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In a Bad State: Responding to State and Local Budget Crises
An authoritative review of the long history of federal responses to state and local budget crises, from Alexander Hamilton through the COVID-19 pandemic, that reveals what is at stake when a state or city can't pay its debts and provides policy solutions to an intractable American problem.
What should the federal government do if a state like Illinois or a city like Chicago can't pay its debts? From Alexander Hamilton's plan to assume state debts to Congress's efforts to respond to the COVID-19 pandemic, many of the most important political disputes in American history have involved federal government responses to state or local fiscal crises.
In a Bad State provides the first comprehensive historical and theoretical analysis of how the federal government has addressed subnational debt crises. Tracing the long history of state and local borrowing, David Schleicher argues that federal officials want to achieve three things when a state or city nears prevent macroeconomic distress, encourage lending to states and cities to build infrastructure, and avoid creating incentives for reckless future state budgeting. But whether they demand state austerity, permit state defaults, or provide bailouts-and all have been tried-federal officials can only achieve two of these three goals, at best. Rather than imagining that there is a single easy federal solution, Schleicher suggests some ways the federal government could ameliorate the problem by conditioning federal aid on future state fiscal responsibility, spreading losses across governments and interests, and building resilience against crises into federal spending and tax
policy.
Authoritative and accessible, In a Bad State offers a guide to understanding the pressing fiscal problems that local, state, and federal officials face, and to the policy options they possess for responding to crises.
What should the federal government do if a state like Illinois or a city like Chicago can't pay its debts? From Alexander Hamilton's plan to assume state debts to Congress's efforts to respond to the COVID-19 pandemic, many of the most important political disputes in American history have involved federal government responses to state or local fiscal crises.
In a Bad State provides the first comprehensive historical and theoretical analysis of how the federal government has addressed subnational debt crises. Tracing the long history of state and local borrowing, David Schleicher argues that federal officials want to achieve three things when a state or city nears prevent macroeconomic distress, encourage lending to states and cities to build infrastructure, and avoid creating incentives for reckless future state budgeting. But whether they demand state austerity, permit state defaults, or provide bailouts-and all have been tried-federal officials can only achieve two of these three goals, at best. Rather than imagining that there is a single easy federal solution, Schleicher suggests some ways the federal government could ameliorate the problem by conditioning federal aid on future state fiscal responsibility, spreading losses across governments and interests, and building resilience against crises into federal spending and tax
policy.
Authoritative and accessible, In a Bad State offers a guide to understanding the pressing fiscal problems that local, state, and federal officials face, and to the policy options they possess for responding to crises.
- GenresCities
248 pages, Hardcover
Published May 5, 2023
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Displaying 1 - 3 of 3 reviews
July 23, 2024
The final chapter of this is >>>
July 9, 2023
This book combines a brisk overview of the history of state and local defaults in the United States with a brisker series of recommendations on how to improve current policies around state and local fiscal crises. Schleicher frames the policy responses around a "trilemma", which involves avoiding moral hazard, fighting recessions, and promoting future investment, of which he claims policymakers can only pick two, and in order of the goal that will be nixed, policymakers can provide bailouts, make local taxpayers pay, or encourage states and local governments to write down debt.
As Schleicher notes, the US federal government has tried different variations on these throughout it's history. After the Revolution, the War of 1812, and even Washington DC in 1836, state debts were assumed by the feds. Yet in 1843 Congress rejected Congressman William Johnson's report suggesting that they bailout the states, eight of whom, and one territory, had defaulted. In the 1840s, 10 states adopted constitutional changes limiting debt, and 8 more did so in the next decade. The end result was underinvestment by the states due to limited borrowing capacity.
Later on the courts got involved in defaults. In the 1870s and onwards eight Southern states repudiated their Reconstruction debt, over $110 million worth, and Virginia and Tennessee scaled down debt and negotiated write-downs. The U.S. Supreme Court, however, in the 1882 case of Louisiana v. Jumel said that sovereign immunity meant states could not be sued to force officers to pay debts, and in Hans v. Louisiana confirmed it. This protected taxpayers but prevented bondholders from getting much of anything and led to continued underinvestment by the states. By contrast, starting in the Gelpcke v. Dubuque case in 1862, the Supreme Court said state courts could not hold invalid previously issued municipal debt, and later made several cases to increase the salability of such debt, namely, that they were negotiable securities, that courts could issue mandamus orders forcing back payment, that courds could prevent "corporate suicides" ending local municipal governments, and could even force local governments to tax greater than their required debt limits allowed to pay for the bonds. As Schleicher points out, this hurt local taxpayers but did allow local debt to balloon from 6.1% of GDP in 1870 to 10% right after 1900, and pay for many other local programs of the era like water and sewer improvements.
The history of the 20th century and the recent post-2008 bailouts are more familiar and a little less interesting, and the recommendations section is fairly broad, but the history and overview of state and local defaults is highly necessary and worthwhile. This should be the go-to book on this crucial topic.
As Schleicher notes, the US federal government has tried different variations on these throughout it's history. After the Revolution, the War of 1812, and even Washington DC in 1836, state debts were assumed by the feds. Yet in 1843 Congress rejected Congressman William Johnson's report suggesting that they bailout the states, eight of whom, and one territory, had defaulted. In the 1840s, 10 states adopted constitutional changes limiting debt, and 8 more did so in the next decade. The end result was underinvestment by the states due to limited borrowing capacity.
Later on the courts got involved in defaults. In the 1870s and onwards eight Southern states repudiated their Reconstruction debt, over $110 million worth, and Virginia and Tennessee scaled down debt and negotiated write-downs. The U.S. Supreme Court, however, in the 1882 case of Louisiana v. Jumel said that sovereign immunity meant states could not be sued to force officers to pay debts, and in Hans v. Louisiana confirmed it. This protected taxpayers but prevented bondholders from getting much of anything and led to continued underinvestment by the states. By contrast, starting in the Gelpcke v. Dubuque case in 1862, the Supreme Court said state courts could not hold invalid previously issued municipal debt, and later made several cases to increase the salability of such debt, namely, that they were negotiable securities, that courts could issue mandamus orders forcing back payment, that courds could prevent "corporate suicides" ending local municipal governments, and could even force local governments to tax greater than their required debt limits allowed to pay for the bonds. As Schleicher points out, this hurt local taxpayers but did allow local debt to balloon from 6.1% of GDP in 1870 to 10% right after 1900, and pay for many other local programs of the era like water and sewer improvements.
The history of the 20th century and the recent post-2008 bailouts are more familiar and a little less interesting, and the recommendations section is fairly broad, but the history and overview of state and local defaults is highly necessary and worthwhile. This should be the go-to book on this crucial topic.
June 22, 2025
A succinct and cogent piece of writing. Part history (of a very overlooked topic - the history of state and local defaults in the US, and how it has shaped federalism), part theoretical framework for understanding state and local fiscal crises, and part overview of the situation in the US today, with proposals for policy change.
The basic framework of a trilemma facing stakeholders (in particular federal decision-makers) when dealing with a state or municipality in fiscal crisis was helpful and original. In the 2010s, when fiscal crises were prominently in the news, media often portrayed a Di-lemma, between moral hazard and acute economic contraction (induced by austerity). But the genuine trilemma also includes considerations around future investability of the jurisdiction. Schleicher also frequently alludes to a fourth potential area of concern (unspoken quadrilemma?), which is jurisdictional autonomy and independence (often, the trilemma is partly solved by the jurisdiction giving up significant authority over its own fiscal decision-making for some time).
The pace is brisk, but the nearly 100 pages of wide-ranging, vivacious footnotes provide a sensational antidote and the greatest joy of the book... it's as if David Foster Wallace (humor and all) swooped in and annotated a law professor's niche book, intellectually deepening and enriching it thoroughly!
Ultimately it's an excellent book not only for thinking through the narrow topic of how federal decision-makers should think about state and local fiscal crises, but an excellent way for a general reader to learn some US history and to learn about the structural economic and legal issues facing state and local governments today.
The basic framework of a trilemma facing stakeholders (in particular federal decision-makers) when dealing with a state or municipality in fiscal crisis was helpful and original. In the 2010s, when fiscal crises were prominently in the news, media often portrayed a Di-lemma, between moral hazard and acute economic contraction (induced by austerity). But the genuine trilemma also includes considerations around future investability of the jurisdiction. Schleicher also frequently alludes to a fourth potential area of concern (unspoken quadrilemma?), which is jurisdictional autonomy and independence (often, the trilemma is partly solved by the jurisdiction giving up significant authority over its own fiscal decision-making for some time).
The pace is brisk, but the nearly 100 pages of wide-ranging, vivacious footnotes provide a sensational antidote and the greatest joy of the book... it's as if David Foster Wallace (humor and all) swooped in and annotated a law professor's niche book, intellectually deepening and enriching it thoroughly!
Ultimately it's an excellent book not only for thinking through the narrow topic of how federal decision-makers should think about state and local fiscal crises, but an excellent way for a general reader to learn some US history and to learn about the structural economic and legal issues facing state and local governments today.
Displaying 1 - 3 of 3 reviews