” are the kind of lab where zombie Armageddons get started.  The “scientists” are deranged, experimental methods are a sadistic joke, and containment is non-existent.  These laboratories will not be sterilized before they can release a fiscal super-virus into the American bloodstream.

Michael Corkery of the Wall Street Journal reports on one such super-virus, the impending bankruptcy of state and local pension funds:

“Congress has little authority over, or responsibility for, state and local public-employee pensions. But with pension liabilities increasingly stressing state and municipal finances, the prospect that the problem will end up in Washington’s lap has some academics and politicians urging that the federal government move preemptively.

The latest wrinkle: A bill introduced last week by three prominent House Republicans to deny states and localities the ability to sell tax-exempt bonds—the lifeblood for many governments—unless they report their pension-fund liabilities to the Treasury Department.  The federal tax-free status of interest on municipal bonds helps generate demand for the bonds and lowers government borrowing costs.

[…] For decades, the federal government has regulated corporate pension funds and a federal agency, the Pension Benefit Guaranty Corp., can bail them out.  But there is no such federal backstop for state and local employee pensions.  Some argue that Washington would be hard pressed to ignore a pension plan if it threatened a major government insolvency.”

Situations like this provide a warning about overstating the benefits of devolving power to the states.  The states are still plugged into the federal spending apparatus, and if they fail on a sufficiently massive scale, taxpayer-funded bailouts are all but inevitable.

The most pressing danger, as the Wall Street Journal story illustrates, is the creation of unsustainable benefit programs.  Public employee unions are a growth medium for this fiscal virus – a mechanism for the government to beg itself to grow larger, by making lavish promises to itself, which the non-unionized workers of the future will be obliged to pay for. 

Labor unions exist to secure higher pay and benefits for their members.  In the private sector, the upper limit of ambition for the union is the point at which its demands kill the industry which employs its members.  Note how the fusion of government and private industry in the General Motors bailout deliberately short-circuited this safety mechanism, pumping taxpayer cash into a corporation that was killed stone-dead by union demands… for the primary benefit of that very union, the United Auto Workers.  The jobs of its membership were preserved by the bailout – a fact openly boasted by President Obama – and their pension fund reaped far more benefits from the bailout than anyone else.  In fact, they were given explicit financial priority over the original private-sector investors in General Motors.

Public employee unions face no such theoretical limits.  Their demands would only end when the taxpayers put a stop to them, through the slow and intricate process of voting union-friendly politicians out of office.  Public unions have grown titanic using the strategy that you care less about restraining their benefits than they care about receiving them.  They have a lot of money to spend on political donations to implement that strategy.

Increased pension benefits are especially tricky for taxpayers to oppose, since they become a fiscal bomb that detonates in the future… when taxpayers will be told they have absolutely no choice but to bail them out.  The measure described by the Wall Street Journal is an attempt by House Republicans to contain this financial virus, but the only cure would be dissolution of public-sector unions, which did not exist at the state level until the Fifties, while federal employees gained the right to collectively bargain under JFK in 1962. 

I have great respect for the Tenth Amendment, and I’m all in favor of states’ rights.  However, without the installation of firm protections against fiscal irresponsibility at the state and local levels, we’ll just end up with state “laboratories” run by mad scientists, in a race to see which big-spending state government goes bankrupt first, and triggers the Mother Of All Bailouts.  California is drawing fearfully close to the finish line already.