{"id":516848,"date":"2010-04-05T12:55:25","date_gmt":"2010-04-05T16:55:25","guid":{"rendered":"http:\/\/www.theatlantic.com\/business\/archive\/2010\/04\/saving-states-from-themselves\/38480\/"},"modified":"2010-04-05T12:55:25","modified_gmt":"2010-04-05T16:55:25","slug":"saving-states-from-themselves","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/516848","title":{"rendered":"Saving States from Themselves"},"content":{"rendered":"

In the new issue of the New Yorker, James Surowiecki has an article
\n <\/a>comparing the debt problems of our states to the member states of
\nthe EU. Surowiecki points out that unlike European states, our states
\nget “automatic fiscal stabilizers” from the federal government, which
\neases the problems. <\/p>\n

But for all that, I think he’s rather too
\nsanguine about the fortunes of American states. For one thing, while
\nit’s true that the US government has greater institutional capacity to
\ntransfer money from feds to states, Europe may have a larger incentive.
\n If a member state defaults, the euro may well go under, causing havoc
\nacross the eurozone as their currency falls apart, and lenders start
\ndemanding currency risk premia. If California defaults . . . well, a
\nbunch of other states will get the fish eye from the financial market,
\nbut this probably won’t translate up to the national level.<\/p>\n

Perhaps
\n more importantly, I think he dramatically underweights the risk of
\nmoral hazard:<\/p>\n

All this aid comes at a price, of course: it
\nincreases moral hazard, and it increases the national deficit. But the
\nfederal government is able to borrow money at exceptionally cheap rates,
\n and, at a time like this, when the economy is still trying to find its
\nfeet, forcing states to cancel building projects and furlough teachers
\nand policemen makes little economic sense. (Indeed, there’s a strong
\ncase to be made that more of the original stimulus package should have
\ngone to state aid.) The European model would do more harm than good, as
\nAmerican history shows: in the early eighteen-forties, after the
\nbursting of a credit bubble, many states found themselves in a debt
\ncrisis. The federal government refused to bail them out, and eight
\nstates defaulted–a move that cut off their access to credit and helped
\nsink the economy deeper into depression. The U.S. did then what Europe
\nis doing now, putting the interests of fiscally stronger states above
\nthe interests of the community as a whole. We seem to have learned our
\nlesson. If Europe wants to be more than just Germany and a bunch of
\nother countries, it should do the same.<\/p><\/blockquote>\n

The moral hazard involved
\n is no small thing. We’ve already introduced quite a lot of it into the
\n banking system, but at least the CEOs of those banks got the sack, and
\nthe rest have some genuine fear that regulators will get more involved
\nin their business. The Federal government is constitutionally
\nprohibited from the kind of prudential regulation that would be
\nnecessary in the wake of bailouts.<\/p>\n

This is particularly worrisome
\n because of the nature of the state problems. This is not a classic
\nsovereign debt issue, where there’s a giant overhang of high-interest
\nbonds that can be renegotiated at a haircut, or bought down by money
\nfrom outsized sources. What the states have is a bunch of other
\nobligations, especially to current and past employees. I don’t see how
\nthese can be bought down, and there are substantial legal and political
\n(not to say moral) issues with asking, say, current pensioners to “take a
\n haircut.”<\/p>\n

If the feds bail out these states, they’re assuming
\nan ongoing obligation–and encouraging other states to let their fiscal
\nproblems get as big as possible, so Uncle Sugar will have to pay off.
\nLeaving aside any ideological questions about robbing Peter to pay Paul,
\n and the proper size of government, the federal government simply
\ncannot afford to take on all these new obligations–and if it did, its
\nability to borrow money would rapidly become unsustainable.<\/p>\n

Sure,
\n there’s nothing wrong with giving states temporary assistance to keep
\nthe recession from hitting too hard–but we’re approaching the point
\nwhere that’s not really what we’re talking about. We’re talking about
\nletting states make big promises without bothering to find sustainable
\nsources of revenue with which to pay for them. That’s not something the
\n federal government can afford to encourage.<\/p>\n



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\n<\/p>\n","protected":false},"excerpt":{"rendered":"

In the new issue of the New Yorker, James Surowiecki has an article comparing the debt problems of our states to the member states of the EU. Surowiecki points out that unlike European states, our states get “automatic fiscal stabilizers” from the federal government, which eases the problems. But for all that, I think he’s […]<\/p>\n","protected":false},"author":80,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-516848","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/516848","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/80"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=516848"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/516848\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=516848"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=516848"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=516848"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}