The Irony Of Mitch McConnell’s Opposition To Blue State Bailouts
Bankruptcy isn’t the only solution. McConnell’s attitude provides the perfect argument for state-level public banking.
I have to admit that my jaw dropped to the floor when I read that US Senate Majority Leader Mitch McConnell suggested that the States should be able to declare bankruptcy if they can’t cover their pensions. According to Bloomberg, McConnell had the gall to say this:
“You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs,” he said. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”…
I love how Republicans like to talk about “kicking the can down the road” and how we’re “borrowing from future generations” when they’re they most profligate spenders. Nevermind that Bill Clinton, a Democrat, was the only president that I can ever recall to produce a budget surplus. Every Republican president in my lifetime has produced nothing but giant budget deficits. Well, I guess at $24 trillion, they’re still trying to create enough debt to justify cutting Social Security. Such wonders never cease to amaze me.
Yves Smith at Naked Capitalism provided some interesting perspective on McConnell’s statements the same day. She too noticed the irony of McConnell calling out California, Illinois, and New Jersey as big spenders on pensions when McConnell’s home state of Kentucky has a public employee pension system that is deeply submerged in red ink. Her parting shot in that article provides a breathtaking overview of the state pension systems across the country:
There is a bigger philosophical problem: that having investments pay for retirement results in overallocation of resources to societally unproductive bsecondary market trading and manager fees, and also encourages policies to favor capital over labor, which in the long run hurts growth (assuming no resource constraints, another looming issue). We see what perverse behavior this creates, with public pension funds eagerly investing in private equity….which among other things, slashes employment, hurting the state and municipal revenues which fund pension contributions, and breaking private sector pensions, which makes it harder to justify having them for government workers. The best solution is a vastly more generous Social Security system. But to vary an old Yankee saying, I don’t see how you get there from here.
On any given day, if I should happen to visit Naked Capitalism, I will almost invariably see headlines like this one:
If you’re looking for corruption and mismanagement of public employee retirement systems, there is no better place to look than to Naked Capitalism. Naked Capitalism is the publication of record documenting the pillaging of public retirement.
Now I like what Yves Smith says about replacing the public (and private) retirement systems with a very generous Social Security system. Stopping short of that, I’d get rid of all the fancy investment ideas and just make public retirement systems go with an index fund for each of the major exchanges like the NYSE and the NASDAQ.
I’ve talked to a few investors and they pretty much say the same thing. Investing in individual stocks is a system gamed for the rich. The rest of us are on our own. But one thing I’ve noticed over the years is that very few if any fund managers are able to outperform an index fund. An index fund covers every stock offered in a market. Theoretically, there is no way to lose with an index fund. The long term trends show us that an index fund is a sure bet because the dummies in Wall Street always make sure that the market goes up over the long term.
But I’m still thinking of Smith’s last sentence, how to get from here to there. There is a way, all we need is the political will to get there. For decades, state governments have been relying upon Wall Street to underwrite their projects. Yes, that’s right. Wall Street underwrites the bonds that are sold by the states to finance freeways, bridges, aqueducts, and other huge infrastructure projects. And if you want to buy a United States Savings Bond, you have to go to Wall Street to buy them. Those guys…they want a cut of everything.
When Mitch McConnell says that we should allow states to go bankrupt, he’s raising constitutional questions. There is a very real controversy as to whether or not states have the right to declare bankruptcy. Some experts have cited the 14th Amendment as a clear prohibition on state bankruptcy, for it says that debts of the states shall not be questioned. But others say that Congress must pass enabling legislation that would permit the states to declare bankruptcy.
I think McConnell has us looking in the wrong direction for help. McConnell doesn’t mention the fact that the wealthiest and most productive states are Blue States, run by Democrats. According to the Atlantic on the same topic of state bankruptcy:
First, the country’s wealthiest and most productive states are overwhelmingly blue. Of the 15 states least reliant on federal transfers, 11 are led by Democratic governors. Of the 15 states most reliant on federal transfers, 11 have Republican governors.
Instead of looking to bankruptcy, all of the states, especially the Blue States, could be looking into public banking as a solution to their revenue problems. Public banking is an idea that is uncontested as far as the Constitution is concerned. There is no law that prohibits the states from forming a public bank. And we already have a working model in the Bank of North Dakota.
During the recession resulting from the collapse of the housing bubble in 2008, the Bank of North Dakota was still returning strong earnings and profits to the state treasury. The government of North Dakota often ran budget surpluses during the Great Recession. And when it came to financing infrastructure projects like roads, bridges, and plumbing, they literally cut Wall Street out of every deal. They formed the Bank of North Dakota precisely to get free from New York banks. From the Institute for Local Self Reliance, we have a little history of the Bank of North Dakota:
Desperately poor and tired of being at the mercy of out-of-state economic powers, North Dakota’s farmers launched the Nonpartisan League in 1915. This political party united progressives, reformers, and radicals behind a platform that called for returning control of the state’s economy to its people. At the time, farmers were utterly dependent on out-of-state grain milling companies, national railroads, and Minneapolis banks, all of which had been gouging farmers.
In the 1918 elections, the League won both houses of the legislature. One of the first bills these new lawmakers passed created a publicly owned grain mill, the North Dakota Mill and Elevator, and a publicly owned bank, the Bank of North Dakota (BND).
How does public banking work? It’s really simple. Instead of having the state or local government deposit their tax revenue money in a commercial bank like Bank Of America or Citibank, they’d have their own bank. All that tax money would be earning interest in a state bank run by state employees.
The state bank would then loan out money to municipalities and agencies for projects that require funding for their projects. It would also loan money out to private banks, at interest. The Bank of North Dakota has demonstrated a sound business model for more than 100 years of practice. Widespread adoption of local banking can reduce budget deficits and keep the money local to the economy.
- Are owned by the people of a state, city, community, or nation;
- Serve as the depository for local government funds (city or state taxes, fees, etc.);
- Are required to benefit the public by serving local community needs;
- Can save state and local governments millions or even billions of dollars, by cutting out middlemen and private shareholders, eliminating fees, and financing projects at lower interest rates;
- Reinvest bank profits into the community, providing a new source of income for cities and states and a source of funding for projects such as infrastructure, renewable energy and affordable housing;
- Are run, not by politicians, but by qualified bankers serving a public mission;
- Provide accountability and transparency to the public for bank decisions, avoiding the risks of Wall Street’s speculative gambling;
- Create new jobs and spur economic growth by supporting local small businesses;
- Partner with and support rather than competing with local community banks;
- Can lend during times of stress and crisis, helping to sustain a healthy local economy.
There is no legal reason why every state could not have its own public bank to finance its own government. Cutting the loan sharks of Wall Street out of state government financing would be a serious hit to Wall Street income and their political power. And during this pandemic, we need public banking more than ever.
Furthermore, there is no reason why a state-run public bank cannot provide retirement fund management services. It would be open to public scrutiny and legislative oversight. The management fees would amount to a simple salary for a staff dedicated to maintaining an index fund. And with an index fund, the state is not picking winners or losers. It’s betting on the entire market to provide the funding for retiree income.
Public banking removes a huge chunk of power from Wall Street. And Wall Street loves guys like Mitch McConnell. Wall Street has been salivating at the thought of privatizing Social Security for as long as I can remember, probably longer. And Moscow Mitch would love to send us all to the wolves on Wall Street.
McConnell is a “states rights” kind of guy. Anything he could to do reduce the power of the federal government is something he’d be interested in. He already told us that he thinks that the states should have the power to declare bankruptcy. So I doubt he’d have a leg to stand on to prevent the states from running their own public bank.