Currently, states are not allowed by federal law to go bankrupt, a situation David Skeel seeks to change, in an important article in the Weekly Standard. He argues that this is far preferable to the inevitable federal bailouts for spendthrift states like California, New York, and Illinois, which have been so generous to their employees in pay, benefits, and pensions that they are unable to raise enough revenue to meet their obligations. The idea that taxpayers in more sensible states like Indiana and Texas should have to bail out wealthy Democratic strongholds unable to operate responsibly is explosive. Mark Steyn has even warned that secession talk could get serious in the face of such looting of the prudent.
There are several issues with federalism that Skeel discusses, and with voluntary bankruptcy, they can be overcome.
The main objection to bankruptcy for states is that it would interfere with state sovereignty-the Constitution's protections against federal meddling in state affairs. The best known such barrier is the Tenth Amendment, but the structure of the Constitution as a whole is designed to give the states a great deal of independence. This concern is easily addressed. So long as a state can't be thrown into bankruptcy against its will, and bankruptcy doesn't usurp state lawmaking powers, bankruptcy-for-states can easily be squared with the Constitution. But the solution also creates a second concern. If the bankruptcy framework treads gingerly on state prerogatives, as it must to be constitutional, it may be exceedingly difficult for a bankruptcy court to impose the aggressive measures a state needs to get its fiscal house in order.
He argues that municipal bankruptcies, with which there is ample experience, provide a model for overcoming the second order of objections, and he is quite correct.
Skeel is more optimistic than I am about the possibility of the Democratic Senate and Barack Obama agreeing on such a change. But his argument is worthwhile. The alternaives are much worse.
