Opinion and Economic Analysis

HICKS: Inspired leader needed to survive next big crisis

November 10, 2012

When President Obama takes the oath of office in January, he faces an impending financial crisis that is as bad as, if not worse than, the national debt—which itself will take a long generation to remedy.

I write, of course, about the potential for widespread municipal bankruptcies and the effective bankruptcy of as many as a dozen states. This will present historic difficulties for the nation, and much will depend on effective leadership from the president.

Today, a slow drip of municipal bankruptcy is spreading across the nation: 28 in the last two years alone, with only about half of states authorizing such steps, and hundreds more bankruptcies or bankruptcy-like procedures under serious consideration. If this weren’t bad enough, bond markets have identified two states that cannot possibly pay their obligations, and another four that are in serious trouble.

Worse still, beginning in 2014, state and local governments will be required to report their pension obligations like businesses now must do. This means sometime in the next fiscal year, debt several times greater than what is currently on the books will magically appear on balance sheets.

Among the worst will be Illinois, where reported government liabilities will rise from a few thousand dollars per resident to as much as $100,000 per citizen. No government without the ability to print money can pay that, and it will create a crisis that will test the republic.

On their face, the problems should be easy to fix. Government employees in many places have been made unreasonable promises about benefits such as retirement pay, retirement age and health care costs.

In the most solvent places, such as Indiana, the solution will mean modest benefit cuts to teachers and public employees. (Along with higher tax rates than we would otherwise have enjoyed.) In Chicago, New York and Los Angeles, it will mean fiscal chaos that is outside of modern memory. That will lead to calls for federal intervention, which must be largely resisted.

The federal government has had to deal with failed states in the past: The great unpleasantness of 1861-1865, the Great Depression and the Civil Rights era are three examples. We have had to watch states unable to pay their bills, but that was when state budgets were small and state services minimal. We need only conjure the names of Lincoln, Roosevelt, Eisenhower, Kennedy and Johnson to comprehend the strength needed to deal with this crisis. I am very worried.

It is telling that the failures will occur in states where huge natural advantages have masked dysfunctional governments. California, Illinois and New York all enjoy grand cities that have shielded their states from a generation of fiscal folly. This will end, most likely in 2014.

Our nation will need smart, thoughtful and steady leadership through this crisis. I pray we get it.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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