Allowing the States to Go Bankrupt Is a Really Bad Idea

One of the most glaring shortcomings thus far of the stimulus and disaster packages that have been passed by Congress in response to the COVID-19 pandemic has been the failure to provide assistance to the states.

Every state in the nation is seeing its revenues plummet to never-before-experienced depths. However, of the trillions of dollars thus far appropriated by Congress, there is barely a penny for state government operations — and by extension, municipalities — which are carrying the battle against the pandemic on the front lines. 

The states thus are caught in an ever-tightening vise of plunging tax revenues on the one hand and skyrocketing costs on the other.

Despite the obvious squeeze on state budgets, Senate Majority Leader Mitch McConnell last week commented, in response to a question about whether the Congress soon would be aiding the states, that he believed it would be preferable for states and municipalities to declare bankruptcy than for the federal government to provide needed funding to close their budget gaps.

It is hard to fathom why somebody of McConnell’s stature would make such a statement, other than to give voice to the general Republican creed that disdains government operations at all levels. In particular, the GOP has immense dislike for what it considers to be overly-generous pension plans for state and municipal union employees.

However, the reason why states are in such desperate fiscal trouble these days has nothing to do with their pension or budget policies, but specifically is linked to the coronavirus, which has had a devastating financial impact on every facet of commerce, including state budgets.

Questions regarding the pension plans of the states as a contributor to their overall fiscal soundness certainly can be debated, but this is not the time to do so amidst this unprecedented crisis.

State and municipal governments across the country provide the first line of response for every American in protecting our health and welfare, so it makes no sense to allow states and municipalities to fail in this mission at this critical juncture amidst a pandemic that threatens to extend for many months.

In addition, without funding from the federal government, state and local governments will be forced to make layoffs of police, firefighters, teachers, and others in order to balance their budgets, a situation that will exacerbate even further the national unemployment rate.

Finally, the effect on the bond market from a plethora of state and municipal bankruptcies could have far-reaching and long-lasting negative effects for the country and the economy.

In short, there is nothing good that can come out of state and municipal bankruptcies at this time; but there is a lot that is bad.

Mitch McConnell’s opinions are a grotesque perversion of responsible government. Hopefully, the rest of the Congress will not go along with his extreme and destructive ideas.