The blue social model was already unsustainably expensive for states like New York, California and Illinois. Now antsy bond markets are raising the price. The bond markets have long ignored the high costs and poor economic performance of blue model states; no more.Paul E. Peterson and Daniel Nadler explain the challenges these states will face in the Wall Street Journal:
In many blue states, legislators have copied the politicians in Washington by running up state debts to extraordinary levels. Nationwide, state debt is running around $3 trillion. If unfunded pension liabilities are factored in, estimated liabilities leap forward by another $1 trillion to $3 trillion, depending on the optimism of the assumptions made.
The bond market is beginning to react to the enormous liabilities of governments that are deeply invested in the blue social model:
States with a bluish hue—that is, states with legislatures that are heavily Democratic and have a highly unionized public-sector work force—must pay interest rates that are often an extra half a percentage point higher than states with a reddish coloring.Specifically, a 20 percentage-point increment in either the Democratic share of the state legislature or a comparable increase in the share of the public work force that is unionized drives up interest rates by nearly a half a percentage point on a five-year security note. That amount is nontrivial. In Obama’s home state of Illinois, it is costing governments over $700 million annually.
States like California, Illinois and New York (America’s PIIGS) are now suffering from the deceptions of politicians and union leaders who made overly-optimistic commitments for short-term gains. Some of these people are still in power and will probably soon be making the case in Washington that their states are “too big to fail.” Instead, they should be asking themselves whether their states are too big to govern.Via Meadia has argued that states like California would be better governed were it to broken up into more manageable constituencies. But states also need to assess the services they provide, jettison those which cost more than their value, contract out those which can be performed by the private sector and find more efficient ways–such as telecommuting–to provide services that only government can provide.It is easy to talk about making these decisions and very hard to actually make them, but the federal government cannot continue to subsidize states subscribing to a social model which will push them further and further into debt. Greece and Italy have seen how a loss of investor confidence can create a destructive death spiral of rising costs. Investors stop believing that you can pay your bills and start demanding higher interest rates on your debt. Those higher rates make your debt more expensive and make it even less likely that you can cover your debts long term. That then makes interest rates go up even more: investors who thought your credit looked shaky at the old interest rate now think it looks even worse. And so it goes.The costs of the blue social model are going up.