What Happens When a state is Insolvent?

I grew up fairly poor. There was one year that my school was having a can-food drive. My siblings and I went door-to-door in our neighborhood to collect cans for this can-food drive and we felt good about doing it. After all, the recipents of this food would have food for this holiday season.

A few weeks later after the drive was over we opened our front door to see two boxes of food sitting our our porch telling us Happy Holidays. At the time to us kids it was just like Christmas. Cool! Food! But looking back on that event now as an adult I can’t help but wonder how my parents felt. They must have felt like failures to us.

I learned at a very young age that money didn’t grow on trees. I joke today with my family that Mom’s favorite word was “no.” Being in the hot seat (controlling bills) she knew all too well what money was coming in and what was going out. And let me tell you, in those days not much was being brought in that wasn’t food. We would always go and get $5 payless shoes that would disentigrate. It seems odd to remember that, but I remember it being a big deal to have finally talked her into some Nike tennis shoes that were like $40, of which I promptly promised that they would last until my foot was too big for it. And, I kept that promise.

It was one of the earlier lessons in my life where I learned that cheap is not always best… that sometimes it is better to spend more for better quality and then take good care of it so that it lasts. Anyways, I digress.

Today if you are living in the United States of America, there is a pretty good chance that you probably are living in a state that has some sort of budget shortfall (according to this site here, the only states that are deficit free are Montana, North Dakota, Wyoming, West Virginia, Alaska, and Texas).

In the above link I think it is interesting where they say, “You’ll notice that the only state with a sizable population without a budget shortfall is Texas.” While a higher population undoubtely makes management more difficult, why is Texas, the second most populous state, able to manage it’s finances so much better than the most populous state, California, which has the worst deficit of a whopping $13.8 billion?

The article goes on to talk about taxation and I found that interesting as well, although not conclusive. Of the Significant Six – Alaska and Wyoming don’t have income taxes and Alaska and Montana don’t have sales taxes. Looking at this data I cannot conclusively say that is the key, because Texas does have a high sales tax coming in at 6.25% (plus any local taxes that are tacked on, which I hear is ~2%). However, I would say that any decrease in taxation does two things – first it makes it so that the State has less revenue to play with and thus they are more careful about giving money away. Secondly, it makes it more friendly for individuals and businesses because they have more money in their pockets and thus more money to spend.

Another state that is in trouble is Illinois. Reported here, Illinois has just stopped paying it’s bills due to it’s falling $12 billion dollar deficit. Even more interesting is that the article points to is the “spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.” So in other words, they need more people to come into their state so that they can tax them so they can give their handouts.

I wonder how my mom would handle all this. To her, how much money was coming in was very relevant to how much was going to be going out. She cut corners on things that were unnesissary. She clipped coupons and saved whenever. And she surely didn’t float $10 billion like Blagojevich did…

When are states (government in general) going to learn that you cannot make 30 million promises and support 20 million different programs and then tax the hell out of everyone to pay for it. I am no economist nor was my mother but it seems very logical to think that you cannot spend what you do not have. What happens when states like California, New York, and Illinois start going completely defunct (nobody will lend to them, nobody will back them up, payments are called in, and all people still working and paying taxes get up and leave)?

People can go bankrupt… but can states? Seriously this is something we need to consider. If we considered businesses “too big to fail” and threatened the domino effect, then what are we going to do when an entire state goes under? I have an idea of what will happen… but I don’t even want to talk about it.


3 Responses to “What Happens When a state is Insolvent?”

  1. 1 Alan Scott
    6 July 2010 at 09:07


    Can you say bailout? The Federal Government bailed out the banks, Chrysler, and Government Motors. They will not let Caleefornia go under. Too many impotent people are from there. Nancy Pelosi and the public unions. It would be a good lesson if at least one State went bust. Say in 2013 when we have a new President and Congress.

    While even a Republican Administration would have to save them, that Administration could impose harsh discipline on the crack head spenders. We’d probably have riots, like when the EU told Greece it’s credit card was maxed out. I do know that Cities and School Districts have been taken over by States. I will have to research how that went. I’m sure it is applicable.

  2. 6 July 2010 at 21:55

    Alan Scott,
    I know they will opt for a “bailout.” However, with what money and what power? All lenders to the American government are about to close shop because America isn’t paying. The dollar power is falling. And less and less people want the Reserve to continue to manipulate the market and print meaningless fiat money.

    Also, would this be a problem between seperation of powers – State versus Federal? Can the Federal government body buy out a state government body? I’d like to see the arguments for that.

    Not sure what you are saying with 2013. Not sure the American people are competent to elect someone to put their foot down.

    I’d hope for riots. Then we can see who the entitlement class is. In Europe, they are all the entitlement class. However here in America the entitlement class lives comfortably in their homes and we don’t really know who they are. A riot would get them out so we can see who is out there milking the cow.

    I don’t want school districts to be taken over by anyone – ever. Let the free market produce smart people. Let the schools produce the best students they can. I’ll take that over this Communist DoE any day.

  3. 3 Alan Scott
    8 July 2010 at 06:44


    There was a recent article in National Review speaking on the dollar. The dollar has held up remarkably well considering our low interest rates, our debt, and the way our useless President has grown entitlements . Liberal economists point to this strength in the dollar to say that there is no problem. The article points out that normally international investors would short American currency against others. The problem is that all of the other nations of the world are dead beats too. We actually compare well against the EU and Japan.

    So where is an investor to go ? The answer is gold. The price of gold is a sign that all is not well. If investors begin shorting America, we will have massive inflation, high interest rates and chaos. Things have to come to a head . SS, Medicare, ObamaCare, Government Pensions, there is no money to pay for it all. Democrats will cut defense like Jimmy Carter did to pay for it. Liberals are calling for that now. Maybe our Soldiers can join NASA on a Muslim Self Esteem tour around the World.

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