Calfornia and Texas Could Turn into Ireland: It's All About the BABs

I've written before about the municipal and state level fiscal crises that are occurring across the U.S. (and, yes, this was not only predictable, it was predicted). Well, now we have a new crisis: no more BABs. BABs is short for Build America Bonds program, and there are two types of BABs:

1) BABs that give the recipient (i.e., the bond purchaser) a federal tax credit--this subsidizes the purchase of the bond, making it cheaper.

2) BABs that give the issuer (the state or local government) a subsidy of 35% of the interest. This lowers the amount the state or local government has to pay out.

So, in an environment where states are already cutting budgets, who would make it harder for states and localities to borrow money? Well, who do you think? Your friendly Republican party:

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That's why the most intriguing aspect of President Barack Obama's tax deal with Republicans is what the compromise fails to include -- a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans "have a very firm line on BABS -- we are not going to allow them to be included."

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states' unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

Now some GOPers oppose BABs because they want more transparency--so they claim. But others? Kaboom:

It isn't hard to recognize this move as part of an effort to push America further into banana republic land, with a small and wealthy elite controlling the government and a greatly disproportionate share of the wealth. As we've indicated, those sorts of societies are unhealthy, even for those at the very top, but that does not seem to deter anyone behind this campaign. Notice that the objective here is not to do the responsible thing, which is to figure out the fairest and least destructive way out of the states' budget woes; it's instead to push this festering problem to a crisis to achieve another goal, namely, break unions, with the objective of transferring even more to the rentier class. Now that we've had stagnant average worker wages for over thirty years, government worker pay, which used to lag considerably, now looks not too bad (although various studies have pointed out that government pay is not out of line when you look at job skill requirements; you have more white collar jobs in government than in the private sector. Cherry picking examples of arguably overpaid government sector workers is no different than trying to base private sector tax policy on examples of ostentatiously overpaid private sector workers, like John Thain's driver, who made $230,000 in 2008).

And note that those stagnant average worker wages resulted not from some widespread failing of US workers, as some critics like to allege, but because the benefits of productivity gains, which used to be shared between workers and the companies, now accrue entirely to companies.

Do we really want Texas or California, the world's eighth largest economy, to suddenly curtail spending (even further)? And for the bold Austerians out there, tell me what you do to help poor children, or the chronically ill? Because these states aren't going to raise taxes on wealthy property owners (especially in California). They're going to screw over the most needy when these cuts come.