In many states, bankruptcy will be an option only if powerful unions and other entrenched interest groups see it as a way to force budget problems onto the state’s bondholders rather than public employees. Bankruptcy in these conditions would allow the state to continue budgeting under the same structure as before, basically giving statehouses a clean slate without providing incentives to change the core of their financial problems: overspending in education, excessive public pensions and benefits, and a swollen state work force. You wouldn’t want to pay down your sister’s credit card balance without taking away her ability to pile up new debt.
That’s Veronique de Rugy, writing on state bankruptcy in the latest issue of Reason Magazine. It is an excellent accounting of the arguments, pro and con. Read the whole piece.