The Truth about Bankruptcy

A couple of months ago while skiing in Utah, my son and I shared a lift with a lean, athletic-looking man in a fancy one-piece outfit. It turns out he was an investment banker from New York City.

After the obligatory jokes about how unpopular investment bankers are, I asked for his take on municipal bonds: Were they as shaky as some analysts and politicians were warning? He laughed, noting that munis now made up more than half of his personal portfolio. But, I asked, what about the interview on 60 Minutes where a Wall Street analyst warned of a coming wave of state and local bankruptcies amounting "to hundreds of billions of dollars’ worth of defaults?"

"I hope the analyst issues more warnings like that," he replied, "because I’ll just keep on buying at a third off where the price ought to be." And as our lift mate skied off, he added, "That analyst is a complete idiot." I guess New York investment whizzes don’t mince words.

I gave his on-the-slopes analysis some credence though, because I had been hearing the same thing -- expressed in less inflammatory language -- from fiscal experts at the National Governors Association and National League of Cities, as well as from Mark Zandi of Moody’s Analytics.

I may end up gorging on crow, but I’m betting that the skier-banker knew what he was talking about and we won’t see a wave of public bankruptcies.

If that’s true, why has this belief been perpetuated? I suspect it has a lot to do with the public-sector pay and benefits issue, which this past winter has made some state capitals reminiscent of Cairo or Tripoli. Public employees are being depicted as a privileged class that is paid more and has superior benefits than workers in the private sector. It’s certainly true that they have fared better in income growth and job security during this past decade of subpar economic performance. But the notion that they are paid better is false. Research shows that when jobs requiring similar skills and education are compared, public-sector workers at the federal, state and local levels make somewhat less than those in the private sector. As they move up toward higher-end jobs, they earn substantially less.

Where there is a significant disparity is in pensions and benefits, in part because private-sector employees have had their benefits pared back substantially in recent years, and public-sector workers have not. In addition, there have been serious abuses where some workers, particularly those in public safety, gamed the system by retiring at incredibly young ages, double-dipping and either maximizing overtime or job-hopping late in their careers to pump up pensions.

To recap, pay generally is not a problem, but pensions and benefits must be addressed because the current situation is unsustainable, both financially and politically. At the same time, exaggerating the problem -- to mythic proportions in the case of muni bond defaults -- has been a useful device in trying to hobble public employee unions, but that’s more about politics than budget balancing.

Furthermore, the fiction that fighting waste, fraud and abuse could easily trim government down to some optimum size, or the opposite, that waste is inconsequential in the great scheme of things, is not true. The continued fragmentation of much of local governance surely qualifies as wasteful. A recent report from the Government Accountability Office offers stunning evidence of mind-boggling redundancy in federal programs wasting billions of dollars. But in both cases, the problem isn’t so much administrative as political, because behind every local jurisdiction or redundant federal program that cannot be consolidated are politicians and their constituents protecting their own turf.

Nowhere is fiction-making more of an art than in Washington, which is one reason much of what passes for a "debate" about the federal debt crisis is so disheartening. Two independent commission reports on the debt problem were supposed to provide some reality therapy -- both for leaders and the populace. Eventually that may happen, but evidently not before we go through a political charade of concentrating on about 12 percent of the budget without addressing reforms of entitlements, the tax system and national security expenditures. All the stuff that’s in the center ring of controversy -- Planned Parenthood, Head Start, environmental regulation, student loans, public broadcasting -- is meaningless in any discussion of a $3.8 trillion budget.

There is a price to pay for all this deception. If we’re going to make choices, let’s make sure they aren’t false ones. The process of whittling down our public debt level, if it’s done right, will be painful for everyone. Powerful interests and common folks alike will have to give something -- and that’s the reality.