States declaring bankruptcy?

TEXT OF COMMENTARY

Kai Ryssdal: The umpteenth winter storm of the season is doing what winter storms do to a large stretch of the country today. It's going to keep on doing it tomorrow, as well. Another big blizzard and another big cleanup bill for already tight state and city budgets. States and cities that are dealing with huge budget deficits.

There's an idea floating around out there about one way to help states regain their financial footing: Just let those states declare bankruptcy.

Commentator and business historian John Steele Gordon says history isn't kind to that kind of declaration.


John Steele Gordon: There is a regular, prescribed way for individuals or corporations to get out from under unsupportable debts and get a fresh start: Bankruptcy. But while the bankruptcy code contains provisions to allow municipalities to file for bankruptcy, there are currently no provisions in law for a state to do so.

The reason lies in our peculiar constitution. In most countries, there is what political scientists call a "unitary government," which controls all political power. Even in countries with a federal system, political power usually flows from the top down. In both Canada and Australia, for instance, the federal constitutions give the states or provinces specific powers, with the federal government retaining the rest.

But in the United States, it was the states that created the federal government, not the other way around. The 13 original states came together in Philadelphia in the summer of 1787 and gave the federal government certain powers, such as those dealing with foreign policy and interstate commerce. But they retained the rest. The Tenth Amendment spells this out specifically.

The American states, therefore, unlike the provinces of Canada, are sovereign, except in so far as they voluntarily surrendered aspects of sovereignty to the federal government. Why does this matter? Because this uniquely American concept of "dual sovereignty" makes state bankruptcy constitutionally a little dicey.

To be sure, one of the powers the states ceded to the federal government was the power to write the bankruptcy code. The Founding Fathers were afraid that if the states controlled bankruptcy, deadbeats would simply skedaddle to another state, taking their assets with them and leaving their debts behind.

So does the federal government have the power to prescribe the ways in which the sovereign states themselves go bankrupt? That's a good question, one that an army of lawyers are likely to wax prosperous figuring out the answer to.


Ryssdal: John Steele Gordon's most recent book is called "An Empire of Wealth." Write to us.

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