Summary: The Democrats have a potentially winning game. But economics are trump in politics, just as in almost everything else. Their past spending sins might crash their parade.
The Democratic Party’s leaders probably believe they have a winning strategy. Open the borders, offer increased welfare, reparations to Blacks (and then perhaps other formerly oppressed groups), benefits to women – all at the expense of white and males. Vote harvesting (door-to-door collection of ballots, where legal). Assuming they can hold the coalition together and keep their extremists off TV, the numbers look good.
One potential pin for their balloon: many long-time Democrat-run local governments will go broke in the next few decades. The timing depends on the business cycle – how many recessions occur, plus their duration and magnitude. Some States are vulnerable, such as Illinois, New Jersey, and Connecticut (see Pew’s display of states’ financial health).
Counties, cities, local agencies – thousands of entities, many of which are doomed past the point of recovery (although they can still pay their bills). What will put them down are their obligations for pensions and retirees’ medical care. California is poster child for financially weak local governments (see the Pension Tracker of the Stanford Institute for Economic Policy Research).
It was a great game!
Politicians got votes by promising lavish benefits but not paying for them (i.e., fully funding the retirement plans). But all games come to an end – and the bills come due. Experts have been warning us for decades. Here are a few of the many recent ones.
- “The Looming Pension Crisis” by Dan Grunfeld at RAND, November 2017 – “California leads the nation in pension underfunding. The numbers are staggering. Currently, the state government has approximately $464.4 billion in unfunded liabilities.”
- “U.S. Pension Fund Collapse Isn’t a Distant Prospect. It Could Come in 5 Years” by Aaron Brown at Bloomberg, April 2018 – “Kicking the can down the road won’t work for much longer.”
- “The Time Bomb Inside Public Pension Plans” at Olivia Mitchell and Leora Friedberg of the University of Virginia at Knowledge @ Wharton, August 2018 – About the “$4.4 trillion public sector pension shortfall.”
- “The Pension Crisis is not a Black Swan Event” by Thurston Powers and Bob Williams at the American Legislative Executive Council, September 2018. This is a big understatement.
We don’t remember, we don’t learn, we don’t prepare
A common element of our public policy issues is how our amnesia shapes them. We do not remember past extreme weather, so activists blame all extreme weather on our emissions of greenhouse gases. We fight and lose 4th generation wars because we do not learn from our previous defeats (or from the defeats of other nations). We do not remember the long history of debt defaults by State and local governments, and so do not prepare for the coming ones.
Note: failure to pay interest or principle on debts is “default.” Bankruptcy is a process of resolving these in Federal Courts.
States cannot file bankruptcy. The 11th Amendment to the Constitution prevents citizens from using the Federal Courts to compel States to honor their contracts. Only State constitutions and laws can do so, and they often allow flexibility by their governments to debts. Article I Section 10 of the Constitution prohibits States from passing a “law impairing the Obligation of Contracts.” Federal Courts have had differing interpretations of this. The bottom line: States have defaulted 17 times (perhaps more), in many ways.
- Eight States defaulted during the 1840’s. Four outright repudiations: Arkansas, Florida, Michigan, and Mississippi. Adjustments in Pennsylvania, Maryland, Illinois, Indiana, and Louisiana.
- Eight States defaulted to varying degrees during the 1870’s and 1880’s: Alabama, Arkansas, Florida, Georgia, Louisiana, North Carolina, South Carolina, Tennessee, and West Virginia.
- Arkansas defaulted on its bonds in 1933; but eventually paid all creditors in full.
Most of these disputes were settled only after long battles in the State legislatures and courts (State and Federal), usually with partial payments (often long delayed). As a result there is a large body of case law on State defaults, which we might soon dust off and use.
Local governments more often default. There have been countless defaults by local governments since the Founding. There were 46 bankruptcies by municipal governments between 1988 and July 2013. See the history of municipal bankruptcy filings: graphs show filings by year (1938-2015), by State, by type of entity.
Defaults of municipalities are governed by Chapter 9 of the Federal Bankruptcy Code. It might get big use during the next few decades. To understand how this works, see the US Courts page about Chapter 9. For more detail see the “Primer on Municipal Debt Adjustment” by Chapman and Cutler LLP.
The bottom line: money and politics
After decades of warnings, the coming defaults can no longer be avoided. But the damage can be mitigated with immediate action. But I will bet that we will do nothing.
It will be messy. Millions of people will be hurt, as each defaulting State and local government respond in different ways. Investors will lose money. Medical benefits will be reduced. Pensions will be reduced. Taxes will be raised. Government budgets will be reduced.
Many, perhaps most, of these entities will be run by Democrats. How will that affect perception of the Party? How will people in defaulting local and State governments react to the turmoil of default? Who will they blame? The answers will shape US politics for the next generation – or longer.
For more information
The information about State defaults presented here comes from American State Debts by B. U. Ratchford, Asst Prof Economics at Duke (1941). For more detailed information I recommend The Repudiation of State Debts: A Study in the Financial History by William A. Scott, Asst Prof of Political Economy at U Wisconsin (1893).
Ideas! See my recommended books and films at Amazon.
- About the coming crisis in public pensions.
- Governments cannot go bankrupt – they can default.
- American States on the brink of financial catastrophe.
- Public employee unions – an anvil chained to the Democratic Party.
- Fact & myth about the debt supercycle, a story of modern America.
- Harsh truths about the Federal debt, showing how Left & Right lie to us.
- Prepare for the bankrupt government pension plans!