by James A. Bacon
As Greece stumbles towards default on its budget promises and the European Union continues its slow-motion meltdown, a growing number of people are wondering if default is in the cards within the Dollar Union, in other words, the good ol’ United States of America.
California’s projected budget gap has increased from $9 billion in January to $16 billion today, a gap that Gov. Jerry Brown proposes to close with a debilitating combination of tax hikes and spending cuts. Meanwhile, despite jacking up income taxes last year (or perhaps because of it), Illinois faces a $2.7 billion revenue shortfall. In desperation, Gov. Pat Quinn is pushing cuts to programs serving his core Democratic constituencies, Medicaid recipients and public sector employees.
The Blue State governance model is in free fall. Normally, states don’t incur budget crises until a recession devastates their revenues. Now, we’re experiencing budget crises three years into a business cycle. I would advance the argument that a number of Blue States — California and Illinois, most visibly — have entered into an irreversible downward spiral. If they don’t raise taxes and cut spending, they will default on their debts, with incalculable consequences. If they do raise taxes, they’ll chase businesses and the productive class out of the state. If they cut spending programs, they will betray their core constituencies. When the U.S. falls back into recession, as eventually it will, the Blue States are toast.
Now people are seriously pondering the possibility of bailouts for failing states. In a Wall Street Journal op-ed, Representative Kevin Brady, R-Texas, and Senator Jim DeMint, R-South Carolina, argue that it’s time to take that option off the table.
As big government-low growth states fall deeper into the fiscal hole, the question becomes whether Washington politicians will force taxpayers in more prudent states to bail them out. This cannot be allowed to happen. As the 2008 financial crisis proved, bailouts never solve anything. They only create more problems—moral outrage on one side, and moral hazard on the other.
It is becoming clear that the only way to force recalcitrant states to put fiscal reform on the table is for Congress to take state bailouts off of it. Recent experience on Wall Street and in Athens suggests that if decision makers in Illinois, New York, California or anywhere else believe Washington will bail them out of their fiscal mismanagement, we cannot expect any self-directed reform from them. … Congress must—in word and if necessary in law—make plain that the taxpayers will not protect these states from the consequences of their policies.
I whole-heartedly concur. Virginia is among the fiscally responsible states that have worked diligently on a bipartisan basis to balance budgets, issue debt with restraint and maintain an attractive business climate. We haven’t done everything right by a long shot — as I frequently remind readers. Over and above engaging in dubious budget tricks, we have pusillanimously avoided fundamental reform of basic institutions from education and health care to transportation and land use. But, hard as it is to believe, we’ve screwed things up less royally than many others. Virginians should not be asked to pay for the glaring failures of others.
Virginia’s Congressmen need to join Brady and DeMint to make it crystal clear that they will oppose any bid to bail out failed states… a bid that is surely coming, whether next year or next decade. It won’t be hard for Republican representatives, who have no sympathy whatsoever for the travails of the Blue States, to say no. But Democrats could find themselves conflicted.
Republican candidates for Jim Webb’s U.S. Senate seat should press the inevitable Democratic nominee, Tim Kaine, on whether he would vote to bail out the blue states. Get him on the record. If he waffles, make it a campaign issue.
For that matter, it wouldn’t hurt to put heat on Sen. Mark Warner. While Warner has been vocal about the dangers of the impending federal budget apocalypse, he voted for the Obama stimulus and for Obamacare. Virginia voters cannot take it for granted that he would oppose a budget-busting bail out of failed Blue States. Let’s get him on the record.