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Saturday, July 4, 2009

United forever?

While we appear to have weathered the initial wave of economic tsunami without the wheels coming off the cart, there are new challenges which may not be amenable to the borrow from the future strategy. The banks and brokerage houses are not folding like lawn chairs and the stock market has stabilized and is less volatile. However, unemployment rates continue to climb, commercial real estate is following the home market, and long standing weaknesses in state finances have become painfully evident.

As politically powerful states such as California and New York face budget issues which appear to defy conventional solutions within their states, there sill be a huge temptation to tap into the largess of the federal government to bail them out. If AIG, GM, and Bear Sterns are too big to fail, why not bail out California? As H.L. Menken once stated "There is always a well-known solution to every human problem--neat, plausible, and wrong."

Such an intervention has the real potential of serving as the catalyst to propel state secession movements to prominence and influence. Five years ago I would not have imagined that I would be writing a blog piece on this Independence day which seriously raised the possibility of dissolution of the US. However, as these events unfold, I see this as a real possibility.

Let there be no doubt, there will be amazing political pressure for the Feds to intervene. However, the implications of such a bail out must include dissolution of the union. Look at any map of the US and identify the states which are fiscal basket cases. They have certain uniform characteristics. Their citizens of these states already carry an onerous tax burden and they have suffered from substantial losses of industry and sources of tax revenues because of their anti-growth tax policies. All this is present without the slightest recognition that their prior actions are responsible for their present state, most notably the growth of entitlement programs crafted to buy the votes of key constituencies.

States which are weathering the present financial crisis also share certain characteristics. They relied on pro-growth tax policies and limited government and were generally supportive of similar policies at the national level. They attempted to create actuarially sound entitlement programs which could be sustained during good times and bad. What will happen if the Federal government intervenes to save states which have maxed out their credit cards, saddling prudent states with additional debt? It may not go over well. The states rights and secessionist movements may become re-energized. It is already happening to some degree (see WSJ link below).

Perhaps re-opening of the states rights debate is not a bad thing. The final word on which powers should reside at the federal level and which ones should reside at the state or local levels is hardly a settled issue. The issues raised in the Federalist papers are just as relevant now as they were over 200 years ago. Throughout my lifetime, the states rights movement has controlled little legitimacy, being heavily controlled by interests who primary driver has been racial segregation. Even in the periods immediately prior Jim Crow, justification for state sovereignty was based to a great degree on the preservation of the institution of slavery, hardly a compelling reason to garner widespread support for a concept that may have still have substantial merits. With the elimination of slavery and the much more arduous and time consuming dismantling of state sponsored segregation, we may begin to look again at the merits of movement of power back to local and state control.

How events will play out in the short term and whether decisions made now will ultimately be seen as thoughtful and insightful is an open question. Whether these questions are settled via open debate or brute force politics may control the fate of the Union.

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