States of Bankruptcy

Part II: Eurozone, USA?

May 15 2012

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As economic policies in the 50 states continue to diverge, so too do their economic destinies.  Many states that model their policymaking on European-style social democracies – with high tax rates, heavy regulation, large bureaucracies, and generous welfare systems – are finding themselves in fiscal situations resembling those of the struggling Eurozone. 

The principle of federalism embodied in the U.S. Constitution gives states wide latitude to adopt the kinds of economic policies they like.  And ideally, this policy experimentation in the “laboratories of democracy” should both respect Americans’ unique intellectual and cultural diversity and, over time, give policymakers everywhere a better understanding of what works and what does not.

But the virtue of this arrangement breaks down when the costs of one state’s policy mistakes are imposed on the citizens of more prudent or successful states.  As both the 2008 financial crisis and the ongoing Eurozone collapse demonstrate, bailouts never solve anything.  They only create more problems – moral outrage on one side, and moral hazard on the other.

And yet, if current trends continue, the United States may be heading toward a two-tiered, European-style economic system, where taxpayers in prudent, prosperous states are forced by Washington to subsidize the imprudent and improvident governments of neighboring states.

With the $15.7 trillion U.S. national debt now larger than our entire economy, state and local debt topping $3 trillion, as much as another $3 trillion in unfunded state and local government pensions, the $1.8 trillion cost of Obamacare, and tens of trillions of unfunded federal entitlement program liabilities, every level of American government is heading toward fiscal crisis.  A recent study published by the National Bureau of Economic Research (NBER) assessed America’s true fiscal gap at $211 trillion -- nearly 14 times our current GDP – with a 35% chance that the United States will face fiscal collapse within 30 years. Filling this gap would require an immediate 64% increase in tax revenues, but such a tax hike would cripple the economy and hasten the collapse. There simply is not enough money to keep the promises politicians have made andcreate jobs to grow the economy...

 

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