Back on April 2, when the $2+ trillion “CARES” Act had just cleared Congress, I issued a warning to “make no mistake — this is a perilous moment.” The country had reached seemingly unanimous consensus that all previous budget constraints no longer apply to federal government spending. After all, we are in a crisis. Therefore we must spend “whatever it takes” — a term with no definition and no limits. With all sensible judgment now thrown to the winds, this would be the perfect time for the well-connected and the corrupt to swoop in to grab the extra tens of billions they have long lusted after.

And of course, this is exactly what has happened. Every thoroughly corrupt left-wing priority — from wind power subsidies to teachers union contracts — has its lobbyists there in Washington trying to get in on the next handout (aka “stimulus”) gravy train. As a Manhattan Contrarian public service, I thought I would look around to find a candidate for the very most completely corrupt and unsupportable demand for a bailout among the hundreds of such demands currently swirling around the Washington firmament.

Although it’s a crowded field, I have a candidate that will be difficult to top. On April 14, a guy named Don Harmon — Democrat and member of the Illinois State Senate, and recently elevated to the position of President of the that body — wrote a letter to Dick Durbin — Illinois federal Senator and member of the Democratic leadership of that body — laying out what the state of Illinois is seeking in the next round of federal “stimulus.” This letter is the very definition of the term “brazen.”

The Harmon letter lays out some demands that are quantified monetarily, and others that are not. The total of just the quantified amounts comes to some $41.6 billion, and even that amount does not include additional tens of non-quantified billions under such categories as hardship payments to hospitals and raising the federal matching share of Medicaid. But the best part of the letter is the list of the quantified monetary demands. For starters, there’s the $15 billion “block grant” — or, in other words, just $15 billion in free, unrestricted money for whatever Illinois might feel like spending it on. And then comes the one that cannot be topped: “$10 billion in pension relief, directly for the state’s retirement systems.”

Everybody who has been paying any attention at all knows that the Illinois public employee pensions have been in a disastrous and ever-deteriorating state since at least the 1990s, and that this situation has everything to do with fiscal irresponsibility of the Illinois legislature over several decades, and nothing at all to do with the current Covid-19 crisis. The game in Illinois for 30 and more years has been that the politicians buy support and votes from the public employees by making lavish promises of long-in-the-future pensions, with no intention of paying for the promises on an ongoing basis, and intentionally leaving the mess for future Illinois taxpayers or, maybe in a “best” case, sticking the problem someday to the feds. In a post way back in January 2014, I identified the funding of the Illinois public employee pensions as the worst among the all the states, and specifically called out the tremendous corruption taking place:

Funny how the so-called "progressives" talk a good game about helping the poor and disadvantaged, but when you look at what they actually do, it is to pass out the big money to their union friends who helped put them in office, while using the pension mechanism to hide the problem from the taxpayers and voters as long as possible.

And now these people have the chutzpah to try to take advantage of the virus crisis to stick the bill to the federal taxpayers, including the taxpayers of those states (49 of them in this case) who have acted more responsibly than Illinois in creating and funding public employee pensions. To its credit, on April 19 the Chicago Tribune came out with a scathing editorial appropriately shaming Senator Harmon for his brazen effort to use this difficult moment to fleece the federal taxpayers. Excerpt:

It is not surprising an Illinois politician finally put in writing what economists and financial watchdogs have been warning for years: That elected officials who failed to take seriously decades of fiscal warning bells in this state eventually would seek a bailout from the federal government. What is beyond galling is using the coronavirus as an excuse. . . .  [T]o suggest Illinois is worthy of such a generous bailout given its history is preposterous.  

So what happens to Illinois if, with reduced tax revenues, they can’t pay all of their bills, be it employee salaries, interest on existing bonds, pension funding obligations, or whatever else? The answer is, they default. Why is that so bad? Eight states plus Florida (then a territory) defaulted during the 1840s. Illinois was actually one of the states that defaulted at that time. The defaulting states got shut out of the credit markets for some years, and then eventually did some deal with the creditors and got back on their feet. That’s how the process works. Illinois has no legitimate argument that they did not know what happens when you get over-extended and can’t pay all of the bills that you have obligated yourself to pay.

Unfortunately for Illinois and any other state in this predicament, the U.S. Constitution does not give the states a lot of flexibility in forcing creditors to take big discounts. There is the pesky Contracts Clause (Article I, Section X, Clause 1): “No State shall . . .pass any . . . Law impairing the Obligation of Contracts, . . . .’ So just telling the bondholders that your contract is no longer considered binding will not fly. If the virus crisis means that the option of raising additional revenue is also not viable, there really is only one option remaining: major cuts to state expenditures. In my view, that would be about the best thing that could happen to a high-spending blue state like Illinois. Needless to say, the highly entitled state employees will not like this. That’s why it’s such a good thing that there is no other viable option.

In a radio interview yesterday, Senate Majority Leader Mitch McConnell suggested another option, namely that the federal Bankruptcy Code could be amended to make states eligible for that process. Currently the Bankruptcy Code provides a mechanism for municipalities (like a city or county or school district) to file for bankruptcy protection, but no such mechanism is provided for the state itself. Unfortunately, I think that the 11th Amendment to the Constitution is a significant obstacle to bankruptcies for states. That amendment, enacted in 1795, was the very first amendment to be added to the Constitution after the Bill of Rights in 1791. It provides:

The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.

The essence of a bankruptcy process is that all claims against the bankrupt entity — here a state — must be brought in a federal bankruptcy court in order that each claim can be adjusted with respect to all other claims under a prescribed system of priorities. How can such a process work if out-of-state creditors are barred from filing their claims in the federal court? I can think of some potential work-arounds (e.g., assignments of claims), but it is not obvious that they would work.

Meanwhile, I’m having a hard time getting together much sympathy for Illinois. And by the way, they are far from the only state in such a predicament. New York, New Jersey and Connecticut all will have serious cash-flow problems coming up very quickly. Even California, which only months ago thought it had a massive budgetary surplus, could quickly find itself in a big hole. The unifying theme is the high-spending blue state model, based on the presumption that the gusher of tax revenue flowing in from the productive sector of the economy would be essentially infinite and would continue forever without any sudden downturns. Sorry, but the world is much crueler than that.

And the federal government? The only real difference between them and the states is that the feds can borrow money in a currency they can print in infinite amounts. So therefore, should we conclude that their ability to spend is infinite, without adverse economic consequences to anyone? That appears to be the narrative that everyone has bought into for the moment. Plenty of countries have gone down this road in the past, and it has never ended well. For the U.S. government, the end could be a long way off; but not forever.