When it comes to smoking in America, there is some good news and some bad news. The good news is that America seems to be making progress in the war on smoking. While smoking remains (appropriately) legal across the country, the number of smokers is steadily falling due to the high price of cigarettes and the effectiveness of state policies to discourage it. The bad news? Many states, including cash-strapped California, issued large bonds backed by payments from tobacco companies. Increasingly, falling sales are reducing those revenues, the NYT reports. Now some of these bonds are on the verge of default.States did two contradictory things: betting on large streams of tobacco money coming in well into the future while simultaneously trying to discourage smoking in every way possible. Now they find themselves in a lose-lose situation where the success of one policy leads to the failure of the other, and state businesses and investors are now going to be left holding the bag.At one level this is just another story of human stupidity. People are often not very smart. But there is something else at work. Unfortunately, bad decisions like this are becoming more common as the blue model declines. Myopic politicians hungry for revenue are prone to making ill-considered investment decisions, while powerful constituencies addicted to government money are only too happy to egg them on.The tobacco mess is a classic of blue dysfunction at work: with one hand the states are busy throttling the cow which their other hand is trying to milk. Currently, affected states are threatening to sue tobacco companies for $8 billion in withheld payments which the tobacco companies claim they are unable to pay. Cue the desperate fiddling as state governments work frantically to get themselves and their investors out of this mess.The tobacco industry is a peculiarly destructive business and, having lost two dear relatives to smoking related disease, I am not unhappy to watch smoking, and the companies which profit from it, move into decline. That the ashtray is becoming as rare as the spittoon strikes me as a good thing.But unfortunately tobacco isn’t the only cow the blue model is trying to kill and milk at the same time. Blue model governance involves relentlessly escalating costs, proliferating environmental and other forms of regulation, and an inexorably increasing tax burden to cover the costs.That is basically the attitude of many cities and states toward small business in particular: they regulate it to death even as they scramble to figure out how to wring more taxes out of an increasingly sickly beast.Hunting your prey to extinction is not a wise move; too often, though, that is where the logic of blue model governance leads.