“I think it’s going to reach a point where there’s either social disorder or bankruptcy before people will act.”
That’s what Richard Ravich said about Illinois. He led the New York Metropolitan Transit Authority during that city’s financial crisis of the mid-1970s and co-authored a the recent bipartisan State Budget Crisis Task Force report along with former Fed chief Paul Volker.
You already know if you’re a regular here that our financial plight is much more desperate than commonly understood and nobody in Springfield is even discussing reforms as big as we need. If you’re new here please see the articles on the right. The sad reality is that Mr. Ravich is correct: Only a devastating shock of some kind will get it done. I hear that same thing regularly from private sector financial folks – though most won’t say so in public. It took Sputnik to get America in the space race, Pearl Harbor to get us into WWII, 9/11 to deal with terrorists…. You get the picture.
So, what would it take?
Civil unrest is not a stretch, as Mr. Ravich said. We’ve had major riots in Chicago before. If governmental services really break down we could see them again. And if we stay the course a real breakdown is inevitable because the pensions are bleeding out, and when they run out the cost of trying to pay pensioners directly would entirely swamp the budget.
The Haymarket Square violence in 1886 is a scary potential precedent, though nothing good came of it for anybody. Like the Gilded Age in which it happened the gap today between rich and poor is severe. Haymarket started as a peaceful labor rally. It took just one person (and maybe some helpers, motivated by who-knows-what, it doesn’t matter here) with a small bomb to provoke what became an international incident now marked by May Day celebrations. Fear of mass violence helped lead to construction of Fort Sheridan to station troops near Chicago, and Sheridan Road was built to march them quickly to the city to suppress riots. Today, at least part of the labor movement is becoming radicalized again — some of the leadership in the Chicago Teachers Union.
Bankruptcy, too, is not a stretch. State pensions are the focus for now but the crisis will soon become just as severe for Chicago and other cities. Some will be considering bankruptcy. Maybe a string of municipal bankruptcies would do it. The state cannot formally go bankrupt, but a small change to Chapter 9 of the Federal Bankruptcy Code would allow it.
Springfield could change, of course, but let’s not waste any time on this one with Madigan and Cullerton assuming veto proof control over the state on January 9 and Illinois voters being what they are.
Finally, a governor with once-in-a-century guts could do it alone. He could simply refuse to sign any spending or pension contributions that he didn’t like, which would provoke an immediate, broad collapse of state operations and thereby require a grand, comprehensive and dramatic set of solutions. Plausible, but painful and risky.
So, I’m starting the year more alarmed than ever, haunted by these two images used by my favorite economic historian, Niall Ferguson, in a presentation about sovereign debt crises: