Until now, the problems in these states have been papered over by federal aid. Essentially, Washington has relieved these states (and the local governments they fund) of their constitutional obligations to balance their budgets by giving them welfare checks in the nick of time. Barack Obama now seeks to pass $50 billion in additional welfare to the states.But, since these federal funds are not necessarily recurring -- and the jobs and obligations they fund are -- they simply enlarge each year's deficit hole and enable the states to go more deeply into the red.
As these deficits mount -- particularly if a newly elected Republican House and/or Senate refuse to fund them -- bondholders will get more and more nervous. Eventually, they will realize that the less solvent states are bankrupt and will refuse to buy their debt. Eyes in Sacramento, Lansing and Albany will turn helplessly to Washington to guarantee their debt, just as Athens turns to Berlin.
Republicans, if they control either or both Houses, should stand firm and insist that these states sink or swim on their own. America's taxpayers will not take kindly to having to bail out other states -- or even their own -- to pay for years of reckless spending. Americans will swarm to the GOP and will hail its stand.
The time is long passed when a local newspaper can generate sympathy -- even from its own readers and the state's own citizens -- with a headline like "Ford to New York: Drop Dead." Now, people in other states (and even in the affected state) would stand up and cheer should the Republicans take so strong a position.
There is currently no legal procedure for a state government to go bankrupt. Congress, especially if it is Republican in 2011, should pass a mechanism that permits states to discharge in bankruptcy their collective bargaining agreements and contracts with their municipal unions. Of course, this procedure would have to let school boards and local governments do likewise.
Obama will veto this bill, and a stalemate will ensue.