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Thursday, July 5, 2012

Union busting - National style

While Scott Walker's antics in Wisconsin have attracted the lion's share of attention when it comes to union-busting, let us consider the prospects for a much more fundamental form of union busting. I want to pose the question as to whether events likely to unfold in the not too distant future may result in dissolution of a different union... The United States.

I see events unfolding which could trigger a serious threat of states threatening to leave the US. These events all relate to budget shortfalls, primarily on the state levels. It is hard to believe but 41 states have constitutional or statutory requirements for legislatures to approve balanced budgets. This includes both Illinois and California. This appears to provide little or no protection against running up debt and making promises which they cannot keep. Due to bookkeeping practices that would result in jail time for any individual doing the same practices in any private entity, unfunded liabilities are held off the books.

Due to unrealistic promises and profligate spending, there are certain politically influential states which face almost certain economic demise, following the Detroit model of economic undevelopment.  To add fire the mix, the Affordable Care Act now will offer "free money" as an inducement to expand state Medicaid programs. While you might imagine that no one could be so stupid as to believe that there is anything approximating free money. As it turns out there are plenty of people stupid enough to buy into this concept since it seems to provide good financial returns in the short term. Remember, as Keynes so astutely observed in the long term, we are all dead.

The financial logic of the Medicaid expansion program is untenable to anyone who spends slightly more than a nanosecond of thought. States will be initially spared the cost expansion which falls upon the Federal government, an entity which is presently either borrowing or printing fiat currency to cover one third of its budget. Sounds like a durable promise by a financially solvent entity to pick up the tab and one could NEVER imagine that the cost of this expansion will ultimately fall upon the states.

While some states may posture and pretend not to take the funds, all will step up because the money will come from their citizens. To not take the money is to play the role of the ultimate chump; the Feds take your money and ship to some other state because your take a principled stance against fiscal irresponsibility. . The Medicaid bribe is only the first of many games with the Federal treasury which will ultimately be used to bail out the most Greece-like of states. The states which run the most fiscally responsible path will be like the Germans, asked to indirectly fund the bankrupt states. Unlike the Germans they will have bargaining power unless they entertain leaving the union.

How could this play out? What if the Federal government declares that the pension obligations of selected union workers of non-right to work states are now the obligations of the Federal government? Not so unlikely since it already happened with the GM bankruptcy. Once states which have ignored their fiscal responsibilities and have accumulated huge debts find their way to print money using the Federal government, we are well into the Argentina model of fiscal decline.

I have to wonder whether before all states go all in on this bad bet, there will be one or a handful which entertain simply leaving the Union. Perhaps Alaska; it is isolated, rich, and filled with independent cusses. What if they simply told the Feds to take a hike. What if they played a bit more passive aggressive and simply refused to enforce certain Federal statutes relating to drilling for oil? Can the Federal government really mess with Texas? What if Texas and /or Arizona created its own military to deal with border issues that the Federal government can or is not willing to deal with. None of this is likely as long as the Feds creates sufficient financial incentives to persuade states that this is a bad idea.

The money will run out and then what.  I don't know but given the regional differences, I suspect that certain regions which have resources will want to go it alone. Nothing lasts forever.

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