The James Wilson Foundation on Natural Rights and the American Founding

“A Better Alternative to State Bankruptcy or Default”: John Baker and Robert Miller in the Wall Street Journal

In an opinion piece in the Wall Street Journal, scholars John Baker and Robert Miller discuss the prospect of state bankruptcies during the Covid-19 pandemic. They discuss state sovereignty with respect to the eleventh amendment and argue that allowing states to declare bankruptcy fundamentally contradicts American federalism. States have always struggled with debt and have never been allowed to declare bankruptcy. Baker and Miller argue for an alternative solution to the debt crisis: increased borrowing and waiving sovereign immunity. Baker and Miller paint a picture of state action where states would borrow in the capital markets and agree to creating bonds subject to the laws of another state or jurisdiction, allowing them to be sued in the that jurisdiction. They emphasize that states that have made poor spending decisions predating Covid-19 ought not to be bailed out for those mistakes by the federal government.

Some quotations from the article:

“But if states are free to govern themselves, they’re also free to make poor choices. Decades of fiscal mismanagement left some states in a precarious financial position before the pandemic.”

“Fortunately, there is a better path for cash-strapped states: more borrowing. States can put investors at ease by waiving their claim to sovereign immunity in the contract under which the bonds are issued. States routinely give such waivers, and courts enforce them.”

“Covid-19 isn’t the states’ fault. But the states least able to weather its financial consequences got that way through decades of profligate spending and confiscatory taxation. Borrowing and timely repayment, not default or bankruptcy, is the best way for states to deal with the current crisis while getting their financial affairs in order. The essence of sovereignty is self-government, which entails a measure of responsibility.”

Read the full essay here.

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Law and liberty cannot rationally become the objects of our love, unless they first become the objects of our knowledge.
— James Wilson, Lectures on Law, 1790