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Published on: December 6, 2010
NY Times Warning: Blue State Armageddon On The Way

The global financial crisis could be heading to a blue state near you: that is the latest grim news from the New York Times:  “Mounting Debts by States Stoke Fears of Crisis.”  Normally a cheerleader for the free spending (in bluespeak, compassionate) policies of the public sector union dominated, high tax, high cost states like […]

The global financial crisis could be heading to a blue state near you: that is the latest grim news from the New York Times:  “Mounting Debts by States Stoke Fears of Crisis.”  Normally a cheerleader for the free spending (in bluespeak, compassionate) policies of the public sector union dominated, high tax, high cost states like California, Illinois and New York, the Times now warns that fiscal ruin could be at hand. 

The problem is state debt.  New York, California and Illinois look more like Greece to their bondholders every day.  Since the November elections, investors have been dumping their bonds, and hedge funds are betting against them, perhaps realizing that a Republican House is not going to offer generous, condition free bailouts.  

“It seems to me that crying wolf is probably a good thing to do at this point,” Felix Rohatyn told the Times.  Rohatyn is the legendary investment banker called in to bring New York city back from the dead in the 1970s and he remains one of the most respected voices in American business life.

The Times story compares blue state debt to the subprime crisis and the Greek meltdown.  A deeply disturbing graph shows a true panic underway as investors pull money out of mutual funds that invest in municipal bonds even faster than at the height of the market collapse in October 2008.  With as much as $4 trillion in off-the-books pension and health care liabilities, the worst hit states may soon be unable to operate without massive federal support.

The crisis could come much faster than Washington thinks.  States and municipalities sold more than $55.6 billion in debt this November even as individual investors reduced their holdings of mutual funds containing these funds by $5.37 billion in the two weeks ending November 24.  If supply keeps rising while demand sinks, sooner or later prices are going to crash.

If things go wrong in the markets for blue state debt, watch out.  If big blue states like New York, California and Illinois hit a point of market failure when private investors will no longer buy their bonds, Washington will have to decide what to do.  Fast. 

It will be ugly, and it will hurt. 

Will GOP legislators bail out the public sector unions and shovel cash into the maw of improvident and badly managed blue states like so many steaming German taxpayers bailing out the lazy Greeks?  Or will Congress sit on its hands while vital state services close down, unemployment spikes, and the financial markets panic?  Will all parties turn to the Fed to buy up state bonds?  If so, on what conditions and terms?

While an unprepared, polarized Washington argues, markets will be melting down.  Risk unnerves bondholders; the sight of clueless debates among angry politicians makes markets unhappy in good times.  In times of crisis this is a scenario for total panic.

It’s hard to overstate the havoc that a meltdown in the state and municipal bond market would cause.  Many private investors and retirees are heavily invested in securities long thought safe.  Worse, many pension funds, including state pension funds, have large positions in the muni market.  The meltdown could feed on itself as falling bond prices would undermine state pension fund reserves and raise the interest rate on new debt issues.  The panic will intensify and spread, sucking new states into the maelstrom — as more and more European countries have been affected by a crisis once limited to Greece.

Bond investors are much more skittish than stock buyers.  Any risk of default sends them running for the exits.  Without swift federal action, a crisis in the market for some cities and states would inevitably lead to sharp spikes in interest rates for other state and city governments whose positions suddenly looked risky.  Massive layoffs of government employees would be inevitable in a widening range of affected states, throwing the weak recovery off course and quite possibly bringing on the much-feared second dip of the recession. Many banks and other financial institutions like insurance companies hold significant portfolios of state debt; if those bonds tank in value, we could go back to the darkest days of the financial crisis of 2008 as big banks and insurance companies come running to Uncle Sam for more bailouts. 

More TARP, anyone?  More huge bailouts of big banks?  More eye-popping federal deficits as world credit markets grow increasingly skittish?

None of this is happening tomorrow.  For one thing, fears about the eurozone are temporarily boosting US markets as nervous investors eye the chances that Spain, Italy and even Belgium will join the growing list of crisis victims. But Americans should not gloat; as Wolfgang Munchau points out in the Financial Times, the ineptitude and gridlock among European economic authorities is a major force in the market uncertainty there. We could quickly face the same problems here as Tea Party Republicans wrestled with Blue State Democrats over potentially the biggest state rescue package in American history.  The US government is less unwieldy than the many-headed Brussels monstrosity, but if Congress and the President are wrangling and small groups of Senators are blocking legislation at a moment of real financial crisis, things could get very ugly here very fast.

Back before the midterms, investors were justified in thinking that Democratic majorities in Congress would rally behind a Democratic president seeking to save the top Democratic states from a financial meltdown.  (Much of last year’s ‘stimulus’ actually consisted of emergency cash transfers to strapped states in order to prevent mass layoffs and service cuts.)  Now it is much less clear where the states stand and what kind of help will be available.  Uncertainty equals risk for bond investors: the White House and the Congress need to plan now to deal with the possible crisis.

A sudden storm in the muni markets will not be fun for Republicans in office.  It’s hard to see the Tea Party forgiving legislators who plump for a vast federal bailout of the big blue states (unfunded state and local pension liabilities plus unfunded health care pledges could total about $4 trillion); it’s hard to see voters forgiving a Congress that doesn’t protect the country from a massive financial breakdown.

But if Republicans will be damned if they do and damned if they don’t, Democrats will just be damned.  The prospect of a blue state fiscal crisis is an uncomfortable and threatening one for the GOP; it spells potential catastrophe for the Democrats.  The bankruptcy of the big blue states would symbolize the bankruptcy of Democratic party policies to wide swathes of the voting public.  Tensions within the Democratic Party would explode: unionized public sector workers would simply not be able to emerge from this kind of crisis without savage layoffs and agonizing cuts in their pay, benefits and pension packages.  All the promises (mostly) Democratic politicians have made to them over decades will be exposed for the hollow frauds they were.

Some Democratic voters, heavily dependent on state spending because they are state employees or because they rely on state and local spending for vital services, will want the party to fight for them.  But very few non-affected Americans want to be taxed or for the federal government to take on large amounts of new doubt to bail out the cushy pensions of public employees. Nor will voters in the non-bankrupt states want to bail out the ne’er-do-wells without strict conditions and limits.

There will be a racial dimension as well.  African-Americans will be disproportionately affected both by cuts in state services and by public sector layoffs and compensation cuts.  They will expect a Democratic Party to which they have been faultlessly loyal for many decades to stand up for their interests in a time of grave crisis.

Cuts from cash strapped state budgets are already rippling through the country — and they are not making people happy.  Cities across New Jersey are making massive cuts in their police forces.  Public colleges and universities are already reeling in many states; over the weekend the Times also reported that SUNY Albany has stopped allowing new students to major in languages like Latin, Russian and French.  (“Orwellian”, screamed an article in Le Monde.)

The fiscal meltdown of the big blue states, if financial Armageddon actually arrives, will be the biggest domestic crisis for the American people since the Depression, and the biggest crisis for the Democratic Party since the Civil War.  Smart contingency planning now in both Washington and the states is the best way to try to prevent the crisis from happening, if that is still possible; if the crisis comes after all, advance planning can keep a serious problem from turning into a historic disaster.

Let’s hope a shell shocked White House, a triumphant GOP and an overburdened Federal Reserve are devoting some time to thinking this through in advance.  Once a long threatening crisis actually starts, it is much too late to plan.

show comments
  • Caleb Winn

    Do you know if there are any legal or institutional barriers to the FED purchasing long-term bonds from State governments, as it intends to purchase long-term Treasuries (QE2)? Obviously this would not be ideal, but that could be a way of side-stepping political intransigence in the face of a true crisis, no?

  • Neville

    “Once a long threatening crisis actually starts, it is much too late to plan.”

    Not so… Politicians tend to see a financial crisis as an opportunity rather than a problem. Suddenly everything depends on what they decide. They have never had so much money to give away, or so many clients clamoring for it. Their immediate goal becomes to drag the crisis out rather than resolve it quickly, extending their period of maximum influence.

    Putting some sort of an effective plan in place, either beforehand or soon after the crisis starts, would mess this all up.

  • joe

    Professor Mead:

    There is some talk of creating an apparatus for legal State receivership as an adjunct to the existing bankruptcy system. How constitutional this is, especially in the western states where statutory questions are put forth to a plebiscite, I don’t know, but people and many lawyers are considering the question.

    I think you are being overly sanguine about the problem. I see it potentially ripping this country apart by political affiliation, race, economic status and region; a pitiable second Civil War where the objection of contention is: pay your bills and make good on your promises. Should it happen, it will be a fitting coda and a bright blue bonnet on the baby boomers’ legacy of greed, and fantastical self-reverence.

  • WigWag

    Professor Mead mentions California, Illinois and New York as if the problems they were facing were all the same; this isn’t true. New York State is faring considerably better than California and Illinois and while deep budget cuts will inevitably be necessary, the idea that New York will become insolvent or default on its debt seems extremely unlikely. As a matter of fact, the smart money is bullish on New York State sovereign debt (and especially New York City debt).

    One of the few sectors of the economy that is thriving is the financial sector; profits on Wall Street are once again approaching record levels and Wall Street firms are planning to disburse huge bonuses. Goldman Sachs is doing extraordinarily well, J.P. Morgan Chase, led by the brilliant Jamie Dimon, is making money hand over foot and even firms that once seemed to be teetering, like American Express, are doing surprisingly well. Hedge funds are back to knocking the ball out of the park and all of the businesses that service these companies (such as the white shoe law firms and accounting firms) have gotten back on their feet.

    The financial sector is far and away the most important ingredient in New York State’s economic climate. With this sector thriving, it seems high likely that tax revenues will improve enough in both New York State and New York City to insure that while difficult budget cuts need to be made, they won’t be overly draconian.

    California, Arizona, and Illinois may be in deep trouble, but as the old song goes, “the Bronx is up, the Battery’s down; the subway runs in a hole in the ground.” As long as Wall Street continues to be located just a few short blocks from the Battery, New York will get by just fine.

    Which is good, because someone needs to subsidize the schools, libraries, hospitals and public safety infrastructure of rural communities like the one Professor Mead now lives in.

  • kj_california

    Your observation, “The bankruptcy of the big blue states would symbolize the bankruptcy of Democratic party policies to wide swathes of the voting public.” is prophetic and quite fitting.

    I wondered how the Democrats managed to win every state-wide office in this past election cycle. I suspect now it is the irony-factor present in much of human affairs that operates on the principle “you asked for it, you got it.” :-)

    If (when) this latest fiscal crisis comes to fruition, it will be vastly entertaining to watch Governor Brown and his cohorts squirm, twist, and wiggle on the hook as public unions scream their bloody heads off for their pension “bailout”. I hope and pray Washington comes back with a resounding “NO” on that.

  • dc

    so much blather, zero understanding of the muni market. give yourself a tutorial: https://self-evident.org/?p=870

  • Wayne Lusvardi

    Professor Mead:
    The California online Treasurer’s Debt Affordability Report doesn’t reflect the picture you paint. The ratio of debt payments to General Fund revenues for 2009-10 is 6.69%, projected to be 7.71% for 2010-11. Moody’s State Debt Medians Report indicates Cal’s debt is 5.6% of personal income or $2,362 per person equating about about $5,905 per household. The debt burden per taxpaying household, however, would be much higher as many Californian’s don’t have to pay taxes (a guess is about double or $12,000).

    The state budget is $90 billion for ’09-’10.

    An analogy would be a household living on $90K a year and it has 7;7% debt ($6,930) to pay on its credit card but only at a 5% interest rate (about $492/year). The problem is that this fictional state household is incurring debts of $20,000 per year in excess of income and rolling it into its low interest credit card (bonds).

    The Cal Legislative Analyst projects $100 billion in deficits accrued over next 5 years ($20 billion per year).

    So back to our make believe Cal household. A $20,000 deficit per year can be managed if it is rolled into the debt at 5% interest rate or a mere $1,419 per year in payment obligations. In five years the payments will only be $7,095 per year. So California is waiting out the recession and rolling deficits into debt until the anticipated recovery shows up. Problem is that it is now becoming apparent that we may be in a deflationary period like from 1929-1939.

    So about 2012 to 2014 the proverbial California hazardous waste should hit one of its greenie wind turbines. 2012 is also the year that Cal’s Global Warming Solutions Act kicks in. So our fictional California family is waiting for a rich uncle of the economy to bail them out by 2012 to 2014.

    It is also hoping to raise electricity rates beginning in 2012 some of which can be siphoned into municipal coffers via utility user’s taxes to pay for overly generous retirement packages. Call it back door financing.

    So California’s state household is waiting for some relief from reverse metering of a solar system installed on its roof to generate higher priced power than the market which it can, in turn, resell back into the energy grid a al Enron “FatBoy” scheme. The problem in that FERC rejected this scheme back in July when attorney general Jerry Brown filed a brief in favor of it. So keep an eye on California around the summer of 2012 when electricity ratepayers get a $750 electricity bill and can’t afford to run their air conditioners.

    • Walter Russell Mead

      @ Wayne LusvardI:
      It’s not whether I believe these numbers; it’s whether investors do. The Times report suggests that increasingly, they don’t. The Greeks published some pretty good statistics too.

  • Mike M.

    As far as I’m concerned, the big socialist coastal municipalities can all drop dead. Let them learn the hard way that their actions have real consequences and that there’s no such thing as a free lunch.

  • Engineer

    Another point that Dr. Mead doesn’t bring up is the aspect of voting with one’s feet. A lot of job creating affluent individuals have been leaving California for lower tax surrounding states. This leaves California progressively less able to meet its bills and saddled with a less dynamic and innovative economy. I’ve also seen anedoctal evidence of movement at the bottom end of the economic spectrum to California to take advantage of generous social welfare benefits.

  • Luke Lea

    End of a superpower. Trade and immigration did us in by gutting our industrial base and undermining the quality (and wages) of our workforce, all in the name of political correctness and economic orthodoxy (which is just another form of political correctness). This is so sad — not that we cannot afford the cost of maintaining an empire, but that we have traded in a middle-class democracy for a racially stratified class society without the means to support itself.

  • Luke Lea

    Let me amend that comment above. It’s not just political correctness and economic orthodoxy that did us in. Corporate irresponsibility played a big part. By their nature joint-stock companies are sociopathic institutions: legal “persons” lacking a conscience or any sense of patriotism. They are like wild animals and need to be caged

  • davelnaf

    We may be witnessing the final days of the old Democratic Party as an important political party, or at least the way we have known it. For many decades the dems used generous amounts of federal money to pad their chances in the next election. Those days are over. We can only hope they have learned their lesson from the last election. But don’t hold your breath. These are leftist politicians, after all, and too many of them find playing the class warfare game far preferable to doing the right thing for the country and the economy.

    Mostly, though, we could be seeing the end of liberalism as a major force in American life. It will survive as some sort of openly progressive party that the Democratic Party actually is right now in all but name. But the widespread cache the latter has enjoyed as the party that claimed to be carrying forward the Roosevelt, Truman, Johnson legacies will turn to ashes if those big blues go under.

    And to think that the Democrats did all of this in order to trigger a VAT.

  • Ritchie Emmons

    I wonder if a Republican House could wrangle out of a tough political spot and at the same time set CA on the road to recovery if CA did actually collapse. Could the Rep House say they would not permit a CA bailout unless CA met certain criteria?

    Could Boehner say that the House will vote to bail CA out only if CA reduces their tax state rate to X%, repeals regulations A, B & C (including that ridiculous delta smelt regulation that’s killing farmers) and passes a law forbidding any public employees from unionizing? I don’t know how practical this would be, but it could conceivably pull CA out of the hole, discredit the liberal/progressive policies that got CA there in the first place and, if successful, show how conservative policies will benefit a state.

  • Claude

    Here’s a suggested compromise. Offer the states some money for their unfunded pension obligations in exchange for converting those plans into 401(k)s. The defined benefit model has been largely abandoned by the private sector because the dynamics of business make a distant promise to pay unreliable. The public sector needs to switch to defined contribution plans too.

  • Jacksonian Libertarian

    Anti Trust the Labor Gangs
    Why should they get special monopolies? Which they use destroy our auto industry, schools, government …etc. The only monopoly I am willing to tolerate is the Government monopoly and I want it severely limited from what it has become. All monopolies suffer from the same massive flaws; they are corrupt, wasteful, greedy, and eventually kill the proverbial “goose that lays the golden eggs” because of it.
    California is going to go first, likely this coming year. It is obvious from this past election that the California voter has discovered that they can “vote themselves monies directly from the Treasury”.
    We are going to test the predictive accuracy of the following quotes (California will lead the way).
    “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship” Alexander Tytler 1787
    “When the people find that they can vote themselves money, that will herald the end of the republic.” Benjamin Franklin
    Pray for and support the TEA Parties, they are our only hope to avoid a bleak future.

  • http://www.lisastewartlaw.com Elder

    Let them fail. If they mismanage their budgets, let them dig themselves out.

  • dookhh

    Boy that 40 years of unbroken Democratic rule that James Carville bragged about a couple years ago seems to have been slightly exaggerated. Looks to me like a party that contains everything from conservatives to moderates to Liberals but always voted uber-liberal may be in for some “readjustments”

  • Black saint

    Obama and the loony left wing of the Open borders, Multiculturalism wing of the Democrat party must be the only species on the face of the earth that cannot or will not learn from experience, even Animals learn from experience!

    The Socialist countries in Europe , Britain, France, Germany, Greece etc. have finally recognized Socialism and the Welfare State with Massive Invasion of uneducated third world parasites flooding in to get on the public dole, does not work and are cutting back government, including numbers, wages, & benefits in order to survive as a Nation and returning to capitalism.

    While here in the USA Obama and the Democrats are hell bent on taking the USA to a welfare socialist paradise in spite of proof all over the world and in the failed Blue States here that it does not work.

    Illinois, Calif, New York, New Jersey, all Blue States that have been controlled by Democrat Majorities for years and long enough to try their spending and taxing that is driving business to other States or Countries while buying votes of public union members by giving wages and benefits that is bankrupting the government and pandering to illegal Aliens with citizens tax money, are now seeing the results, all are bordering on bankruptcy.

    Now Obama is following the same blueprint on a vastly bigger scale for the rest of American using 100,s of billion of the simulate money to reward Democrat supporters and to keep the under worked and overpaid public unions in jobs and buy Workfare & Welfare votes!

    The same multi-trillion dollar con job Obama is attempting, by open borders and giving Amnesty to the invading horde of Criminals & Uneducated Prolific breeding third world parasites & with chain immigration all the ones still left in Mexico to buy 10,s of millions of welfare votes for the Democrat party with money borrowed from China while bankrupting this Nation.

    With the future & further goal of turning the USA into a Spanish speaking Third World Slum modeled on Mexico but controlled Lock, Stock & Barrel by the Socialist/Democrat party Dictatorship of the United Sates of Mexico!

  • PAUL REVERE 2010

    YOU PEOPLE ARE SO EATEN UP BY YOUR OWN SELF ABSORBED INTELLECTUALITY ON THIS THAT YOU FAIL TO SEE THE RATTLESNAKE LAYING AT YOUR FEET ABOUT TO BITE YOU (PROVERBALLY)IE: YOU FAIL TO SEE THAT UNLESS DRASTIC FUNDAMENTAL IDEOLOGICAL CHANGE SWEEPS THE FORM OF GOVT THAT IS IN PLACE, IT WILL BREAK, AND STAY BROKEN BECUASE THE IDIOTS THAT RUN IT NOW, WHO HAVE NO CLUE HOW TO RUN IT RIGHT, WILL STILL BE BEHIND THE WHEEL OF A BUSTED GOVT VEHICLE WITH 4 FLAT TIRES …SO THEY WILL SIMPLY VOTE THEMSELVES PAY RAISES AND COLLECT THEIR CHECKS TILL THE DAY EITHER THE MORON VOTERS WHO PUT THEM THERE HAVE AN EPITHIMY..(NOTGONNAHAPPEN) OR ALL THE MONEY DRIES UP…WILLHAPPENEVENTUALLY…AND AT THAT POINT IT WILL BE SO VERY TOO LATE THAT
    THERE WILL BE NO CHOICE BUT FOR THE GOVNER TO DECLAIR THE EQV OF MARTIAL LAW OVER THE STATE AND LITTERALLY CLEAN HOUSE BY MILITARY FIAT… BECAUSE THE MORON LIBERAL RATS WILL NOT BE ROUTED FROM THEIR HOLES BY ANY OTHER MEANS…. THIS..IS WHATS COMING…TAKE IT TOTHE BANK…

  • Benjamin Norbert

    The people — of all ages, states, ethnicities and degrees of dependence on government services, largesse and jobs — who voted the present anti-American Obama regime into place, deserve to suffer. This once-great nation needs shock therapy, as it’s young are not really educated in the sense needed to be good citizens, while it’s present rulers and ‘elites’ comprise (with exceptions of course) the Worst Generation. I welcome an upheaval of the sort that Mead describes. The America post such a crisis will be a freer, more constitutional nation, with the soft Stalinism and rampant PC/White Guilt in academe, MSM, and other institutions in ruins. Our immigration policy will return to one favoring US national interests and a rational distribution of demographics. Borders will be enforced, and people at airports profiled based on sensible criteria. People like Ayers, Manning and the Ground Zero Imam will be arrested/tried or deported, as the case may be. People will get into colleges and land jobs based on their talents and abilities, not their victimology ranking.
    For decades, Liberals have been migrating to nice, sensible, high-quality-of-living states and cities, and in so doing both escaping the mess their voting patterns and ‘values’ have created in their old haunts, and wrecking their new locales. It us time That physically beautiful, yet otherwise basket-case states, were reclaimed by true America. Perhaps by some Lind of Reconstruction, following the crisis that this article foresees.

  • FriscoDB

    How could advance planning stave off the impending bankrupcies? Name a solution that is politically feasible. The electorate would have to comprehend the problem and submit to a market assessment of their value before any solution could be implemented. If Jerry Brown’s solid victory in California has taught us anything, it is that economic carnage, institutional chaos, and reeducation borne from desperation are exactly the medicine required to remedy this nation’s parasitical infestation. The nexus between survival and behavior has to tighten before we will ever again witness an improvement in our mean standard of living.

  • Scott in CA

    I’m not sure the House can do much about the Delta smelt issue as it was a federal judge that gave the order to turn off the water pumps.

    State employees here got the right to unionize by an executive order issue by one Governor Jerry Brown in 1974. I assume that order could be undone by Brown again with enough federal pressure. That would, of course, destroy Brown’s political career here, but since he’s 72 he may not care.

    I work for San Francisco city government. Our pension system is in much better shape than the state’s but still needs more funding. Here’s the problem, though: SF needs to put $150-200 million a year into the pension system. SF spends $175 million a year on “homeless services”. This is the nature of the problem. “Services” must always take precedent over financial reality. This is the heart of Democrat “government” and why we are in this mess.

  • http://www.inthisdimension.com Alex Scipio

    While it is true CA is a self-made disaster, people also need to understand what their voters just did (aside from insanely returning-to-office the guy who legalized in 1977 the public sector unions that now are bankrupting the state).

    Raising taxes requires a 2/3 vote. Dems don’t have it. So they’ve passed “Fees” instead. Now that also requires a 2/3 vote. RESULT: No more revenue increases.

    The Legislature did not get paid from the date the Budget is required by law, until it actually is passed – but then they got their back-pay, so it was really just a savings account. Now they FORFEIT PERMANENTLY their pay from June 30 until the budget is passed. RESULT: The budget will be passed on-time henceforth.

    Before the election, passing the budget required a 2/3 vote, allowing ideologues to hold it hostage. Now it requires only a majority. RESULT: A more-easily-passed budget NOT hung-up by ideologues Left or Right.

    CA requires a balanced budget. Now we’ll get one, we’ll get it on-time, and it can be balanced ONLY by spending cuts.

    Longer-term result? With no ability to raise revenues, Dem pols will begin to retire as they’ll be unable to pay-back the unions who put them in office. Conservatives will return to office, more spending will be cut. And we’ll be OK… IF, of course, we can get past the next year or so as this takes effect and, no doubt, is contested in various courts…

  • Phil Grimm

    This is an excellent discussion. I believe this will be the mechanism precipitating the coming US sovereign debt crisis.

  • KG1

    Agreed, Paul B. Kansas, deep in the middle of flyover country, has a balanced budget requirement in its Constitution. Its small town appeal and low taxes have attracted the masses of folks escaping the hell-hole of Kansas City, Missouri, where liberals have spent the last 50 years driving that city into the ground. Unbelievably, these new “immigrants” continue with their foolish voting habits that destroyed the city or whatever blue state they just left. New York, California, and Illinois, you and other states like you have had your time of free spending and bailouts. Sink or swim.

  • RWW

    I hope all the big Libs enjoy the trip down. They are the ones who have over promised and need to reep what they have sown. Why should the rest of us bail them out???? May the semi rational people who vote for these idiots will finally learn there is no free lunch and sometime you have to say no.

  • Commodore

    I hope Washington and the American taxpayer do not bail these three states out of the mess they have created for themselves. Most Americans and most states are required to live within their means. These three ‘Democratic’ states have lived the good life, promised their constituents more than they could deliver and now what? More money for their coffers? The citizens have themselves to blame. They should have voted for better, more credible leaders who have the strength and character to say ‘NO.’ Now it’s time to pay the piper

  • CatoRenasci

    The states are sovereigns, let them default on their obligations. There’s no need for bankruptcy, they simply don’t allow employees to sue and they repudiate all or a part of their debts. It will be ugly, but I’ll bet the Supreme Court would stay out of it on state’s rights grounds. They’ll be shut out of the borrowing markets, of course, and they’ll pay their employees in scrip, but since state not federal law governs the labor provisions, let them all fight it out. Different states will come up with different solutions, some will sort it out, others will become [extremely unhappy places resembling less fortunate parts of the developing world– ed].

  • Michael B

    “Let’s hope a shell shocked White House, a triumphant GOP and an overburdened Federal Reserve are devoting some time to thinking this through in advance.”

    Famous last words! The next time any of those entities thinks anything through in advance, will be the first.

  • Michael B

    PAUL REVERE 2010 – turn off your caps loack for heaven’s sake. Nothing says “crank” like an all-caps rant. (By the way: unless you are actually sweeping the floors and dusting the blinds, you are not “literally” cleaning house.)

  • Phil42

    Let China buy those blue states.

    And turn them RED !

  • julia

    If the red states are forced to bail out the blue states, then the citizens of the red states have every right to dictate the terms of how that money is to be used and what cuts must be made in order to repay those citizens. Anything less than that will infuriate people. And if that is not something the blue states can live with, then they can do without. Period.

  • WM

    All that political leaders would have to do when states begin to go belly up is end the accounting and capital rules which it places on financial institutions. That would contain the so-called crisis to just the affected employees and specific financial institutions. The market would self-correct just like it does after every sovereign crisis. Not pleasant, but not contagious either.

  • Steve Thomas

    Allow the reckless and irresponsible blue states to fail. The only thing that bailouts do is perpetuate irresponsible behavior and put our posterity in indentured servitude. Public sector unions must be outlawed. Public sector employees have raped and pillaged the wallets and pantries of the taxpayers for far too long already.
    Steve T., McHenry IL

  • jack carlson

    Any member of Congress from a red state who votes to bail out Illinois, California, or New York had better not come home!

  • http://www.roughtruths.com John the California Refugee

    While advance planning for the coming crisis is a good idea, the kind of plans we would get from our pols now would try to save the states and their cost structure – and those are the root of problem. I believe that unless a crisis is imminent, our political class will decline to make the really hard choices – the ones that will yield howls of ‘heartlessness’ and cries of ‘taking a meatax’ to ‘essential’ services.

    I’m afraid only budgetary brinksmanship is inevitable. We must forces these states to renounce the insane and unfunded promises that they have made to their employees, beneficiaries and well-heeled advocates as the core of any help we might offer. Or we are going to have an even bigger problem a couple of years down the road.

    The markets will punish us severely if we continue to delay the inevitable – look at what happened again today. We must stop pretending we can find a way to pay for what we cannot afford through debt, and level set the states costs (and those of the feds) to sustainable levels. A little pain now will save us later.

  • FBSeagull

    “if the crisis comes after all, advance planning can keep a serious problem from turning into a historic disaster.”

    For 30 years the Democrats in the California state legislature have proven that they can’t even plan tomorrow’s lunch.

  • Eugene WR Gallun

    Speaking of California the motto there is — PARTY TILL THE LIGHTS GO OUT —

    If the democratic politicians bought the votes of the citizens of California — then the citizens of California willingly sold their votes. Who is more corrupt — the politicians or the citizens?

    Don’t expect anything to change in California.

    Eugene WR Gallun

  • Danram

    The consequences of decades of bone-headed liberal policies are as undeniable as they are inevitable. As Margaret Thatcher once said, “The basic problem with socialism is that eventually you start to run out of other people’s money.” And yet what did the good voters of California do just four weeks ago, apparently oblivious to the pending bankruptcy of their state? They re-elected two of the prime architects of their home state’s fiscal train wreck in Barbara Boxer and Jerry Brown.

    Idiots. I can only hope that when they come to Washington asking to federal money just like a crack addict begging for another hit, the new Republican congress will tell them to shove it. They got themselves into this mess, let them get themselves out of it.

  • g50

    Great article. FWIW, you boomer [time wasters– ed] have already put us into indentured servitude, GOP & DNC alike. Fortunately you also drilled self esteem into our heads, so it’s impossible to feel anything other than optimistic about the future. Great article, again. I have faith that America can avoid this catastrophe – good to be aware of the risk though!

  • Skep41

    I look at Jerry Brown and the California legislature and fear for my safety. Where can I run? Where can I hide? Is this the true end of the revolution against the old values that took place in the 1960s? Lack of integrity turns bonds and currency into worthless paper and with the election of Barak Obama and the Democrat supermajority the end of integrity was reached. The corollary of an innately dishonest system like socialism is a worthless currency. The fact that there is no sense of urgency about this little matter in the ruling class is terrifying. We’re going to be Mexico poor.

  • CAPT Mike

    Professor Mead,

    As a libertarian that has lived in many states, I state the obvious opinion of most of the country:
    Screw CA, NY and IL.
    Their pols lied, they bought the lies, and now they can pay the piper. Or not.

    Most likely they will ultimately have to renege on public employee union contracts that were never properly funded in the first place.

    In any case, there is no d*mn way any resident of FL, MT or “fill-in-blank” state should have to bail out the losers that overspent.

    Life is tough. Get a job. Spend less.
    Stop whining.

    Best Regards,

  • John Morris

    Not bailing em out isn’t an option. If it were a couple of small states we might could tell em to suck it up and deal. CA, IL and NY comprise too large a share of the US economy to allow em to just sink.

    So we need to be figuring out what conditions we can attach to the aid. If we can get to 2013 and an all R government we should make every [darn — ed] D in states receiving aid resign as the very first condition. And make em do the full acceptance of blame in public. “Yes, I was part of the problem. I made promises I knew couldn’t possibly be kept to buy the votes to keep my crooked ass in power.”

  • jhoger

    It must be a lot of work shoveling snow out of a driveway, if it drives this kind of irrational blind hate of California.

    Yes Cali’s a hell hole of riots and fires and gangs and contaminated beaches. Please remain right where you are and avoid California at all cost, [unloved persons of the Tea Party persuasion — ed].

  • PN Peterson

    The central state-level political question for the coming 5-10 years: When do public sector unions turn from becoming the electoral engine of the Democratic Party to its anchor?

  • PerryM

    Blue states believe in socialism – stealing from some citizens to make other citizens’ life easier.

    Well that can’t go on forever – bank robbers eventually run out of money robbing the same bank over and over.

    So blue states will face horrible consequences of immoral governing – it couldn’t happen to a nicer bunch of thieves…..

  • Rick

    Socialism is collapsing around the world. America has lived on borrowed money since the Second World War established our premier credit rating. Instead of acting prudently, our political class used our good credit to buy votes with giveaways that did nothing to build prosperity. Our political system has proved itself incapable of fiscal restraint. It will have to be imposed on us by our creditors.

  • Dale Squires

    For red staters, please be advised that when farmer welfare, errrr agricultural programs, are cut and they have to pay the full cost of gasoline (for pickups driving long miles) and they have to pay the full cost of internet, electricity, and other utilities (phone, cable) to small towns and isolated farm households, then they will find that their states are much more expensive to run than they think. Moreover, when their transfer payments to rural poor households are cut, look out.

  • Wil Golden

    [spit — ed] on the lot of them. They did it to themselves by voting themselves bread and circuses from the treasury.

    Now, let them wallow in their own mess. The rest of us didn’t vote their crooks down their throats, and quite frankly, I don’t give a [darn — ed] if they starve.

    If you live in Kalifornistan, and have a brain, MOVE NOW while you are allowed to.

  • Robbins Mitchell

    Well,if the blue states think the American taxpayers are going to bail them out because a cabal of servant class grunts has bankrupted them,then they are seriously self delusional…the public sector can just get its resumes ready and hit the bricks like everybody else

  • Victor LaGina

    Blue State meltdown…grab the popcorn. Can we sell them to the Chinese please?

  • JD

    What’s the difference between California and the Titanic?
    The passengers on the Titanic didn’t vote to hit the iceberg.

  • Tyler McClellan

    Cognitive Dissonance. Outstanding comments.

    http://www.taxfoundation.org/taxdata/show/266.html

  • Thomas

    The problem is that these debts are illegitimate to begin with and the banks and speculators, which engineered this crisis and have profited wildly from the bubbles and from the catastrophes, want to force the states and national governments of the world to sell their remaining assets to them.

    The deficits and debts of Greece, Ireland, Spain, and Portugal are not ultimately worse than those of many other countries which have not yet been attacked. The debts of US states are mild in comparison to the Fed Govt. And, NY and CA DON’T HAVE A HIGH DEBT AS % OF GDP ANYWAY (like 10% vs. 60-70 for the Feds).

    You people who say you are “conservative” or “libertarian” so you hope the blue states go under, YOU ARE NEXT. DON’T SELL OUT OUR ASSETS TO THE FRAUDULENT BANKSTERS!!! PEOPLE COME TOGETHER!!!

    The problem is not the unions, which have long had almost no power (even if you don’t like them), and it is not black people or welfare, which is a tiny % of the budget, it is the BANKS and the DEBT-MONEY system which are the cause of ballooning debt!

  • Buster Bunns

    It all comes down to responsibility for our actions. It is too much to expect our feckless politicicans to be up to this mammoth task. It is We The People who must assume responsibility for the fiscal mess we have created. There are no silver bullets. Only years of thrift, hard work and determination. This demon is ours to slay.

  • Bernd

    Let them go bankrupt. Then force them to cancel all of their union contracts with their public employees and cut pay, benefits and employment levels back to where they were 5 or 10 years ago. So some simple math. How many State employees were there per 1000 people 20 years ago in each state? 10 years ago? Cut that ratio back to something reasonable. Turn all of the State defined benefit retirement plans into defined contribution plans with no commitment on the part of the government to contribute anything in the future (make government employees save for their own retirements like the rest of us).

    These states have acted extremely irresponsibly. There is no reason for the taxpayers of this country to bail them out of either the financial mess they are in, or reward them for their irresponsible behavior.

  • Delmar jackson

    We could start by enforcing current immigratrion laws and stopping emplyment to 20 million illegals and stop 100,000 a month work visas still going strong like nothing has changed in the economy in last 3 years. We could start by recalling and impeaching judges that alowed propositions in california to deny goods and services to be overturned. we couls start by ending 29 % credit card interest and unregulated derivatives by banking that turned into riverboat gamblers and expect us to pick up their losses. we could start by bringing back troops from two stupid wars and closing 200 overseas bases and let foreign boys fight and pay for thier own wars. we could start by ending affirative action for a jamaican or indian that just got off the plane, we could start by stop using Diversity to destroy the social cohesion of communities and let people do for themselves instead of expecting big governmemnt to do everything for them.

  • http://kralizec.wordpress.com/ Kralizec

    In the end, the Americans may be well rid of what seem to be many millions of parasites. However, the parasites are also family and friends, and the anguish of so many loveable parasites may be difficult to endure.

  • http://www.theclassicalliberal.com The Classical Liberal

    I live in a blue state. The government waste is incredible. OTB (a bookie operation) is losing money. Why, because it’s used as an old-fasion client-patronage system.

    I walk my daughter to school every day. There are 8 school crossing guards (one for each corner) but yet EVERY child comes to school with a parent. In 3 years I’ve NEVER seen a child come to school unaccompanied by a parent or guardian. So why do we have school crossing guards for this school?

    We’re paying $100,000 a year for people to collect the trash and work in toll booths (that’s salary + benefits + pension). That’s crazy.

    I could give 1000 examples. The waste must go. These states and municipalities must be let to go bankrupt. The politicians have failed in the fiduciary duty. They have let benefits sky-rocket in return for votes.

  • MRobs

    I agree with Bernd – let them go bankrupt and then the states can break the stranglehold that the unions have on them.

  • jason

    Let us see. California dumped Meg Whitman, a CEO with a wealth of business know how, for Jerry Brown, a mental moron rehash. New York ushered Cuomo in, a regurgitated liberal hack and Illinois re-signed the financially irresponsible retread, Pat Quinn. It’s the idiotic voters in those states that should reap what they’ve sown, not the American public at large. Aside from California produce, what do these states offer the country as a whole? Nothing but debt and ill-mannered gluttons.

    • Walter Russell Mead

      @Jason: Well, there’s Silicon Valley, the Metropolitan Opera and the Chicago Cubs. And a few other things, too — but definitely some tough reform is needed! WRM

  • ConservativesAreFools

    Exscept for Thomas, you are idiots. Get with reality – banks, hedge-fund operators, speculators, corporations with no loyalty to anything but the almighty dollar – they are the enemy. Not unions, not minorities, not the poor. Grasp that very basic fact of life and leave off your whining about them, blue states, etc. We need more Socialism and less Capitalism to make this country work for its people!

  • Bernie Alessandrini

    It’s already too late to save California, Illinois and New York. Americans will not permit another staggering bailout, particularly for States like California that have been living like drunken sailors for decades. It’s too late and it’s time to pay the piper. Government keeps putting newer and bigger bandaids on the disease which keeps getting worse and worse. Either we operate and remove the tumor that is progressivism, or the patient will perish. Big government has its tentacles into every part of our lives, and no matter what it does, it impacts some of our citizens negatively. It’s time to return to the meaning of a “limited federal government” and stop worrying about the financial condition of the rest of the world. A “limited federal government” is what made our Country the greatest in the world and the reason why more immigrants came here than all of the other countries combined. It wasn’t because our government did the “most” for the people. It was because our government used to leave the people alone, and let them do for themselves. And then when the individual citizen failed, it didn’t require a massive bailout and drag half the country down with it. It’s become too big, too much and we don’t want it.

  • http://www.oaktreepublishing.ca J.D.

    Farewell America…
    Hello NWO….

    Farewell naivety
    Hello reality

    Farewell Hollywood
    Hello soup-kitchen

    All so very sad…yet so easily recognizable…if only ….

  • The AntiProgressive

    Let them go bankrupt. No bailouts. No voting privledges while they are in bankruptcy. A bankrupt state is not an “asset” to the Republic and should not be allowed to participate in national politics until they are again solvent.

    Remember in our history a “state” had to “apply” to join the Republic and I am sure had to prove responsibility in order to do so. Fiscal responsibility should be of prime concern and be considered much as a new potential spouse bringing on board massive credit card debt.

  • http://www.liveoffshore.com/ Jason

    It would be great if the Republicans in Congress actually let these socialist states suffer the consequences of their own foolishness.

    Most likely Republicans will cave.

    The second best approach will be for Republicans to insist that these states slash their budgets, end their love affair with the unions, slash their bureaucracies, slash tax rates, slash government regulation of business, enact meaningful tort reform, and more. In turn the states should demand that Congress end all federal mandates that force the states to spend money like school busing. All this in exchange for a bailout.

    I suspect at the first hint of a crisis the Republicans will come rushing to bail out the these states. They will not insist on reform. And the rest of us will have to pay up.

  • oldvet

    Question for mr.conservatives are fools:
    it seems that most of the states and cities in deep trouble
    are run by democrates(ie progressives/
    socialists/communists);do you think that’s
    a coincidence?think about it.take your time.

  • Sheepdog

    More socialism? OMG! Look at europe and its riots!Been a real winner there. The US has been socialist since 1913 with its socialist monetary system. Free market capitalism does not exist in amerika for decades since the criminal central bankers “FEDERAL RESERVE”, government and wallstreet have joined forces to pay off both sides of the isle on Crapitol hill!!Meanwhile the [persons born out of wedlock –ed] loot everyone in sight! Pull up a chair to the government trough and have a big mouthful of fascism! Works great untill you run out of other peoples money!!! All by design and the first step is to dumbdown and demoralise a generation or two of entitlement driven,equal justice, fairness minded , lazy idiots!

  • evan

    Who is John Galt?

  • Howard

    …”Tensions within the Democratic Party would explode”…. WRM wrote on December 6, and today, December 10, with Obama’s tax plan rebuffed with senior expletives, they have. The formula going forward: “Blue states, blue language.” The future is getting closer, you think?

  • dcalsup

    We are in the ditch and no one wants to get out and push, hell, no one even wants to just get out as long as the radio keeps playing.

  • Fred A Milton

    Regarding misinterpretation of the 2005 Tax Foundation study that commenter #4 Tyler McClellan linked to, the Tax Foundation policy blog had this to say:

    http://www.taxfoundation.org/blog/show/24471.html

    “The spending-to-tax ratios are driven by demographic factors like the age of the population and the average income, not governors and state legislators…

    “To quote the author of our most recent dollar-for-dollar comparison, former Tax Foundation economist Curtis Dubay:

    “”The Tax Foundation’s annual federal tax burden and expenditure study clarifies the geographical patterns of income redistribution that federal tax and spending policies cause each year. The results of the study have been controversial for years because they show that the nation is not only redistributing income from the prosperous to the poor, but from the middle-income residents of high-cost states to the middle-income residents of low-cost states.

    “”Thanks to a steeply progressive federal income tax, states with higher incomes pay vastly higher federal taxes, payments that are unlikely ever to be matched by federal spending directed to those states. Ironically, most of these high-paying states are the so-called blue states that have generally elected politicians who support a more steeply progressive tax system even though their own constituents bear a greater share of the burden as the code gets more progressive.””

  • Gregory

    Whatever happened to the “Pay as you go” system? Congress has a affirmative duty/obligation to keep the budget balanced. That is, if they pass a new spending bill, they have to keep the cost basis neutral by either eliminating any increased spending by cutting some other program(s) to pay for the new spending. The main problem is that the beneficiaries of any funding cut have a vested interested in preserving the status quo, at least for themselves. Once started, nobody will willingly give up their benefits under previous legislation. Congress has robbed Social Security, and many other programs until we face a funding crisis for a number of good medical and social necessities for those who simply are scraping by.

    I agree with Evan (December 10, 2010) above, we need a John Galt to set things straight, even if it means the tremendous sacrifices that will be needed.

  • Ted Rice

    Those who say let the States go under – when all those State employees hit the unemployment line, the deficits and resulting chaos will pull the whole country into a major depression. Even cuts in public employee pay and benefits, without corresponding increases in private ones, will decrease buying power and cause economic collapse.

  • Boneman

    How about austerity measures for bankrupt states? I wonder if that would work. You could force the hand of the high paid union workers, cut off services for illegals, and dramatically scale back these welfare states. Bill Clinton signed welfare reform into law and it dramatically improved our economic picture in the south. It would work for California, Illinois, and New York too except their “welfare” is unions and government.

  • Nancy Johns

    To eliminate the retirement funding:
    1. Transfer the trillions of dollars in state and federal retirement accounts to social security.

    2. Pay all of the former government retirees the same amount as social security would pay. The savings would be enormous and social security would be safe for another 100 tears.

  • Tyler McClellan

    Almost none of it has to do with demographics. You are correct that most of it has to do with income, (though not all, the legislative system is also a modest part of it). So what? All I was pointing out is that the ridiculed states are by and large democratic and they by and large pay their way (oh and by the way the amount transferred to the federal govt is huge relative to the budget deficits mentioned as evidence of failure in these places, precisely the same issue that makes any analysis of state fiscal positions difficult to do). I assure you I do not (and did not) ascribe it to altruism. Just pointing out that most of the poster have no idea what they are talking about, which is ok.

    ”Thanks to a steeply progressive federal income tax, states with higher incomes pay vastly higher federal taxes, payments that are unlikely ever to be matched by federal spending directed to those states. Ironically, most of these high-paying states are the so-called blue states that have generally elected politicians who support a more steeply progressive tax system even though their own constituents bear a greater share of the burden as the code gets more progressive.””

  • picomanning

    An indivdual who cannot afford to keep up with a lifestyle previously enjoyed will quickly decide where not to spend to minimize his emotional acknowledgment of an undeniable lower standard of living. He knows there’s no other option, unlike government.

  • Peter

    “African-Americans will be disproportionately affected both by cuts in state services and by public sector layoffs and compensation cuts” and “will expect a Democratic Party to which they have been faultlessly loyal for many decades to stand up for their interests in a time of grave crisis.”

    There’s a bit more to it than this.

    As politically incorrect as it is to say, the blacks better hope & pray that people don’t make analyses of what they’ve been costing society since, say, the 1960s in terms of crime, destruction of neighborhoods, welfare, and excessive costs in public education.

    When the U.S. was experiencing prosperity, all such calculations were swept under the rug. But the present conditions can make things quite different, right?

    And in times of want, what Democrat will continue to argue for affirmative action and preferial treatment for blacks in terms of hiring or admission to colleges?

  • j stuart

    Send the illegals home, and send all the Union types and Gummint workers back out to the fields to do the picking. They should be good at it since they’ve been picking our pockets for decades.

  • Tom

    When your mother comes to live with and, in the end, die with you because there are no safety nets…what will you do? Will your children do the same for you? When the services that allow the population of this country the most productive in the world? The water in your sink, the sewage you never see, the honest cop not on the take because he makes a living wage, the schools your kids go to. Gone. And has anyone noticed that the blue states are the economic engines of the US. Enjoy your self-righteous indignation while you can. And I hope you, like me, are rich.

  • Georgiaboy61

    “And has anyone noticed that the blue states are the economic engines of the US. Enjoy your self-righteous indignation while you can. And I hope you, like me, are rich.” Tom, California (if my memory and stats are correct) is something like the 16th largest economy in the world, on a stand-alone basis. But that doesn’t change the fact that it has been irresponsibly run, managed incompetently, and otherwise run into the ground. Actions have consequences, and California will not change its ways unless it feels some pain. Sometimes, an addict (and out of control government spending is an addiction) must hit bottom before beginning the long climb back to normalcy.

  • John Skookum

    Excellent news. We have ten times as much government as we need. Burn, baby, burn!

  • jamiejoseph

    What a shock reading these posts. If anything represents the decline of the US it is the mentality and character displayed by most of you people! Let me descend to your level. Hooray bring on the chaos and pain….cheer as the republic degenerates, blame everyone you dislike; and in the collateral cleansing which you no doubt piously pray for in your weirdly colored fantasies: may your daughters be raped and your children die foolish, absurd, squalid deaths…flies crawling over their sightless eyes… you and your loved ones will deserve it because you are worthless morons. The fact is the Founding Fathers would spit on you and beat you as dogs. Walter Mead you used to have some gravitas and distinction. What a shame to see you auditioning as Goebbels for a lowbred rabble.

    JJ

  • Andrew P

    It will be fitting for Jerry Brown to be forced to break the state’s unions. If the state defaults, it will be limited to the cash collected in taxes, and busting the unions will become necessary.

    I cannot see a GOP House agreeing to bail out insolvent states unless the price is the complete banning of their unions and making all state worker pensions discretionary on the part of the legislature. States cannot repudiate contracts, but the Federal Gov’t has to power to cancel their union contracts, and should do so as the price of any bailout.

  • bullhorn

    Well they have managed to outsource as many decent paying jobs as they could now they are going after the jobs they cant outsource.Leaving the borders open to illegal immigrants to compete and take jobs from American citizens the only thing left to do to further widdle down wages and grow shareholder profits is to bust the Unions and pay everyone 9 dollars and hour with no benefits.Congratualtions this is the America you want. Enjoy it

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