E.J. McMahon Argues for Alternatives to State Bankruptcy, and Fred Siegel on Public Employee Unions

The Manhattan Institute’s EJ McMahon argues for alternatives to state bankruptcy in the Wall Street Journal today.  The article is not framed as an argument for the sustainability of the state debt obligations – i.e., raise taxes to the level necessary to cover the promises made – but instead argues that governors and state legislatures have the tools necessary to deal with the public employee unions.  Perhaps most tellingly, it asks why a state would voluntarily enter into bankruptcy if it already lacked the political will to deal with the public employee unions.

For constitutional reasons, any federal law enabling state bankruptcy would have to be voluntary, meaning states would have to invite federal judges to play tough with their unions. But if Gov. Jerry Brown and the California legislature are unwilling to rewrite their collective bargaining rules—signed into law by Mr. Brown himself, 33 years ago—why assume they would plead with a federal judge to do it for them?

It’s more likely that a state like California would pursue bankruptcy if powerful unions and other budget-dependent interest groups saw this as a way to deflect some of the pain to bondholders. California is one of the states that constitutionally guarantees its general obligation debt, and whose bondholders are now seemingly untouchable. That could change with a bankruptcy option.

It’s a good piece, and worth reading closely, although I think it is somewhat arguing past Skeel’s argument.  It’s even better read in conjunction with historian Fred Siegel’s account of how New York’s mayor Robert F. Wagner first saw the opportunity presented by public employee unions, and how politicians and the unions found the way to collude to internalize benefits to themselves and externalize costs onto taxpayers.  It is a textbook example of public choice theory in operation, and Siegel gives the historical context.

Liberals were once skeptical of public-sector unionism. In the 1930s, New York Mayor Fiorello LaGuardia warned against it as an infringement on democratic freedoms that threatened the ability of government to represent the broad needs of the citizenry. And in a 1937 letter to the head of an organization of federal workers, FDR noted that “a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable.”

Private-sector union leaders were also divided. George Meany, the president of the AFL-CIO from 1955-1979 who came out of the building trades, argued that it was “impossible to bargain collectively with the government.” Private unionists more generally worried that rather than winning a greater share of profits, public-sector labor would be extracting taxes from a public that included their own workers. But in the late 1950s, with the failure of the labor movement’s organizing campaign in the South, Meany’s own executive council insisted on the necessity of winning the right to organize public employees.

The first to seize on the political potential of government workers was New York City Mayor Robert F. Wagner …. Running for re-election in 1961, Mayor Wagner was opposed by the old-line party bosses of all five boroughs. He turned to a new force, the public-sector unions, as his political machine …  Ten weeks after Wagner’s victory, Kennedy looked to mobilize public-sector workers as a new source of Democratic Party political support. In mid-January 1962, he issued Executive Order 10988, which gave federal workers the right to organize in unions.

Siegel then traces through the political organizing down through the 1970s and 80s.  He is not arguing for state bankruptcy, but instead for reversing the source of the public choice conundrum, going back to FDR’s original concern.  I share Siegel’s view of the underlying problem.