Capitalisn’t: Coronavirus—The State Bankruptcy Debate

Kate: What’s new, Luigi?

Luigi: Not much on my front. What about you?

Kate: I got an antibody test.

Luigi: Wow. And what is the result?

Kate: I don’t know yet. Obviously hoping that I had coronavirus.

Luigi: OK. We’re looking forward to hearing the results, but you must also be very excited this week because everybody is talking about bankruptcy, and that’s your favorite topic. I think most people are put to sleep or to worry with bankruptcy, but you get excited.

Kate: I mean, sort of. For those of you who don’t know, my research is mostly on bankruptcy, but at the risk of sounding narrow, I know about corporate bankruptcy, and it’s state bankruptcy that’s been in the news lately.

Luigi: Wait a minute, bankruptcy is bankruptcy, no? What is the big difference?

Kate: I mean, yes, that’s true. There is a genuine debate to be had about whether states should be allowed to go bankrupt, but at least in what I’ve been hearing so far, I’m not hearing people talk about the issues that would be most relevant to this debate. It just seems like Andrew Cuomo was pissed at Mitch McConnell for not setting aside enough money for states like New York, and Mitch McConnell was pissed at Andrew Cuomo for not being able to afford New York pensions.

Luigi: It looks like a husband and wife who fight about who picks up the laundry, but the real fight is about something else.

Kate: I don’t know. Do you have those kinds of fights, Luigi?

Luigi: Never.

In this episode, we’re going to make Kate happy, and we’re going to talk about the possibility of state bankruptcy: whether this is a good idea, a bad idea, why we are at this point, and why some political leaders are presenting this as an opportunity or something to do before even considering sending some money to the states.

Kate: From Georgetown University, this is Kate Waldock.

Luigi: And from the University of Chicago, this is Luigi Zingales.

Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.

Luigi: And, most importantly, what isn’t.

Kate: Before we get into the episode, we should insert what is now becoming kind of a regular disclaimer, that there are certain legal issues surrounding state bankruptcy that we’re not going to spend too much time getting into. For example, there’s the issue of whether state bankruptcy would violate a clause in the Constitution that bars states from impairing the obligation of contracts. Plus, even if it were constitutional, states would have to opt into a new bankruptcy system.

Luigi: We sound like those ads for pharmaceuticals that have long disclaimers. This discussion about state bankruptcy is quite hypothetical, because my understanding of the current legislation is that states cannot go bankrupt under the existing US law. At the very minimum, Congress would have to pass a law for states to go bankrupt. So, we’re talking mostly about a hypothetical, but I think it’s an important hypothetical, especially for states like the one I live in, Illinois, that has a terrible financial situation.

Kate: To lay out this hypothetical for you, first, we want to set out three facts. The first fact is that states can’t currently go bankrupt. There’s no system for them to go bankrupt. To understand that, first, you need to know, what is bankruptcy? Let’s just simplify the issue and think about bankruptcy as a default for now, or an inability to pay a debt. What happens when an entity or an individual goes bankrupt? Well, there’s a court-overseen negotiation between the debtor who can’t pay the debt and the creditors. Usually, the outcome involves some sort of write-down or restructuring of the debt, and in return, the debtor has to come up with a plan to make future payments to creditors in a way that’s reasonable. They are reasonably able to make those payments, and this is all overseen by a judge. Right now, who can file for bankruptcy? It’s individuals or consumers, small businesses, large corporations, and municipalities like towns or cities, but states cannot file for bankruptcy.

Now, there’s also an interesting alternative. Can a state default? If a state can have debt, can a state default on that debt? What does that even mean for them to default without going bankrupt? We don’t have a great answer to this question. It’s only happened once in the past 100 years, and that was in Arkansas in 1933. That whole experience was really devastating for Arkansas, because what ended up happening was that the senior creditors were very aggressive. They sued Arkansas. At least those creditors ended up getting paid back a lot of what they were owe, but in turn, Arkansas had to make a lot of cuts. They couldn’t invest in infrastructure that they wanted to invest in. And so, they had to experience pretty severe austerity measures for many years after that. That’s not the alternative states really want to fall back on right now. That’s partially why it’s only happened once in the last 100 years.

Luigi: But something pretty close to that happened recently, in a place that is not a US state, but a US territory, Puerto Rico. Later on in this episode, we’re going to bring in an expert who played a role in that restructuring to understand how complicated it is. But before that, fact number two, the US states are not like the US government. They cannot run a constant, permanent fiscal deficit. In fact, in one form or another, all US states have some form of a balanced-budget amendment that prohibits them from running a deficit. In some states, this is stronger than in others. In Alabama, basically your obligations are not valid if you violate this clause. In states like Illinois, they succeeded in getting in a lot of debt, in spite of that clause. So, I’m not so sure that this is so tight.

But it is very important to understand this in the current debate, because a lot of important social obligations are put on the burden of states. For example, the Medicaid program and part of unemployment insurance, and these obligations become particularly important during a recession like the one we’re facing now. And the problem is that if you really need to balance the budget in a moment like this, you would naturally cut these expenditures precisely at the time when you need them the most.

Kate: This brings us to our third fact, which is that states still borrow money. They still have debt outstanding. Now, there are two forms of liabilities that they owe. The major form of debt is bonds. There are two forms of this. One is through state authorities, like the transit authority or the port authority. They can issue bonds that are linked to specific projects. Let’s say, building a new port. Seventy percent of state bond issuance is through these authorities, but the other 30 percent is by the state governments themselves.

There’s also another big boogeyman when it comes to state debt, which is pension obligations. This isn’t really debt in the sense that there are bonds outstanding, but it’s still a liability that states owe. Historically, a lot of states have offered retirees a fixed dollar amount or a fixed rate when people retire, regardless of what sort of assets the pension has returned. So, a state might offer a retiree $1,000 when they retire. If they’re holding a stock that used to be worth $1,000, and, all of a sudden, that stock is worth $500, the state still owes the retiree $1,000, but then, all of a sudden, has a $500 shortfall. This difference between what states owe and what they have in assets has been growing, and that pension gap in 2017 was $1.3 trillion, which is about the size of what they owe in bonds.

Luigi: And this is particularly true for the state I live in, Illinois. Illinois governors for years underfunded their pension system, and, as a result, now there is a gigantic hole that the current governor is trying to plug, but this is going to be extremely painful in many dimensions. But this describes the past.

Let’s now look at the present, and the present is, states do need to have a lot of money to intervene, from unemployment insurance to Medicaid to other considerations directly related to the COVID crisis. However, they cannot issue debt for this, and in the sense that maybe they can issue debt to build a new building or to improve some facilities, but they cannot issue debt to finance current expenditures. Some states actually can issue emergency bonds through a referendum, but not all the states. It is pretty hazy how you do it, and certainly it’s not something you can do in a hurry like this, when the US economy is plummeting, unemployment is skyrocketing. You need to intervene right away. You don’t have time to wait.

Kate: This all raises the issue of whether this system is a good system, whether it makes sense and whether it works. If the system is that states are supposed to balance their budgets so that we don’t have 50 states continually issuing debt and continually defaulting, but in return, if there’s a huge shock, if there’s a huge crisis, a hurricane, a plague, a pandemic, that the federal government will step in and provide that state with the funding they need to get through that difficult time, I think that that system actually works pretty well. And it has worked, for the most part, in the past. But the thing is that if the federal government doesn’t provide that backstop, if states can’t really raise that much debt in order to deal with coronavirus, and if the federal government isn’t willing to provide them with the funding they need to just be able to meet unemployment claims, that becomes a huge problem, because then their alternative is, what, are they going to raise taxes right now? No, that doesn’t make any sense.

What ends up happening is that states with stricter balanced-budget requirements have to cut back on their spending later on, and that has been incredibly painful for states in the past. After the Great Recession, for example, in the following years, states had to enact a lot of austerity measures, and something like 225,000 teachers were laid off in the years afterwards. Do we want another quarter-million teachers’ jobs cut after coronavirus just because the federal government didn’t step in and allow us to continue funding our education? I think that would be a disastrous outcome.

Luigi: So, Kate, our producer, who lives in Illinois like me, is wondering what’s going to happen to his life when—I’m not saying if, it’s when—Illinois files for bankruptcy.

Kate: I think the real question is, what happens to citizens of a state when a state has a huge budget crisis? Because that means that they’re between a rock and a hard place. The state could default on its debt, in which case it’s going to be dragged through court. It’s going to have to fire some of its state employees, which will hurt citizens, or it’ll have to make cutbacks so it can balance its budget, in which case it would have to fire people, and that will hurt citizens, or it could go through bankruptcy, in which case part of the loss is borne by the creditors. Some part of the loss will be borne by the bondholders, presumably, maybe part of it by retirees, but invariably, it will also have to make cutbacks to state employees.

Either way, cutbacks will have to be made. I think that it would be least painful in bankruptcy. The best empirical evidence we have is from a handful of municipal bankruptcies that took place over the past few years, and those all seem to suggest that, actually, they were good for the states. Detroit came out much better afterwards, its citizens were much better off, and the bondholders ended up taking a much bigger cut than we expected, which is good for citizens. And so, hopefully, state bankruptcies would look like that, too.

If it hasn’t become clear to you so far, I’ll put it plainly. State finances are complicated. To give us a sense of what state bankruptcy would look like, I’m going to phone in a lifeline to David Skeel, who’s a professor at Penn Carey Law. He’s also one of the few people who has experienced working on probably the closest thing to a state bankruptcy as a member of PROMESA, which is the board that oversaw Puerto Rico’s restructuring, starting in 2016. David, welcome to the show.

David Skeel: Thanks for having me.

Kate: You’ve been a clear proponent of state bankruptcy. Why?

David Skeel: Because I think that if a state is in deep financial distress, if there’s no way they can pay the obligations they’ve incurred, state bankruptcy would be the best of the possible options. The other two options are either just a massive default or bailout. Each of those, I think, is much inferior to state bankruptcy in the event that a state is in true collapse mode.

Luigi: Now, most people are concerned that if a state goes into bankruptcy, then the judges would be particularly harsh toward unsecured creditors like pensioners or employees, et cetera, and be particularly lenient toward the bondholders. Are you concerned by that?

David Skeel: I’m not concerned about that at all, and in fact, I think that argument has things exactly backwards. What happens when a state is in deep distress outside of bankruptcy is that one or two constituencies end up bearing most of the sacrifice. So, if you look at Illinois right now, who’s getting hammered are service recipients, people who are losing the services as they’re being shut down. Bankruptcy provides for a much more equitable distribution of the sacrifice. And particularly if you’re concerned about pensions, if you look at the best evidence we have so far, which is the big municipal bankruptcies, Detroit and Stockton in particular, the pension beneficiaries did get slight adjustments to their pensions in Detroit. They got no adjustments at all in Stockton, and they did quite well. And in fact, in both of those cases, it really was the bondholders who got hammered, not the pensions.

Kate: But to some extent, isn’t that specific to those particular bankruptcies? How sure are you that that would continue to be true for state bankruptcies?

David Skeel: It is specific to those bankruptcies. I think in reality it would continue to be true. The legal rule that is guiding all of that is a rule that says it’s impermissible to unfairly discriminate against any class of creditor. So, unfair discrimination is the standard. That is designed to make sure one class of creditors doesn’t get 99 cents on the dollar, while other classes of creditors get 20 cents on the dollar. That’s what provides the guardrails. You can’t be certain how a court is going to apply that, but so far, courts have been comfortable with generous payouts to pension beneficiaries. Again, there’s no guarantee that’s what happens in the future, but I think it’s very likely that’s what will happen in the future.

Luigi: In a sense, how to allocate losses is very much a political decision. There’s very little economics. There is more of, as you said, what is fair? I feel a little bit uncomfortable in this major decision to have a single judge who inevitably will have his or her own biases and will make the decision without a political process involved.

David Skeel: Well, the key response to that, I think, is, first of all, a state would never go into bankruptcy unless the state voluntarily chose to go into bankruptcy. If Congress were to pass a bankruptcy law that allowed creditors to throw a state into bankruptcy, it would clearly be unconstitutional. It would be a violation of state sovereignty. Not only does the state have to decide whether to file for bankruptcy, the state would be the one that would be making the proposal. The judge doesn’t decide what the allocation is going to be. The state does, and so the political decision makers would be the ones who were proposing the distributions to each class of creditors, so it’s not like the state disappears and democratically elected lawmakers disappear and a judge takes over. The state really is in charge of the process. The court’s primary role is to say no if the court doesn’t think that the proposal is OK.

Luigi: But in my understanding—it might be completely wrong—in the case you got involved in, PROMESA in Puerto Rico, PROMESA was making the decisions, the board you were part of, and not the elected governor of Puerto Rico.

David Skeel: That’s because we are an independent body of the Puerto Rican government, and Congress set us up in 2016 and gave us the authority to act as the debtor in a restructuring proceeding on behalf of Puerto Rico. In a state, you wouldn’t have a board like that, almost certainly. And so, the state itself would be acting on the part of the state in the bankruptcy. Now, you can argue about whether it’s a bad idea that Congress passed PROMESA and put this board in place, but it is a board that is acting as and for Puerto Rico in the bankruptcy proceeding.

Kate: Since we’re on the topic of PROMESA, it has gotten some flack. Some of its detractors argue that the original measures you adopted were too austere and that those could have been partly responsible for Puerto Rico’s declining population. What would you say to those people?

David Skeel: I would say to those people that Puerto Rico had been in recession for 10 years before Congress stepped in. It’s not like Puerto Rico was fine and then the oversight board was put in place. There was a 10-year recession underway. After the recession, we had Hurricane Maria, we have subsequently had the removal of a governor of Puerto Rico, earthquakes, and now the coronavirus. That is where the problems have primarily come from, in my view. It’s also the case, in my view, that Puerto Rico did need to restructure its government services a bit, that Puerto Rico has had declining population over the last 10 years. Initially, Puerto Rico’s government, in my view, was too big for its declining population. It did not shrink.

Since the board has been in place, the government has shrunk, appropriately, in my view. So, that’s no longer the same kind of issue, but all of which is to say there were very big problems in Puerto Rico when the board was put in place. We’ve made some tough decisions. Some have argued, Joe Stiglitz has argued, that there’s too much austerity. On the other side, creditors have argued there’s not enough austerity, that really, there are lots more cuts that could have and should have been made. Our view is that we’re in the sweet spot where we’ve made the cuts that needed to be made, we haven’t made too much in the way of cuts, but one can argue about that.

Kate: I would call it a rock and a hard place, not a sweet spot.

David Skeel: We’re definitely between a rock and a hard place. The response to what the oversight board has done reflects that. We’ve had wanted posters with my picture on them on the Penn campus a couple of years ago. We’ve had protests.

Kate: Yikes.

David Skeel: Unfortunately, that kind of goes with the turf. In a very difficult situation we’ve made, I believe, the best decisions we could under the circumstances, and I think in the long run they’re going to prove to have been good decisions. But there certainly is a lot of debate about it now.

Luigi: David, I completely agree with you that Puerto Rico was in a terrible situation. It needed to restructure, it also needed to do a severe reduction in government expenditures, given, as you said, that the population has shrunk, and so on and so forth. But of course, there is the issue of the trade-off, and you said you are in the sweet spot, and it reminded me a bit of my mother that when she was ruling, when I was a kid, she would say that she was always in the middle, and pretty quickly I figured out that she was picking the extreme. So, if you pick the extreme, you can define yourself always in the middle. So, if you pick Stiglitz on the one hand at the most extreme, and Robbins, the hedge fund manager, on the other, of course, you’re always in the middle. So, the question is very controversial, how you allocate the losses between the hedge funds and the population of Puerto Rico.

Kate: So, hedge funds hating you and, I guess, the students at Penn Law also, gets back to an interesting point with what’s going on today with the issue of state law bankruptcy. Oddly enough, some Democrats have raised the point that this could cause debt markets to go haywire and that debt financing won’t be available to states after this if they’re allowed to go bankrupt, because creditors won’t trust them. I said it’s sort of strange that Democrats would be raising this point, because usually it’s the other way around that they’re not supposed to be aligned with the creditors. But anyway, do you think that there’s any legitimacy to this claim?

David Skeel: I find those arguments completely unpersuasive for a couple of reasons. One is they tend to be premised on an assumption that the bond markets can’t tell the difference between a fiscally healthy state and a state that’s not fiscally healthy. I think the bond markets are not perfect, the municipal bond markets in particular. But I think they can. Even now, if you look at Illinois, the interest rates on Illinois debt are very different than the interest rates on a more fiscally responsible state. The final thing I would say is that if bankruptcy is going to destroy the bond markets and have these huge repercussions, you would think that would be the case with municipal bankruptcy. Cities already can file for bankruptcy if their states let them file for bankruptcy. There is no evidence that that’s crippled the bond market. I think there’s some evidence that in states that do let their cities file for bankruptcy, it can have a positive effect on bond prices.

Luigi: I think that you’re right, David. I saw a paper about the debt of Puerto Rico. The debt was trading at very high prices until the Detroit bankruptcy, because there was a presumption that Detroit would be bailed out, and as a result, Puerto Rico also would be bailed out. The moment the market realized this was not the case, prices of Puerto Rican debt actually collapsed. In a sense, that started the unfolding that led to PROMESA.

OK, so that’s a good introduction to what I wanted to say, which is that some people have raised the concern that the board of PROMESA was too close to the hedge funds. So, my question is, as the PROMESA group, do you have some rules in place that after you step down, you cannot go work for any of the hedge funds involved or something like that?

David Skeel: You know, I don’t know if we do or not. I suspect we might. We have very stringent conflict-of-interest rules. They’re mostly focused on while we’re on the board. I don’t know whether we do or do not have post-oversight board rules.

Luigi, I will promise you here and now I will not go work for a hedge fund, either immediately or in the long term after my service on the board. People have tried to argue there are various conflicts of interest on the board, and there really aren’t. And in the places where there was anything remotely like a true conflict, we’ve acted to eliminate that conflict and to make sure it had no role in the decision-making process. All of which is to say, I think it’s worth looking at these things and paying attention to see if there are conflicts, because there are situations where it could be problematic. This is not one of them, in my view.

Kate: OK. I have one last question. Going back to state bankruptcy. It’s like a ping-pong match between Luigi with conflicts of interest and me and state bankruptcy.

David Skeel: Who would have known.

Luigi: Bankruptcy is about conflict of interest.

Kate: I know. OK, so let’s say, hypothetically, we did have a state bankruptcy option and states opted into it right now. Do you think that would really free up much capital for them to be able to use right now to combat coronavirus?

David Skeel: I really think the state bankruptcy issue is a long-term structural issue, and so I don’t think it would free up lots of capital in the short run. If you think about Illinois, which is the poster child for long-term, structural fiscal problems, they can pay their debts as they come due now, because their real problem is those pension obligations that they’re going to need to be paying down the road. And that hasn’t fully hit yet. If there were a bankruptcy, if a state were to file for bankruptcy, I think it would free up some capital, but I really don’t think that’s the argument for state bankruptcy.

I think there are two different sets of issues. One is, ought Congress to be providing funds to the states to fill the hole in their revenues as a result of the coronavirus? And my view on that is, yes. Ought Congress also to be thinking about long-term structural problems in the states? And I think the answer to that also is yes, and in my view, bankruptcy is the best solution to that. But they’re different responses and both important, both relevant now, but different. And the best way to ensure that states have adequate capital now is for Congress to pass legislation that helps them fill the current hole in their revenues.

Luigi: But David, you gave me a fantastic idea for Congress, which is to do a big deal, a big package, in which Congress passes the money for temporary relief and at the same time law for bankruptcy. The Democrats want the money for states, the Republicans want the bankruptcy. You package those together, and you have a bipartisan deal, and we’re going to call it the Skeel deal.

David Skeel: You either have a bipartisan deal or no deal at all. But I take that to be what Sen. McConnell was hinting at a week ago, when he said that he thinks we ought to consider the possibility of states filing for bankruptcy. I took him to be firing a shot across the bow and making clear that he does not want money to be used for long-term, pre-coronavirus problems. Any funding should be limited to coronavirus-specific issues. But I love the Skeel package, and if we’d like to make it the Skeel-Zingales-Waldock package, I will sign on, and we’ll have two more scholars in favor of this idea than we did at the start of the interview.

Kate: That’s very generous, David. All right, this has been very a helpful conversation, and thanks so much for joining us on the show.

David Skeel: Thanks so much for having me. I’d love to do it again sometime.

Luigi: David was very skillful in explaining the difference between a budgetary issue today and the long-term liability problem that some states, including Illinois, have. Unfortunately, you don’t see the same level of skill, not only in the US Congress, but also in the European Union. In the European Union, the states that belong to the euro area have kind of a balanced-budget amendment—not as tight, but kind of a balanced-budget amendment—but then they don’t add the fiscal redistribution coming from the center. And so, when a country is hit by a major shock, like the COVID epidemic in Italy or Spain, then these states basically cannot really borrow very much to face this problem, and they can’t expect any help from the central government.

And there is not a way to restructure them appropriately, as described by David Skeel. So, the problem that we see here in the United States, multiply that by a hundred. That’s the problem of Europe and the fear that every Southern European has is that you end up in a situation like Puerto Rico, where you have a junta—because the PROMESA board is called a junta—that you have a junta imposed by somebody else that rules your country. And I think that that’s pretty dangerous.

Kate: But I think the key thing you mentioned, though, is that European states are able to issue some debt in order to cover their shortfall. So, they do have more flexibility than the states, it seems, in that regard.

Luigi: Yeah, absolutely they do. But speaking of a county, I always seem to come from or locate in the wrong place because Illinois, Italy, they’re all bankrupt. So, the country I come from—

Kate: Correlation or causation?

Luigi: —causation or correlation, I don’t know, but Italy has so much preexisting debt that it finds it very difficult to actually issue a lot more to face this. Now, is Germany responsible for the fact that Italy has so much preexisting debt? Absolutely not. And, like the US government should not bail out Illinois, Germany should not bail out Italy. However, Italy in this moment needs help, like Puerto Rico needed help after Hurricane Maria, and Louisiana needed help after Hurricane Katrina, and a lot of federal help came. Actually, ironically, much more went to Louisiana than to Puerto Rico, and you wonder whether this is because they don’t vote or because there is some racism or combination of the two.

Anyway, either way is not good. But the point is, at least some federal help came. In Europe, there is zero. And what happened in Italy in the previous crisis, the euro crisis of 2011 and ’12, is that a lot of health-care expenditures were cut. And, ironically, part of the problem that Italy is facing today with the coronavirus is because they cut down a lot of health-care expenditures, and if Germany was able to deal with the coronavirus much better than Italy, it is because they spend more on health care.

Kate: Can I raise this issue? I don’t know if this is too in the weeds, but I’m concerned about whether there might be any perverse consequences to the introduction of state bankruptcy, because what we have right now is states balancing their budgets, or at least believing that they’re supposed to balance their budgets. Because as you said, Luigi, it’s not set in stone, and states have run deficits in the past. They’ve issued bonds to cover deficits in the past. It’s kind of a fragile system. And so, if we introduce bankruptcy, and the introduction of bankruptcy itself overwrites some of these elements of state constitutions that say that they’re not supposed to carry deficits into the future, then is that going to break that whole system? And is that going to lead to kind of a race to the bottom, where states, some states, decide to issue a ton of bonds in expectation of defaulting on those bonds in the future, because they know that they can?

Luigi: I think that you are right that there might be some systemic effect from introducing this law, because now the cost of defaulting is so large, as you described with the Arkansas case, that no state is taking this option seriously. However, this is what we call in economics a commitment strategy. You make some state particularly unappealing so that you never want to go into that state. The historical example is Cortes, when he went to conquer Mexico, burned the ships he came with as a commitment device for his soldiers to say, either you win or you’re not going to survive. And we know from game theory that this commitment has a lot of value. However, if you lose the battle, it is very expensive because you die, you can’t run away. And in order to work, the commitment needs to be costly.

The problem is that as you approach that cost, you start to wonder, maybe we can build some ship quickly in order to run away. And of course, that undermines the credibility of the entire strategy. But the alternative can be ex post very painful, which is a massacre. And what you described with Arkansas was a massacre, basically, and before we reach there, hopefully we’re going to have some form of organized process, which is not imposed from the top like the one in Puerto Rico, but is actually done in a more democratic fashion.

Kate: This is kind of my point, which is, if the only default possibility is to experience a ton of pain, then people won’t default, states won’t default. But if, all of a sudden, there’s a bankruptcy that’s not that painful, then states will start defaulting more and more.

Luigi: Yeah, but remember, after you default, you’re going to pay a significant cost to go back on the bond market. So, it is not that pleasant. And my reading of history is that democratically elected governments don’t like to default, because the chances that you’re not going to be reelected after default are approaching one.

Kate: Right, but there’s this typical time inconsistency problem with politics, which is that you’re not defaulting on debt that you issue. You’re defaulting on debt that someone issued 15, 20 years ago. And so, people might want to borrow a lot of money now, knowing that the consequences will be borne down the road. And then, we’ll have states like Argentina, which has been in continual default.

Luigi: Yes. But the market tends to anticipate this. And so, I’m not too worried about that, because we have seen after municipal defaults, It’s not that after municipal defaults municipalities were unable to borrow, or the opposite, they went on a borrowing spree. No, they pay a cost, and they’re more careful moving forward.

But I think that your concern is well posed in this particular moment. So, is this the right moment economically to introduce bankruptcy for states? And the answer is clearly no, because we’ll destabilize the market even more so at a time when the market is already very iffy.

However, the problem is political, in the sense that if you tell me, we won’t introduce it now, but five years from now, we’ll introduce it for sure, I would go for that deal any time of the day. The problem is that reaching a bipartisan deal on something like this will take another crisis. And so, the Skeel deal is a good idea, because it makes possible something that otherwise will never be done.

Kate: The Skeel-Zingales-Waldock deal.

But, look, we’re facing a huge crisis right now. We need unemployment insurance, we need hospitals, we need health care, we need education to continue. Who should be providing that? If states can’t, it should be the federal government. We need that assistance.

Now, separately, states have this pension issue, and that’s a big problem. And I think a lot of the concerns that have been raised about state bankruptcy aren’t actually true, as David said. And so, maybe this compromise that he proposed could work, but I think it’s kind of a sideshow. It doesn’t address the problems of coronavirus right now.