Bankruptcy for States
19th January 2011
[S]tate bankruptcy could even permit a restructuring of the Cadillac pension benefits that states have promised to public employees. These are often “vested” under state law, and in some states, like California, are protected by the state constitution. Under state law, little can be done to adjust them to more reasonable amounts.
A central feature of these promises in many states and municipalities is the capture of both sides of the bargaining table by public employee unions. It is a classic process described by public choice theory, through which the campaign contributions of a highly motivated subset of voters capture the political offices that negotiate economic terms with that same set of voters-as-employees. I have sometimes wondered whether a legal theory — far fetched in court, of course, but not so very far from the situation in economic terms — of fraudulent conveyance could be raised against these kinds of negotiations, as a basis for being overturned in bankruptcy.
One of the problems with government is the propensity for corruption whereby those running the government pass laws favoring the politically powerful class, which then rewards those running the government by keeping them in power. In Britain, for example, this was as true for the upper class, when they were in charge of politics (look up the history of the Corn Laws and the Black Act, for example), as for the lower, when the trades unions ran the government in the period between Churchill and Thatcher.
Yet another argument for having government with strictly limited powers. Nobody’s going to bother buying politicians who can’t pay them back with taxpayer money.