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Trouble, Scope, Apostrophes, and State Bankruptcy

posted by Jonathan Lipson

When Bob Lawless introduced me a couple of weeks ago, he promised that I would stir up trouble.  If responses to my post on amending the Bankruptcy Code to permit states to file are any indication, I have kept Bob's promise.

While no one seemed especially interested in the merits--does Wisconsin's budget fight show that amending the Bankruptcy Code is unnecessary?--the post nevertheless brought out the mob.

Respondents attacked me and each other (sometimes pretty crudely) for, among other things:

  • Writing about something too "political" for Credit Slips (yes, well, amending the Bankruptcy Code is political, as are state budgets); 
  • Allegedly having a conflict of interest for writing about this at all (not quite:   I am not a member of a union, which is what the fight here is about); and
  • Failing to use apostrophes correctly (sorry, but for some reason the  blogging response function doesn't always pick up apostrophes or quotation marks).

While there were plenty of personal attacks,  no one really responded to the basic observation in the original post:  Why amend the Bankruptcy Code if states have the political will and ability to get their debt under control on their own?  

My view is that negotiated debt restructurings usually preserve more value than other ways of dealing with distress.  This, of course, is a principle underlying much of the Bankruptcy Code (see, e.g., chapter 11).  It would likely be imputed to a "chapter 8" for state bankruptcies--if enacted--as well.

In Wisconsin, Governor Walker has said he won't negotiate with the unions.  But all that tells me is that he has more power than a new chapter 8 would likely give him.  He doesn't need state bankruptcy.

While I am suspicious of Governor Walker's claim that Wisconsin's fiscal "crisis" warrants severe reductions in public employees' power to bargain collectively, he was duly elected governor in a state with Republican majorities in both houses.  I have little doubt that his proposals, unlike Newt Gingrich's on state-bankruptcy, will eventually become law.

Responses to my post (to say nothing of thousands marching on Wisconsin's capital) show very strong feelings in both directions about what is happening here.  Some of the responses--e.g., debates about the merits of high-speed rail--do go beyond the ordinary scope of Credit Slips.  

But state bankruptcy is, by definition, a political subject.  If it works, it will affect a state's finances, for better or for worse.  Either way, it will alter the range (and price) of a state government's set of options.  

That's political, like it or not. This should be no surprise.  As Bruce Mann has observed, debt crises have punctuated our nation's history from the start.  Excess debt was one of the most pressing social issues at the framing, and remained a frequent source of political and social upheaval throughout the 19th century.

The irony of the Wisconsin experience thus far is that it suggests that the conventional political wisdom on a state bankruptcy amendment may be wrong:  In this case, given the likely outcome, state bankruptcy may actually have been better for Democrats than for Republicans.  

For example, if there were already a chapter 8, Wisconsin might have threatened to use it in the past as a stick to get unions to agree to reduce benefits.  If that had happened, there may have been no "crisis" today, and so no need for the "budget repair" the Governor currently proposes.  

Moreover, any chapter 8 actually enacted would likely give the state less power over unions than it has through the legislative process.  If the chapter 9 (municipal) model is any indication, chapter 8 may permit rejection of collective bargaining agreements.  But my guess is there would be some process and protections for unions (see the Orange County cases).  Not so if the legislature simply strips public-employee unions of the right to bargain collectively over most matters, which is what will likely happen here.

By a parity of reasoning, a chapter 8  might thus be worse for Republicans who support the concept. If you already control the state government, and have the stomach to take on your debt, the ability to file bankruptcy may not add much.  

While I remain agnostic on the question whether Congress should amend the Bankruptcy Code to permit states to file, I think the Wisconsin experience suggests one important (perhaps unintended) consequence:  It would replace a more open and indirectly democratic process (the legislative process and the public response) with one that is much more private:  the court-house-steps renegotiations of bankruptcy.  

The latter (state bankruptcy) may or may not produce better results for states--that's what we don't know--but it seems unlikely that 25,000 Wisconsinites would swarm the federal courthouse in Madison if the same sorts of things were playing out in bankruptcy court.  

In any event, this will be my final Credit Slips post this cycle.  It has, as always, been an interesting experience.  I thank the "regulars" who run the blog for permitting me to cause trouble.


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