Working Paper No. 12-75:
Our Federalism is Not Europe's. It's Becoming Argentina's.

Author(s):

Michael Greve

Date Posted: November 2012

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Abstract:

In some ways, a 2012 symposium on “Dilemmas of State Debt” may seem a bit behind the news curve. At the end of 2010, municipal bond markets were in a deep funk. Analysts predicted that countless municipalities and perhaps one or more of the United States might default on their debt obligations. Newspapers and the blogosphere teemed with comparisons to the ongoing disaster in the European Union—if Greece could default, why not California or Illinois? Several states toughened laws dealing with insolvent municipalities, and proposals to legislate a federal bankruptcy procedure for states received considerable attention.

What a difference a year seems to make. Greece and other members of the Euro Zone escaped disorderly default only by a series of improvised, increasingly desperate interventions by E.U. institutions and the International Monetary Fund, and no good end to the nightmare appears in sight. In the United States, by contrast, the crisis atmosphere has abated. The city of Vallejo, California, went through bankruptcy, and municipal authorities in Birmingham, Alabama, Harrisburg, Pennsylvania, Flint, Michigan, and a handful of other places are in bankruptcy or state receivership, but the predicted financial collapse failed to materialize. Municipal bondholders registered solid gains in 2011. Many states are still in dire fiscal straits, and there is wide agreement that even a robust economic recovery cannot cure their long-term, structural deficits. In that sense, the crisis continues. The risks, however, do not seem acute or systemic. For example, it seems unlikely that a fiscal collapse of Illinois or even California—with an economy many times the size of Greece and an equally dysfunctional government—could wreak havoc of European magnitude.

Even so, the strikingly different trajectories provide no cause for American “we-do-federalism-right” triumphalism. In the United States, as in Europe, subordinate governments are beset by unsustainable financial commitments. Those obligations differ in form and immediate urgency, but they share a common source: an inability on the part of the central government to maintain a credible commitment against bailing out spendthrift junior governments. That commitment was once the glory of American federalism. Over the past decade, however, the no-bailout commitment has effectively collapsed. Its demise entails fundamental changes in American federalism, none of them encouraging.

After a brief account of the transatlantic differences (Part II), this article traces the history of the anti-bailout commitment in American federalism, including its origins (Part III), erosion (Part IV), and recent collapse, as exemplified by a seemingly unrelated object of agitation, the Patient Protection and Affordable Care Act (Part V). It then compares American federalism’s emergent pathologies with Argentina’s, a federal system that exhibits them in full flourish (Part VI). The concluding part (Part VII) suggests that our political institutions may no longer possess the capacity to reform our dysfunctional federalism in any meaningful way.