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Which States Will Go Bankrupt First?

bankruptcyRecent economic problems overseas cast a powerful light on what’s happening in the U.S. In particular, I’m referring to the sovereign debt panic brought on Europe by Portugal, Ireland, Greece, and Spain, the “PIGS.” But look at the problem in context. Three of the PIGS have populations that are relatively small (three of them about the size of a U.S. state). In addition, their contribution in terms of GDP is similarly small. Seen this way, the problems they cause for Europe are no greater than the crisis for Washington posed by large U.S. states.

Look at the U.S. through this grid: Seek out states that are populous, have high rates of unemployment (and have had to borrow a lot to pay unemployment claims), plus are large net importers of energy (some states will suffer for years against the rising cost of energy). Keep in mind that these problems will cause headaches for Washington all the way through the 2012 elections, and likely beyond. Seven states that make the cut are Illinois, Ohio, Florida, California, Michigan, New Jersey, and North Carolina.

These states are bound together by population (each over 8 million); unemployment (each has underemployment above 15 percent measured by the U-6 measure for the States); each is indebted for more than a billion dollars for borrowing to pay unemployment claims; and each is a large net importer of energy (natural gas, oil, electricity; in some cases, all three).

Texas missed the list partly due to the fact that its total energy production matches its total energy consumption almost perfectly. In addition, its underemployment rate was only 13.7 percent, below my arbitrary minimum of 15 percent, as the states above suffer. ItsAlso, its ability to generate funds via energy production offset its borrowing to pay unemployment claims. Texas is set apart from other states by its energy production, which is the next best thing to printing money. U.S. states, like their European counterparts, can’t print money.

The states we’re considering here have lost key economy-driving sectors, and they’ve lost them permanently. Michigan and Ohio are at the end of the auto era. California has undergone a massive housing bust. North Carolina and New Jersey have taken the blow of the financial sector’s downfall. In addition to their loss of major money makers, these states also have higher energy costs. inNow toss into this mix the dim prospects for wage growth in the United States at this time. Energy and food costs exacerbate wage problems. The seven states examined here are pinched between stagnation of personal wages, and lack of relief in energy costs.

In real terms, wage growth in the U.S. has been stagnant for years. States over-leveraged to the automobile have taken a particular punishment in the most recent decade of higher oil prices. These include Florida, North Carolina, and California, where public transport is dwarfed by highway and road systems. Even Ohio and California, able to produce some portion of oil and gas, cannot produce enough energy for the size of their populations. On the other hand, it may be interesting to watch states like Colorado, Wyoming, New Mexico, North Dakota, Oklahoma, , and Louisiana, all net exporters of energy, to see how things play out for them in this depression.

Gasoline would have fallen to a dollar during this depression if not for peak oil, as oil fell to the lows of the late 1990’s. Gas under a dollar would bring some relief to the painfully decreasing spread between punk wages and energy input costs, the lot of underemployed Americans. And when it comes to other fossil fuels, coal and natural gas prices are also much higher than the lows during the 1990’s. What a gap: 2010 energy prices and a 1990’s labor force.

homelessAnd yet mainstream economics lacks attention to the relationship between long-term stagnant wage growth, higher energy inputs, and the OECD countries’ creation of credit as the solution to that set of problems. One of every eight Americans receive food stamps; a visit to states like Illinois, North Carolina, Florida, and Ohio, would show the huge difference between $2 natural gas and $5 natural gas, and $15 oil and 75 oil.

Greater than one third of the U.S. population lives in the seven states of energy debt under consideration. Like other states, the horizon may reveal policy clashes between protected state and city workers, and the growing numbers underemployed in the private economy. Recent events at the meeting of the Los Angeles City Council give evidence that the days of unlimited borrowing by governments – against future growth based on cheap energy – are rapidly ending. If it wants, Washington can print money and support these states for years. Just like the 70 million people in Portugal, Italy, Greece and Spain, the 108 million people in these seven U.S. states are likely facing even higher levels of unemployment, as austerity measures impact their bankrupt coffers, and limit their borrowing ability.

If a state goes bankrupt, what will happen? Will the feds come in and take over? Will they administer as they do D.C.? Does anyone really believe the feds can continue printing money and taking on more obligations when they are already at 40 percent deficit spending (relative to budget), the threshold at which hyperinflation historically kicks off?