Ohio Farmer I

The form and voice of this post is to pay homage to a group of citizens who early in our country’s life engaged in passionate yet civil debates about the best form of government for our new country. They argued their case for the best form of government via letters to the local newspapers. These letters came to be known as the Anti- Federalist papers.

To the Editor of the Goshen Gazette,

Recently David Goldman at the Asia Times argued that banks would not allow a default by our city and state governments because of the impact of the defaults would have on the banks. In this article he said,


It’s not about the impact on the real economy (the attendant cut in public services and public employment), it’s about the effect that such defaults would have on the banks.

In fact, that’s a good rule of thumb. If it’s going to hurt the banks, it’s probably not going to be allowed to happen.

I agree with his point that the banks will  try to do everything in their power to avoid having a city or state to fail however I do not see that they have a choice in the matter. In this crisis the issue of whether to provide municipal financing is a relatively minor issue. Across the country the voters have largely rejected tax increase proposals. This leaves our legislators without a choice, spending cuts are inevitable. The only questions that remain unanswered are what programs do we cut and by how much. Resolving this issue will undoubtedly be very messy.

An interesting irony in this crisis is my belief that our elected legislators are particularly ill-suited for the job at hand. When I was a young man there seemed to be a multitude of legislators from both parties who not only campaigned for a more efficient government but applied the political pressure to make government actually work better. As the years went by and our legislators continued to drink heavily from the “deficit spending” Kool-Aid,  “deficit spending” went from a tool to stimulate an economy during a depression to a perpetual facet of our federal budget. Legislators from both parties paid lip service to balancing the budget but they made almost no effort to do anything about it. It was the next administration’s problem. Passing laws dependent on overly optimistic estimates of reduced spending became the norm and one of the many ways they could avoid voting on spending cuts. In fact almost all of the “spending cuts” over the last forty years have not actually cut spending but postponed the spending to later years. These legislators knew we would eventually have to pay for their lax budgeting practices but with a wink and a joke they hoped it would not occur during their term in office. We got away with these budget failures because we are the largest economy in the world and we were pretty effective competitor in the world market. However we might have reached our peak in the world market place and the willingness of foreign countries to finance our debt might have finally reached its limit. It looks like we have finally reached our budget doomsday and the best team we can put on the field is a group whose most redeeming quality is their inability and unwillingness to control spending.

The new twist to this crisis is that the budgeting illness that started at the federal level has mutated and infected our state and local governments. Three of our most important states, California, Illinois and New York, are for all practical purposes bankrupt. California paid their vendors in 2009 with IOUs. Despite the embarrassment of paying in IOUs the budget crisis is unresolved. Illinois has been paying their vendors late all year and the governor of New York vetoed 6900 bills to balance the budget. These states are not alone. There are 46 states with budget deficits. Not only do they share huge operating budget deficit problems but many states have a huge pension fund liability problem, too. To compound the budget deficit issue Medicaid costs are dominating the lion share of many state budgets. Without the 2009 stimulus money many states would have been forced to severely cut back Medicaid. Without additional federal money in 2011, many states will be forced to cut back on Medicaid. Some states have already decided that they have no choice but to cut back Medicaid. If the state tax revenue situation does not improve dramatically real soon, the state budget deficit issue will likely force at least one state into some form of “managed bankruptcy” within a year. This in turn might start a cascade of municipal failures. It could get pretty chaotic. Some legislators will work to manage the situation but it appears that many legislators would rather take their chances in bankruptcy then betray their constituencies. Although there might be some banks who have a good business reason to help the cities and states out, this is a life or death situation for politicians and constituencies. This situation may be too hot to handle for the banks.

It is my hope and prayers that we can find a group of legislators with the courage to put good government and budgeting over politics. Good government should always trump politics.

Here’s The Real Reason Cities And States Would Never Be Allowed To Default
Joe Weisenthal
Wed, 07 Jul 2010 17:49:48 GMT