States Will Be Slammed by Default

July 27th, 2011 at 4:22 pm | 40 Comments |

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A federal default could cascade through state governments, forcing tax increases and budget cuts on local taxpayers. Medicaid budgets could be slashed. Federal money for unemployment benefits could halt. State colleges could lose federal grants.

The Pew Center on the States reports that the municipal market would get swept along in the wreckage, severely constricting state budgets.

Different states would experience different kinds of shock.

Take Colorado. A federal default would cause more than 53,000 federal employees to be furloughed. All national parks would be shut down, and thousands of military service members would not be paid until a deal is reached. With Colorado’s large military presence, this could strike at the incomes of many families.

Moody’s has created a watch list warning the states of Maryland, New Mexico, Tennessee, Virginia and South Carolina as being at the highest risk for a downgrade. Should the federal government default and downgrade from its current AAA rating, these states will suffer most, largely due to their high federal employment numbers and Medicaid exposure. Some states are taking preventative action.

New Mexico – which takes in $500 million of federal funds each month for unemployment and forestry programs – has asked agencies to request any federal reimbursements by Friday, to ensure the return of their payments.

California borrowed $5.4 billion from a bank on Tuesday to avoid the interest increases that would accompany a default. This will increase municipal debt, but may save the state in the case of a default-instigated financial disaster.

The direct risk to states is obvious. There is also a less discussed risk that a federal debt downgrade will raise state borrowing costs.

“Maryland had a bond sale scheduled for this week – a $700 million bond sale,” said Pew Research Manager Sarah Emmans. “And the treasurer decided to postpone part of it due to the uncertainty of the August 2 deadline.”

Increases in state borrowing costs will disrupt local economics.

“State and local governments actually issue debt to build things like roads, bridges and highways,” said Emmans. “So if there’s a default, then it’s harder for them to issue debt. They might have to cancel or postpone a lot of those projects that both create jobs and also provide vital services to taxpayers.”

A recent article claims most of us are affected by the “normalcy bias” – a mental state causing us to underestimate the severity of the looming default and generating our inability to cope with it. But some states are taking actions to prepare themselves – and their cash stocks – for financial disaster.

“State and local governments can’t go very long without that federal money,” said Emmans.

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40 Comments so far ↓

  • tommybones

    And yet here we are, watching economic suicide bombers known as the Tea Party bring us to the brink of mass destruction. If we lived in a real democracy, where the population actually had a handle on the facts, the Tea Party would have been laughed off the national stage in it’s infancy.

  • rbottoms

    Don’t blame me, I didn’t vote for these assholes.

  • Chris Balsz

    The House voted for the money. The bill is sitting in the Senate. If it becomes law none of this happens.

  • balconesfault

    Do you think the Tea Partiers care?

    They just want the opportunity to take hostages again in 6 months.

  • Oldskool

    My epiphany during the Iraq mess was to send the entire Shrub team over there to ruin their country the way they ruined this one and game over. We could say the same thing about the teabaggers and Libya, Syria, Pakistan, etc.

  • cporet

    Hey, me too! My wife’s 401K hasn’t recovered from ’08 yet and now? Where do I put the money? Stocks? Bonds? Treasuries? Cash? My Congressman is a used car salesman, literally, and he’s sworn to NEVER raise taxes and wants to use “common sense” to run the budget. We’re all screwed and for what? To make sure that Obama is a one term president per the Senate Minority Leader.

  • valkayec

    I don’t think I can say anymore. I’m running dry, arguing and fighting for sanity. I’m glad CA borrowed money last week to sustain the state, but I’m pissed off that we had to incur this extra debt because of the irresponsibility of those in DC. There are going to be a lot of small businesses and mom&pop shops that will go under if there’s a default or even if the triple-A rating is reduced because of much higher interest rates and credit freezing up again.

    Thankfully, I cashed out on my retirement funds last Thursday when the market was almost 12,700. I’m going to sit on my cash until this whole mess is over and some stability returns.

    Today, I read a letter to John Boehner from a real conservative Republican, Michael Stafford, that I found refreshing, sensible and reflective of older conservative values. I wish the GOP had more real conservatives like this man.

    Here’s is just part of that letter:

    [i]Effective tax rates for all income brackets in America are at or near historically low levels. Our corporations benefit from one of the lowest effective rates of taxation in the industrialized world. And yet, under your leadership, Congressional Republicans have dug in their heals and — for the most part — refused to consider closing tax loopholes for big business or, most importantly, raising income tax rates for the wealthiest Americans.

    Such a solution, coupled with spending reductions and entitlement reform, is just and equitable. It recognizes two fundamental realities: first, that corporate profits have increased during the present “recovery” even as wages, and hiring, have not. Second, that the top 1% of income earners in America have amassed an increasing share of our nation’s wealth over the past several decades while wages for most Americans have stagnated or declined.

    In the Book of Genesis, God famously asked, “Cain, where is your brother Abel?” This question still resonates today — it reminds us of our duty to care for the poor, the elderly, the disabled, and the most marginalized elements in society. Does the Republican Party no longer see any role for government in providing for these groups? That certainly seems to be the case given the spending cuts proposed by Congressman Ryan. While some entitlement reform is necessary, the cuts in Rep. Ryan’s plan amounted to a repudiation of our collective responsibilities towards our fellow citizens. Speaker Boehner, do Congressional Republicans know where their brother Abel is today?

    Every American understands that sacrifices are necessary. But sacrifices demand a balancing of benefits and burdens. Is it right and just that those Americans who have benefited the most from the economic growth over the past 30 years and from the recovery should see their burdens lightened in this time of fiscal crisis while those who have benefited the least — average Americans who have seen their jobs outsourced overseas, their wages stagnate or decline, their benefits reduced — are told to carry an additional share? I think the answer is obvious: it is not. [/i]

    http://www.coffeepartyusa.com/dear-boehner

    • Primrose

      Thank you for the posting this letter Valkayec. I think he gets to the heart of the matter. The wage gap has created a community dysfunction where those living large are living so differently than their fellow citizens, they feel they don’t have to care.

      To them the burden of taxes is not financial (as it is for the rest of us) but mental, suggesting that they have to pay taxes like everyone else suggests they are like everyone else, and they’ve crowned themselves different, better, the only ones who matter.

      But countries rise or fall because of shared community and the participation of all citizens. I wonder when their fortunes disappear in a whiff of market jitters, how self-sufficient they will be?

    • Chris Balsz

      What about that is in any way “conservative”? It sounds like Jesse Jackson’s 1984 keynote address to the Democratic Convention.

      • TerryF98

        It does not sound Conservative to you because you are not a Conservative.

        • Chris Balsz

          We are gathered here this week to nominate a candidate and adopt a platform which will expand, unify, direct, and inspire our Party and the nation to fulfill this mission. My constituency is the desperate, the damned, the disinherited, the disrespected, and the despised. They are restless and seek relief. They have voted in record numbers. They have invested the faith, hope, and trust that they have in us. The Democratic Party must send them a signal that we care. I pledge my best not to let them down.

          …President Reagan says the nation is in recovery. Those 90,000 corporations that made a profit last year but paid no federal taxes are recovering. The 37,000 military contractors who have benefited from Reagan’s more than doubling of the military budget in peacetime, surely they are recovering. The big corporations and rich individuals who received the bulk of a three-year, multibillion tax cut from Mr. Reagan are recovering. But no such recovery is under way for the least of these.

          Rising tides don’t lift all boats, particularly those stuck at the bottom. For the boats stuck at the bottom there’s a misery index. This Administration has made life more miserable for the poor. Its attitude has been contemptuous. Its policies and programs have been cruel and unfair to working people. They must be held accountable in November for increasing infant mortality among the poor.

          http://www.americanrhetoric.com/speeches/jessejackson1984dnc.htm

          Yeah, the great conservative tradition.

          I guess I’ll call myself “reactionary” so I don’t have to hear about what conservatism REALLY means from conservatives.

        • balconesfault

          My constituency is the desperate, the damned, the disinherited, the disrespected, and the despised.

          If you didn’t notice – Congressman Stafford doesn’t call those his constituency.

  • Banty

    Note that the states that are most dependent on the federal dole outs are those voting largely Republican. Rand Paul can explain to his Tennessee constituents how this is just a step over the threshold into a brave new Libertarian world.

  • JohnMcC

    Not only are the interest rates related to Treasuries at stake and the millions of checks & transfers that the federal gov’t sends out becoming more and more uncertain, the businesses that count on their customers will receive those funds are vulnerable. Grocers count on their customers to get ‘SNAP’ (food-stamps), for example. What if WalMart’s sales drop even a little — say 7% or 5% — how long will that go on before they cut their payroll. And their employees have to pay their rent, decide whether to buy their kids new clothes for school, etc etc. This is how a ‘liquidity trap’ become a ‘deflationary spiral’. This is how a ‘down-turn’ becomes a 2d great depression. Frankly, I’m terrified by the possibilities of the next few months!

  • Primrose

    These people can’t add. They are against higher taxes but not apparently lower costs to regular people. They say things like its not a revenue problem, its a spending problem.

    No, its a balance sheet problem. You’ve got to adjust whatever is possible. So if you are deeply in debt, yes you have to tone down your lifestyle, but you better get a better or another job, or at least ask your boss for a raise.

  • balconesfault

    I’ve figured out the perfect analogy.

    Balancing the budget is like landing a big jet airliner on a short runway. It’s tricky … wind shear and other factors can make it even trickier. Sometimes, like under Clinton, you pull it off. Under Bush we basically blew it off as a national goal.

    Now we suddenly have Tea Partiers who are insisting that the most important thing in the world is to land the plane right now. Doesn’t matter that the runway is icy, and if the winds are too strong, they want us to land NOW dammit. No more time in the air – we’ve had enough.

    But complicating things … you’ve got a co-pilot who is insisting that since you’re trying to land, you can only go down. No upward adjustments to level the nose or anything – it’s dive or nothing.

  • A.F. Entrekin

    “…budget cuts on local taxpayers. Medicaid budgets would be slashed. Federal money for unemployment benefits would halt. State colleges would lose federal grants.”

    These are all things Tea Partiers support. A default would force a de facto balanced budget on the US which would gratify fiscal nihilists like Rand Paul and the Tea Party, neo-Austrian minions.

  • NRA Liberal

    I for one am sick of this clown and pony show.

    Part of me says “go ahead, do it, and let’s see exactly what the American people REALLY think about life with “small government”.”

  • D Furlano

    A default would be a bad situation.

    But on the other hand ANY reduction in the debt has the potential to cause another recession. The UK is finding that out now.

    The debt is not the problem and austerity is only going to make the current economic situation worse.

  • NRA Liberal

    We’re going to learn the hard way what they already learned in the 1970s.

    Don’t negotiate with terrorists.

  • valkayec

    BREAKING NEWS: The CBO just scored the revised House bill. It knocks off $917 billion over the next 10 years, with $22 B reduction in 2012 and nearly double that in 2013. I read over the scoring on the CBO website and it ain’t pretty but it is rather hard to understand. The demand for another BBA vote by 12/2011 is in the bill too. All Senate Dems sent a letter to Boehner vowing to vote against his bill.

  • Houndentenor

    I’m sick of this.

    Split the difference, pass the bill and come back to fight for more cuts/spending and tax cuts/increases in the next session. There’s a new budget every year. (Well not lately because Congress can’t seem to pass a budget, but you know what I mean.) Nothing in a budget is permanent. You can’t get everything you want in every bill. Get the best bill you can and then try to get more of what you want next time.

    Is anyone else here old enough to remember when grown-ups ran the country? Tip O’Neill and Ronald Reagan disagree on just about everything but they’d never have risked an economic meltdown like this.

    • balconesfault

      As much as his Democratic supporters hated Ronald Reagan, Tip O’Neill was never going to deliberately wreck the economy so that Reagan’s popularity would wane.

      • Houndentenor

        Of course the big difference between then and now is that we still had liberal Republicans in the northeast and conservative Democrats in the south. That meant that virtually every bill passed was done so with some sort of bipartisan coalition. There was far less partisanship and a lot less “I’m against anything the other side is for” politics. It’s actually amazing that anything at all gets done since the entire political culture is reactionary rather than proactive.

        • balconesfault

          Of course the big difference between then and now is that we still had liberal Republicans in the northeast and conservative Democrats in the south.

          There actually are still some conservative Democrats in the south. The GOP has been doing their best to try to gerrymander them out of existence, but they definitely exists … and had they been liberal Democrats we’d have seen a large supplemental stimulus bill pushed through in early-mid 2010.

          It was the actions of these Blue Dogs working in concert with the GOP that kept this from happening.

          As for the GOP – you shouldn’t necessarily in this day and age confuse voting record with ideology. There are at least a handful of northeastern Republicans who would vote more liberally on some issues than the southern Democrats I was talking about, except for fear of primary challenge.

          Politically, I’d say that the Democratic Party is playing between the 20 yard line on one side of the field, over to about the 40 yard line on the other. Between the 20 and the goal line there are extreme leftists who have no real voice in our current political process.

          On the other side of the field, the GOP is playing from about the 35 to the goal line. I’m not sure what level of conservative extremism it would take for someone to be dismissed as not a serious participant in the GOP these days. In fact, it’s difficult to come up with a parody of right wing discourse that would actually get someone censured by most GOP politicians these days, they’re so afraid of the extremists in their base.

  • Oldskool

    What’s shocking to me is that a group of looneys in Congress who see themselves as leaders are so willing to create so much anxiety, knowing that we were barely sleeping as it was. They must be thinking we’ll eventually get Stockholm Syndrome and then they can rest easy on election day.

  • cporet

    Allow me to be snide for a second and add this to the thread. Imagine President John McCain. Phew, that WAS close.

  • jg bennet

    here is something else to worry about………..

    Iran revolutionary guards’ commander set to become president of Opec
    Rostam Ghasemi, who is blacklisted by western powers, could have major role in determining global oil price.

    http://www.guardian.co.uk/world/2011/jul/27/iran-revolutionary-guards-opec-rostam-ghasemi

  • Sinan

    Start with the red states. Stop making payments to them on August 3. Send all their money to the blue states. Watch them squirm, watch them beg, watch them scream bloody murder. Then sit back and enjoy a nice chardonnay with some foi gros perhaps. Or some ripe gruyere. Or have a latte. Enjoy the carnage. I will.

  • Chris Balsz

    BTW

    “Yesterday, the markets showed little debt ceiling concerns, as seen in 10-year Treasury note yields hovering around 3 percent, below the average of 4.05 percent over the last decade, and the average of 5.48 percent when the country was running budget surpluses between 1998 and 2001. ”

    http://www.bloomberg.com/news/2011-07-27/u-s-credit-rating-rests-on-s-p-s-london-view-of-washington.html

    Given the comparative values of the dollar to other world currencies and our deficit, are we a better investment than we were in 1998?

    Interest rates are going back up. No matter what.

  • anniemargret

    Sinan. I would agree with you (it’s a great idea) but unfortunately there are thousands of us ‘blue-staters’ living in red states. Frankly, they could go take a hike. This is a minority acting like spoiled brats, with bad manners and very ill-bred.

    Somewhere along the line they decided this was ‘their’ country. Ahem. Because they haven’t kept up with the USA and its progress, they were mightily shocked when Obama was elected Prez. Good golly Ms Molly. They couldn’t handle it. It was OK when Bush and Cheney were working overtime to destroy the economy and get us mired in two unnecessary wars…they looked the other way.

    But Obama, a half black guy elected? That’s when their ire rose. And it roasted their eyeballs thinking that their special status as white America was going to be threatened.

    So, no. This is not about legitimate grievance. This is about a deeply held, deeply favored feeling that they are more special than other American citizens, and their rabid fear of the ‘other’…

    • Sinan

      Annie…you are quite right and I completely agree with your bottom line assessment. I work in rural America myself and learned quite quickly where they stood on all sorts of issues. While rural America provides us our food and resources, it is also one of the most heavily subsidized areas in the nation. They are essentially getting to live there because the cities and urban areas agree to pay taxes and fees to support rural life. As for the racial component, I keep telling folks that the current GOP is filled top to bottom with racists. Perhaps not in the mode of the 1950s but there is definitely a racial tone and animus there especially in regards to crime and welfare. Scratch any conservative voter and you will quickly hear about the horrible abuses of welfare fraud. What welfare fraud? After a few drinks, it’s that black lady in the cadillac with the four kids by different fathers.

  • Bunker555

    Interesting piece in Thursday’s Wall Street Journal:

    In September 2008, the Treasury Department appeared to have brokered a deal to save Lehman Brothers, at least that was the bet going into the weekend of Sept. 13. But, against a deadline, the deal fell apart and the market began a six-month plunge it took years to recover from. The economy still hasn’t recovered.

    That is why the market’s two main reasons a deal will get done—that Washington would never risk it, and even if it did, an agreement would be reached before full impact is upon us—are misinformed.
    http://online.wsj.com/article/SB10001424053111903635604576472650714241120.html?mod=rss_markets_main#articleTabs%3Darticle

  • Raskolnik

    Chris,

    Interest rates are going back up. No matter what.

    That is probably true.

    However, it also begs the question. Interest rates are headed up, but there is no comparison between what will happen because of long-term trends in the Dollar Index vs. what will happen if the United States decides not to pay her creditors all of a sudden. If you disagree, you are ignorant, and I suggest reading Reinhart and Rogoff’s This Time is Different as a palliative. Hint: this time is not different, default on sovereign external debt is always ugly and always leads to prolonged fiscal complications.

    • Chris Balsz

      I would disagree that “long-term trends” will be easier to bear than sharp default. To use an engineering analogy I was taught in Statistics: the Space Shuttle engineers knew that freezing temperatures could cause the O-rings on the fuel tanks to lose integrity; so they built a system with 9 O-rings. However this did not reduce the chance of failure at all; each of the O-rings froze and all of them failed on the Challenger.

      If you have a market where US Treasuries are not worth the trouble without markedly higher interest, you will not see a gradual loss of bids for our debt. You will see major buyers stand out all together, all at once.

  • Chris Balsz

    “‘My constituency is the desperate, the damned, the disinherited, the disrespected, and the despised.’

    If you didn’t notice – Congressman Stafford doesn’t call those his constituency”

    But the author of the letter did plead on behalf of “the most marginalized elements in society”.

  • ProfNickD

    “Increases in state borrowing costs will disrupt local economics.”

    Excuse me? Why are these bankrupt, bloated state and local governments doing borrowing money?

    They *should* have their borrowing costs increase — it would be a huge disincentive for them to continue their reckless fiscal behavior.