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The New Costs Of Blue

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.

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  • dearieme

    As I understand it, States can’t go bankrupt, but don’t need to since they have Sovereign Immunity. Lower tiers of government can go bankrupt. My question: does bankruptcy of a lower tier of government ever result in liabilities floating up to the state level?

  • Richard F. Miller

    Professor, a technical point with large implications: the logic of Simpson-Bowles, which will have to adopted in one form or another, ultimately leads to a repeal of the biggest subsidy ever to state and local governments: the exclusion of muni-bond interest from income (although still includable in some AMT calculations.)

    This eventually must happen, especially if a “post-Blue Model” tax code is adopted (a drastic lowering of brackets in return for the elimination of line item deductions.)

    Don’t think this scenario is fantasy. Just this week, the Obama administration, hungry for revenue, floated a trial balloon suggesting that such interest be partially includable in gross incomes above $250,000.

    It’s just the beginning, Republican or Democrat.

    • Walter Russell Mead

      @ Richard F. Miller: a very important point. Investors should take note. Presumably the smartest ones already have.

  • Jacksonian Libertarian

    The Blue Beast is now living on borrowed time.

  • WigWag

    Note to Professor Mead.

    With all due respect, repeating yourself in post after post does not exactly qualify as gripping commentary. When the posts in question are light on detail and heavy on bloviation, the problem is exacerbated.

    Producing copy several times a day for fans voracious for the product of your fecund mind must be difficult. But put yourself in the place of a reader of your blog; unless you actually have something new to say about the blue state model or unless you have some genuine data that serves to verify your point of view, why say anything at all? You reach a point where your commentary on the subject fails to shed any light and merely becomes tedious.

    Surely you must have something new to say about this subject; if not, my suggestion is you move on to one of the many other subjects where your point of view will enlighten your readers rather than put them to sleep.

    I am not trying to be unfriendly but any devoted reader of your blog has read the contents of this post 20 times already.

    • Walter Russell Mead

      @ Wig Wag; following a major historic shift as it unfolds in the daily news does not feel like repeating myself endlessly post to post. It is true that I have said more than once that the blue model is failing and that even its friends can’t help taking actions that drive it further into decline, but observing the stages of this development and helping readers think through the implications of each new stage seems to me like what journalism ought to do. My suggestion: skip the posts you don’t like, read the ones you do.

  • Anthony

    WRM, blue social model costs are indeed undergirding fiscal imbalance in many states. Yet outside of your focus, you find very few serious public policy gurus identifying blue model issues as signal to structural government fiscal/budgetary problems going forward. Why?

    • Walter Russell Mead

      @Anthony: look at my post on the crisis of the American intellectual.

  • Corlyss

    “jettison those which cost more than their value”

    Here in tiny li’l Nibley City, the fastest growing city in Utah and the US in 2008-9, the city government believes that one of it’s three raison d’etre is “promoting community” among the citizens. I think that came off a cereal box somewhere. We budget hawks can’t get the city to eliminate wasteful “feel good” [waste] like an annual summer Heritage Days celebration. We just assumed 3/4 of a million in debt to pay for a new city hall, one of whose alleged major selling points was that it provided a “community center.” Never mind that the “community center” in the old city hall was rarely leased out to functions. If I wanted community per se, I’d have my friends and neighbors over for dinner, go to movies with the girls, or go skiing with a church group. I’m not going to dink around with uninteresting programs the city provides. Services-happy city governments are a blight on tax payers, regardless of the size of the city.

  • Toni

    “States like California, Illinois and New York (America’s PIIGS)”

    We could call ours NYIC, pronounced “nyik.”

  • Anthony

    WRM, thanks for redirecting me to Dec. 8, 2011 post. I reread it and remember the “why” posed earlier. “America has everything it needs for success in the twenty-first century with one exception: a critical mass of thinkers, analyst and policy entrepreneurs who can help unleash the creative potential of the American people…” says it all – thanks again.

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