Monday, January 24, 2011

Thomas Sowell on State Bankruptcy

Read the whole thing for other interesting bits.  I just want to address this one issue...

We're getting very close to the point where we could have states default on their debts for the first time. What should happen then? 

They should go bankrupt. I'm looking forward to it. 

There are three possibilities -- bankruptcy or bailouts or ruinous taxations. Of the three, bankruptcy is the one that makes the most sense because it's the one that conveys the most accurate knowledge -- which is that they've run out of money and couldn't cover all the promises they made. That fact should be revealed to all for future reference. The other thing about bankruptcy is that it's the only thing I know of that can get rid of these ruinous public sector union contracts with these extravagant pensions. Those pensions are so popular because the politicians can promise the pension now and get votes now without losing the votes of taxpayers now, because they don't set aside enough money to cover the pensions. Then they simply kick the can down the road and leave it to somebody else to figure out what to do when the money runs out.

I greatly admire Thomas Sowell, and I would never contradict him on economics, but I think he's ignoring the constitutional issues with state bankruptcies.  States are sovereign -- there's no current legal way for them to go "bankrupt".  They can simply refuse to pay theirs debts, as some did after the Civil War.  I think it would take a constitutional amendment to allow states to go bankrupt.  That's probably a good idea, but it seems unlikely to happen as long as Democrats are in power.  They'll go for a federal bailout so that they can protect their political allies.  Look for the bond holders to take a severe haircut.  Ask the Chrysler bond holders how that worked out for them.

Posted via email from The Blue Pelican

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