The following editorial appeared in the St. Louis Post-Dispatch on Feb. 3:

Panic, frenzy and hysteria rarely produce good judgment and wise decisions. But the deep economic fears stirred by the Great Recession may be a breeding ground for policy ideas pushed by ideologues that could severely damage the public interest.

One of the more extreme notions that’s been floated by Republicans, including former House Speaker (and possible presidential candidate) Newt Gingrich, is bankruptcy for individual states. The practice is forbidden now, and overcoming the legal barriers to it would be extremely difficult.

Even so, the idea is being touted as a tool that states could use to nullify existing collective-bargaining contracts and neutralize the commitments they made to workers’ pensions and retirees’ health insurance. Doing so supposedly would help restore the states’ fiscal health.

In truth, allowing states to declare bankruptcy might make it all but impossible for them to issue affordable bonds — the standard method to pay for such major infrastructure projects as building prisons, repairing and replacing decayed roads and bridges and creating new state university facilities like biotech labs. As Washington University bankruptcy-law professor Dan Keating told the St. Louis Post-Dispatch’s Dave Nicklaus, investors no longer would see states as “a reliable entity to business with.”

With $2.8 trillion (with a “T”) in municipal and state bonds circulating as of May 2010, legalizing state bankruptcy could have a catastrophic effect on individual states and on the economy as a whole.

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It’s not all that surprising that the state bankruptcy idea surfaced, given almost three decades of anti-government propagandizing by corporate-funded think tanks and lobbying groups. It reinforces the arguments that governments can’t manage their finances and that there’s very little need for government workers to provide public services anyway.

Using pensions earned by public workers and retirement health insurance promised to them in good faith to make those arguments only confuses long-term and short-term challenges. And such abuses as double-dipping into multiple public pension plans are long overdue for reform.

But a more significant reason for the shortfall in funding public pension funds is the same reason for the shortfall in funding private ones: Pension funds are invested in everything from the stock market to real estate trusts to municipal bonds, and the economic collapse in 2007 cut deeply into their value and earnings, just as it hammered people’s 401(k) plans.

The recession also threw millions of people out of work and threw government payroll revenues into a tailspin at the exact moment that more people needed government help — unemployment payments, Medicaid subsidies for health care — to keep themselves and their families afloat. The purpose of a safety net, after all, is to catch people before they smash to the ground.

The recovering economy will ease those short-term fiscal pressures but not quickly: Even the promising data just released for the fourth quarter of 2010 leaves states far below pre-recession levels.

In the longer term, though, state leaders need to find the courage to tackle their structurally defective financial systems. The real waste, fraud and abuse have been all but rooted out. States simply need more revenue to do what they’re supposed to do: meet the legitimate needs of their people.

The anti-tax, anti-government crusaders will not make it easy for them.


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