The state of Illinois is on the verge of bankruptcy.  It was quite evident that things were not going well a couple of years ago when lottery winners were not receiving their money.  Still, as we know, things have a tendency to last longer than we think possible.

State and local governments are different than the national government in Washington DC.  The politicians in DC have the benefit of a central bank that can create money out of thin air.  This makes it possible to run huge deficits at relatively low rates.  When a government doesn’t have the ability to print money, or receive money from an entity that can print money (such as Greece from the European Union), then the government is far more limited in its ability to issue debt.

The state of Illinois can’t create money out of thin air like the Fed.  If it wants to borrow more money, and its fiscal soundness is in question, then lenders can ask for higher interest rates.  It puts a severe limit on the state government’s ability to borrow endlessly.

There are many good reasons that Illinois should go bankrupt.  This should be repeated by many state governments and local governments.  There will be winners and losers.

In a bankruptcy of a state government, the losers become apparent rather quickly.  They are people who previously were benefitting from the plunder of the population.  They are the politicians, the lobbyists, the government workers, the government retirees receiving large pensions, and really most anyone connected to government funding.

Yes, this includes retired teachers and firefighters if their pensions are cut.  But should the rest of the population suffer to pay for the lavish retirement of these people?  It is just plain ridiculous in many of these places when a teacher or firefighter can work for 20 or 30 years and then receive half their salary (or much more in many cases) for the rest of their lives.  There are not very many so-called private sector jobs that offer these kinds of benefits any longer.  In addition, they usually get some kind of great health insurance package that is not available to most other normal people.

When a middle class family is working hard and struggling to pay their bills, it isn’t fair that some retired teacher is raking in a portion of this family’s money and living the good life.

In a state bankruptcy, the winners will be the population at large that isn’t losing out on any great benefit.  Even some people who are seeming losers for no longer receiving some benefit may actually end up making out better in the end.

The bottom line is that there is a bubble in government spending.  This is true of the federal government.  It is true of state and local governments.  With state and local governments, some are obviously far worse than others.

After the fall of 2008, state and local governments were somewhat forced to cut back, or at least temporarily stop the expansion of government.  This was not true of the federal government.

Illinois is typical of the blue state mindset where there are few limits to taxation and spending and regulation.  But now they are finding out there are limits.  At some point, the people will not put up with paying more taxes when they are already struggling to such a high degree.  Even the excuse of it being “for the children” may no longer work for the politicians.

Just as with any bubble, it needs to pop.  While the popping is painful for those who benefitted from the excesses, the correction needs to happen.  There is a reason it is called a correction.  It is a reallocation of some resources away from government and towards actual consumer demand.  For most, it will ultimately mean a higher standard of living.

I hope that Illinois goes completely bankrupt.  I also hope that the people there realize that they are far better off with a much smaller government, despite the whining of the bureaucrats.  The timing of this seems to work well, as I don’t think the politicians in DC will try to get away with a major bailout of the state.  There are too many Republican politicians who would lose their job if they supported such a measure.