A Bankrupt Option

The 50 states, as we have seen recently in Wisconsin and elsewhere, are in serious fiscal trouble. Total state debt is estimated at more than $1 trillion, and that doesn’t include another $3 trillion in unfunded liabilities from pensions and other obligations. We can afford neither a federal bailout of this sum nor the precedent it would set. But how about giving states the option of filing for bankruptcy, as municipalities can do via Chapter 9? Bankruptcy may sound like a silver bullet that could solve budget woes, dismantle cronyism, fix pensions, and forestall a federal bailout. But it contains plenty of potentially counterproductive consequences. Restoring the states’ fiscal health requires fundamental changes to the way they do business. Until that happens, their balance sheets will be bleeding red ink, whether they are officially bankrupt or not.

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