PhillyDeals: States' defaulting on commitments as a GOP strategy?

Bank of Moscow logo. In '98, Russia defaulted on the debts ex-Communist bosses amassed.
Bank of Moscow logo. In '98, Russia defaulted on the debts ex-Communist bosses amassed.
Posted: February 01, 2011

Once upon a time, Republicans were the party of big bankers and other people who lent money for a living - the pay-your-bills, personal-responsibility, sound-money party.

Democrats, from Andrew Jackson to Dennis Kucinich, led inflationary fights to help small farmers, urban homebuyers, and others who voted for them to escape the burden of having to pay market prices for borrowed money.

But now, former House Speaker Newt Gingrich and former Florida Gov. Jeb Bush, both at various times seen as possible GOP presidential hopefuls, have joined the "Can't Pay? Don't Pay!" movement.

They risk unleashing America's Inner Deadbeat on a really big scale. As if too many people weren't already in default.

"Struggling state governments" should declare "voluntary bankruptcy," so they can cut funding to their "bloated, broken, and underfunded pension systems for current and future workers" and end the "lucrative pay-and-benefits packages" of millions of state troopers, judges, and other public employees, Bush and Gingrich wrote last week in a Los Angeles Times column.

Stop the checks!

But why just pension checks?

If we're going to stiff retired corrections officers and social-work supervisors, how long before we're also tempted to rip up lucrative long-term government software and construction contracts; "economic-development" subsidies to major employers and favored start-ups; promised payments to hospital, university, and school projects; leases negotiated in the inflated mid-2000s; and other costly public commitments?

And can we expect corporations and working debtors to keep paying their bills, if states won't?

Here's a precedent: Russia in 1998 defaulted on its debts after its ex-Communist bosses borrowed too much.

Since then, that nation has elevated public corruption and investor-robbing to national policy, as William Browder, head of the biggest foreign investment fund that invests in Russia, lamented in a recent BusinessWeek column.

Bush and Gingrich don't seem to care about the forces an intentional government default could unleash. "Very irresponsible. It is the politics of fear," says Tom Kozlik, vice president and municipal credit analyst at Janney Capital Markets in Philadelphia.

A "political" default as Bush and Gingrich recommend "would rock the municipal market," Kozlik tells me. Borrowing costs would shoot up. Towns would have to pay banks more to finance legitimate projects - water service, police cars.

Some Republicans who actually help govern this country are less irresponsible than Bush and Gingrich. House Majority Leader Eric Cantor has protested the proposed use of "state bankruptcy as a bailout," writes Mark Fabian in the Municipal Market Advisors newsletter.

Like Russia?

Of course, debt traders would protest state-bankruptcy defaults: "If the muni-debt business gets hit with a dose of reality, those firms lose their cash cow" and their traders' commissions, veteran South Jersey banker John T. Coleman told me.

States have, in effect, already defaulted, Coleman added. "Governments are spending more in current appropriations than they can possibly take in," he told me. "I am glad that some politicians are finally bucking the trend and facing reality."

But is cutting off retirement incomes, in difficult times, the best answer?

Legislators can vote to trim future pension guarantees, just as they inflated pensions without paying for them under "good-times" governors like Pennsylvania's Tom Ridge.

Pennsylvania and New Jersey have already done this. They may do it more, if they conclude that most voters aren't willing to continue financing payouts at today's rates.

Maybe that's Bush and Gingrich's real, limited goal: Talk tough so their allies can get a little back at the bargaining table.

But saying it's OK to run away from the promises the knuckleheads we elected already made to millions of legally vested retirees is a crude and dangerous cure.

We're not as bad as Russia. Let's hope.


Contact columnist Joseph N. DiStefano at 215-854-5194 or JoeD@phillynews.com.

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