If Greece, Why Not California?

The asleep-at-the-wheel news media hasn't mentioned the possibility of American state-level bankruptcy for quite a while. But folks should be thinking about it. You might remember that I posted some favorable comments about David Skeel's article urging a new chapter of the Bankruptcy Code to permit States to reorganize their debts (read it here). Today the Wall Street Journal published an article about a new study to be released Tuesday by the Republican staff of the Joint Economic Committee: Eurozone, U.S.A.

The study compared with the ten U.S. States with the lowest rates of economic growth since 1990 with the States with the highest rates of growth and concluded that high-growth States had (i) smaller unfunded pension ratios (by 26 percent); (ii) lower debt ratios (by 18 percent); (iii) less tax revenue collected (by 22 percent); and (iv) lower welfare benefits (by 31 percent). The report also shows that over the last decade, states with no income tax have much higher rates of job growth and population growth than states with the highest income taxes. The fuse on the State debt bomb may prove to be the massively underfunded state public-employee pension systems. Years of overly optimistic growth projections, coupled with underfunding and over-promising by politicians have rendered many of these public pension systems toxic assets on states' books.

The ability of the low-growth States to deal unilaterally with this time bomb is limited by the Contracts Clause of the Constitution. Only federally authorized reorganization (which is already available for cities and counties) may be enough to turn the trick. Either that or a federal bailout that would dwarf anything seen in the aftermath of the 2008 financial crisis. Which ain't gonna happen.

The vincible ignorance of America's State and federal elected official and the cupidity of the news media are appalling. But if the world's markets are tremoring at the possibility of a Greek debt default, just try to imagine what effects a default by a State such as California would have.