Ugh, this @davidfrum piece comes somewhat close to understanding municipal bankruptcy (and thus state bankruptcy) but then screws it up pretty dramatically. https://www.theatlantic.com/ideas/archive/2020/04/why-mitch-mcconnell-wants-states-go-bankrupt/610714/ A few notes for the curious….

Frum rightly notes that states can default without bankruptcy. They’ve done so often in American history, 2 big waves in the 1840s and post-reconstruction. Arkansas has defaulted 3 times, in fact, in the 1840s, 1870s and 1933, the Argentina of America

(Btw, wonder why Arkansas is so underdeveloped? Part of the story is that it wasn’t able to invest in infrastructure because it was largely shut out of debt markets in the crucial period of fast growth in public investment in the late 19th century)

Good so far. But Frum ignores that — if Congress passed a state bankruptcy code — states would have to opt in. That’s a constitutional rule . The only thing that saves the constitutionality of municipal bankruptcy is that it requires state authorization before a city can file.

Second, Frum argues that state bankruptcy would be a nefarious way for federal R to defund state pensions. But unless it was very different from Chapter 9 (raising really substantial constitutional questions), states would be in charge of designed their own plans of adjustment.

Further, in practice, municipal bankruptcy has not been consistently pro-bondholder. While there are a few counter-examples, pensions have often done better than bondholders in most recent Chapter 9 cases.

Courts — notably in Detroit — explicitly determined the differential pro-pensioner treatment of unsecured creditors to be fair, given state constitutional commitments and municipal need to hire going forward.

The big question with state bankruptcy is whether states would opt in at all. As @vsjbuccola notes, if there was a state bankruptcy code and a state opted in, doing so would reduce its discretion about which creditors to pay and which not to

The idea still has merits worth discussing. Sovereign immunity isn’t functionally absolute, as this wonderful paper about Arkansas 1933 shows, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2747674 and filing for bankruptcy would allow states to avoid special pleading by every class of creditor

The other thing Frum almost gets right, but then doesn’t, is his claim that state debt problems are long term concerns, not immediate. It is not, as he says, that reducing debt have no effect on today's budget, as it surely would

(Unless he’s assuming no one will make their contributions to pensions, which may be true, but will make future debt crises worse)

The reason state bankruptcy has little to do with the crisis today is that the Fed is going to buy short term state bonds through the municipal lending facility, so there just will not be a short-term financing crisis ala NYC in the 70s

Perhaps some states will not want to issue debt, and would rather cut services (this will be true of all of them to some degree). But no state is going to default on debt in order to avoid borrowing from the fed.

State bankruptcy is not much of a response to the COVID-19 crisis, but that does not mean it is a conspiracy either. Maybe it's a good idea, maybe it's a bad one, but columns like this obscure both sides of the argument

btw, ht: @kimmaicutler for identifying this piece! It's so characteristic of The Discourse around state and municipal bankruptcy