Is State Bankruptcy a Good Idea?

E.J. McMahon has a very interesting take on the Gingrich-Bush proposal to allow states to declare bankruptcy. Read it here. The basic argument is what does bankruptcy allow a state to do, that it can’t already do? Two core areas for spending reform in the states that remain untouched are K-12 education and Medicaid. And restructuring these requires joint reform with the federal government.

In fact, pensions are in trouble for one reason – they have been misvalued by government accounting standards, and thus mismanaged. A better idea is the Nunes-Ryan-Issa proposal to get states to accurately report their true liabilities, and then states need to figure out how to pay it. That’s going to require a hard look at other areas of the budget that are poorly managed, unnecessarily centralized, badly structured and based on distortionary formulas. Budget gaps have been created over a long period of spending expansion in state and local governments with the help of federal programs, regulations and mandates. Pension obligations are waiting in states’ near budgetary future.

In other words, it’s not clear bankruptcy is the only way for states to fix their structural deficits and in fact it may come with many unintended consequences.