For the Balkinization symposium on David Schleicher, In a Bad State: Responding to State and Local Budget Crises (Oxford University Press, 2023).
Noah Kazis
As a matter of both craft and substance, David Schleicher’s In a Bad State pulls off a remarkable
high-wire act. It makes municipal finance—always important, but rarely
enthralling—downright dramatic. It zooms from seemingly-dusty 19th century railroad cases to the heated fights over COVID relief, stopping at
famous and forgotten fiscal crises of the 20th century alike. And it
synthesizes these disparate examples without once slowing. At each of those
points, Schleicher speaks in multiple registers: here a point for the
legislative aide about their options for refinancing municipal debt, there a
point for the lawyers and historians about municipal debt’s role in the origins
of the Erie doctrine or the
unraveling of Reconstruction. This is a book approachable enough for
policymakers, while rich enough for scholars to draw from for years. It’s no
mean feat to keep this all together.
And the book plainly succeeds at what I take to be its two
main goals. The first (and stated) goal is to better explain federal
policymakers’ aims and options when faced with subnational fiscal distress
(page 6). The existing literature, as Schleicher describes it, has emphasized a
binary tradeoff between the macroeconomic relief provided by bailouts (or more
general federal spending) and the avoidance of moral hazard, in the form of
future states and cities spending profligately or investing with undue risk.
Schleicher shows the centrality of a third value: promoting state and local
borrowing to fund the development of infrastructure.
Schleicher shows persuasively that this goal not only
appears implicitly in the structure of multiple federal statutes, but, in fact,
has motivated federal policymakers (the Supreme Court included) and, in fact, has
mattered considerably for the health and wealth of the nation over the course
of our history. Schleicher’s tracing of how mid-19th century judicial
decisions about the legality of local debt connect, by way of intergovernmental
fiscal relations that let cities borrow and invest quickly and unilaterally, to
the infrastructural miracles of American urbanization is eye-opening. At the
turn of the 20th century, cities from Cleveland to New York had five
times more flush toilets per capita than London, ten times more electric
streetlights than Berlin, and more streetcar riders than anywhere in the world
(page 55). Schleicher clearly shows this to be a function of urbanist
initiative and innovation, enabled by localities’ independent access to credit
markets.
Organizing federal officials’ motivations into this
“trilemma” of avoiding both austerity and moral hazard while still encouraging
debt-financed investment allows Schleicher to tell a clearer, fuller story
about state and local borrowing. Better yet, this is a story that can partially
sidestep unhelpful blame games about struggling localities.
Schleicher’s challenge, though, is that he’s right. And the second goal, to some
extent, inherently undermines the first. Having shown that debt, and the
anticipation of potential problems with that debt, has always been central to
the operation of state and local government—and to their interactions with each
other and the national government—the book is forced to take on, well, everything.
Schleicher’s theories implicate matters of high
Constitutional law, unresolved details of municipal bankruptcy, and pretty much
the full sweep of local government law, and he gamely takes them all on. Likewise,
he has to survey broad swaths of everything the federal government does. Billion-dollar
federal programs appear, but can get only a few paragraphs, if that. Schleicher
touches briefly but consistently on the importance of Medicaid throughout
(Medicaid absolutely drives states’ fiscal circumstances, representing over 28
percent of state budgets, more than any other single program), but the
complicated intergovernmental schemes governing K-12 education, transit
operations, and subsidized housing (just to name a few) also peek out from the
wings, visible just off-stage.
This is how it has to be. As Abbe
Gluck has argued, federalism today (and this book is a major contribution
to the federalism literature—though it’s not always pitched that way) overwhelmingly
plays out within statutory schemes that organize their own, bespoke
relationships between levels of government. Health, education, transportation,
and all the other cooperative programs are the forces that push and pull on
state and local budgets, and the conduits through which the feds provide most
intergovernmental transfers. It’s no longer possible to describe an overall
system of fiscal federalism apart from the multiple fiscal federalisms embedded
in each of these statutory domains. Surveying the complex, and ever-changing federalist
dynamics of any one of these issue areas would be a career’s work. In a Bad
State doesn’t and shouldn’t try to do them all justice.
But as a result, the book fractures, especially as it
reaches the 20th century. Schleicher’s story explores more policy
issues’ interconnectedness with debt and distress, introduces more types of
indebted local government, and sweeps across more decades. But as it does so,
it seems that the unified framework of the trilemma necessarily can do less and
less actual work guiding policymakers.
Take the changes over time. As Schleicher compellingly
shows, what was in the 19th century a stark tradeoff between the
three prongs of the trilemma has been softened dramatically over the 20th century. The strengthening of the national welfare state, for example, makes
local austerity somewhat more tolerable by providing general relief when
unemployment rises and incomes fall. Further, it does so without inducing
substantial moral hazard for localities. The New Deal may not have produced a
“radical change in how the federal government responded to specific local
fiscal crises” (page 68), but it (and the Great Society) certainly recalibrated
the stakes of choices about local budget cuts. Indeed, Schleicher ultimately calls
for redoubling this federalization of the welfare state. Likewise, Schleicher
shows how the invention of new legal techniques to politically discipline
cities in distress—tools like the imposition of emergency managers that
penalize politicians while still bailing out citizens—have dramtically mitigated
the moral hazard leg of the trilemma (pages 74-77). Presumably, the creation of
ratings agencies and the easier spread of financial information have
transformed the dynamics of contagion and moral hazard alike. (Schleicher gives
the delightful example of Nicholas Biddle using his status as former president
of the national bank to imply a federal guarantee for Pennsylvania state debt
(page 38), but it’s hard to see the same move working today).
Today’s trilemma isn’t yesterday’s. As Schleicher clearly acknowledges,
in some instances (like the bailout of Washington, D.C. in the 1990s, which
didn’t create moral hazard) it can even be tamed into something that is barely
a trilemma at all.
Even today, it’s not the same trilemma across jurisdictions,
either. Schleicher points out that the two governments who availed themselves
of the Federal Reserve’s Municipal Liquidity Facility during the early depths
of the COVID-19 crisis—i.e., the entities that came closest to being “bailed
out”—were the state of Illinois and the New York region’s Metropolitan
Transportation Authority. These are very different governments! The MTA, among
other things, relies less on taxes and more on revenues
from user fees (tolls and fares) uniquely affected by a pandemic that
crushed commuting: a COVID-related bailout has very different moral hazard
calculations for the MTA than for Illinois, assuming the next recession is
expected to be an “ordinary” downturn. The MTA also relies on the federal
government for operating and capital support—as the country’s largest transit
agency (by an order
of magnitude), it surely has a special, active relationship with the
Federal Transit Administration. It isn’t nearly as independent from the federal
government as Illinois, offering a different set of mechanisms to reduce moral
hazard. This is a different trilemma than Illinois’, not just in degree, but in
kind.
At a high level of abstraction, the trilemma is a powerful
organized framework. It works very well for the 18th and 19th
century world where In a Bad State begins, when the national government
was less interconnected with state and local governments, and when those
connections operated relatively more through basic structural relationships
than complicated cooperative statutes. It may work better for states than for
specialized local governments. The trilemma seems more relevant for economic
officials whose brief is especially trans-substantive—the Federal Reserve
lenders mentioned above, for example—not to mention us more generalist
observers: scholars, students, and the like. For most policymakers today, though, the particular seems like it might swamp
the general: figuring out how to apply the trilemma will often take a level of
subject-matter expertise that obviates the need for using the trilemma in
general terms.
And—in what I suspect is the inevitable result of trying to
synthesize across time, space, and countless institutions—this fracturing
continues all the way down. The more Schleicher (rightly, and impressively)
draws out the diversity of situations encompassed within the broad heading of “responding
to state and local budget crises,” the more difficult it becomes to say
anything definitively.
For example, as one of his many policy suggestions, Schleicher
proposes increasing the amount of information states and cities disclose when
issuing bonds (page 132). But who needs help monitoring whom seems highly
contingent. An ordinary municipal bond is awfully different than the customized
financial engineering whose implosion helped trigger the bankruptcies of
Detroit and Jefferson County (page 89, 94). There, the local governments’
counterparties have their own important informational advantages. This isn’t a
book about the full diversity of local financing schemes. But not being one,
it’s hard for the reader to meaningfully evaluate the merits of any given claim,
much less to develop a policy proposal.
The difficulty of engaging this many topics at this level of
generality keeps destabilizing the overall framework and the policy
prescriptions alike. To give one last example, in laying some basic groundwork
setting up the trilemma, Schleicher winds up laying out a new theory of
federalism in infrastructure policy (pages 25-26). To explain why the federal
government enlists states and cities to borrow and build infrastructure—i.e.,
why the third leg of the trilemma exists at all—Schleicher argues that it’s a
function of Congress’s districted structure. Each representative wants pork for
their district, so Congress can’t effectively fund place-based projects that
aren’t evenly spread across the entire country. Instead, it delegates to states
and local governments. According to Schleicher, the feds so consistently
encourage subnational borrowing because they can’t do build infrastructure
properly themselves. It’s an interesting theory, and one that speaks to the
many issue areas potentially illuminated by In a Bad State.
But is it true? I’m skeptical. Schleicher would be the first to point out
that the problem of pork-oriented “distributional politics,” unorganized by
clear ideological factions, is usually worse at the subnational level (where
partisan competition is weaker). And there is no shortage of state-level
transportation policy designed to check every geographic box, rather than serve
the core ends of mobility and accessibility—California’s meandering
route for high-speed rail being perhaps the most high-profile of many
examples. But more to the point, the book can’t reasonably provide what a
reader would need to address their skepticism. To assess Schleicher’s
claim—much less prove it—would require a deep dive into the history of federal
infrastructure policy, including the intermittent Congressional efforts to redirect
state and local transportation planning through the creation of mandatory
regional planning bodies or performance-based
metrics. This would be miles outside the scope of this book. But absent any
such evidence, I couldn’t shake the concern: just why does Congress route borrowing for infrastructure through states and
cities (and why does it sometimes briefly
start and then stop doing more of that infrastructure funding itself,
directly, whether for the interstates or the Clean
Water Act)? This would be, after all, another way out of the trilemma.
I don’t offer these examples to nitpick, only to illustrate
the impossibility of the task Schleicher has posed for himself. Indeed, I think
Schleicher does a markedly better job of applying and adjusting his
theory to the particularities of specific problems and contexts than many
accounts of federalism, which are endemically
susceptible to over-generalization. The book’s broad sweep speaks to
Schleicher’s curiosity and keen eye for underappreciated connections across
bodies of law. It speaks to how he’s shown these questions of debt and distress
to be bedrock on which many other aspects of federalism are built. It’s what
makes the book important and interesting—and it’s true to the substance. But that
breadth simultaneously leaves much of the book on an unseen and perhaps unstable
foundation.
Perhaps Schleicher faced his own trilemma. He could 1) write
usefully for a broad and policy-oriented audience; 2) pull in all the issues he
has shown local debt and distress to be connected with (from sovereign immunity
to land use reform and the creation of a VAT system); and 3) cover them across
disparate institutional contexts and eras of history. But he, too, faced an
unavoidable trade-off between those goals.
Still, there is also virtue in going wide. Even if many of
its specific claims are on shaky ground, In a Bad State can inform a
hundred debt-conscious analyses of individual institutions that haven’t yet
been written. I know if I were to rewrite my own examination of
federalist dysfunction in subsidized housing, I would now pay far closer
attention to how insolvency and indebtedness among subnational housing
providers—most notably the collapse of New York’s U.D.C., one of Schleicher’s favorite
case studies—shaped federal choices thereafter. Future inquiries into so many
aspects of fiscal federalism and state and local government law will be asking
Schleicher’s questions. And they will be all the better for it.
Noah Kazis is an
Assistant Professor of Law at the University of Michigan Law School. You can
reach him by e-mail at nkazis@umich.edu.