George Will has an excellent op-ed (here) in which he describes the importance of the freedom of state governments to be allowed to fail. Chiefly, he describes the importance of letting bond markets freely decide the cost of borrowing for states that would others never face the reality of train-wreck “budgets”.

Will makes two points that are worth explicitly excerpting here (points that I have made elsewhere on this blog):

“They cite studies demonstrating that investors’ perceptions of risk of default are correlated with the rate of unionization among government employees. Higher percentages of government employees who are unionized, and larger Democratic shares of state legislative seats, correlate with increases in state borrowing costs.”

That is, given the freedom to fail (a freedom that is often taken away by Federal bailouts of states), investors suitably punish states that are highly unionized/progressive. Or, as I would paraphrase: the price system works; markets work.

And later, Will writes:

“In a system of competitive federalism, Peterson and Nadler write, “If states and localities attempt in a serious way to tax the rich and give to the poor, the rich will depart while the poor will be attracted.” And government revenues and expenditures vary inversely.

From September through December 2008, the premium that investors demanded before they would buy California debt rather than U.S. Treasurys jumped from 24 to 271 basis points (100 points equals 1 percent). The bond market, the only remaining reality check for state politicians, must be allowed to work.”

Again, markets work if there is a real chance of risk being realized through failure.

Senator Joseph Ivy understands that freedom to fail – called responsibility by most adults – is important. Senator Sheila Beal does not. Read about the consequences of understanding or not in Evolve, Part 3: Emergent Order

-JD Cross