BLUE MODEL MELTDOWN: Here Comes Puerto Rico’s Default.

The Puerto Rico meltdown is going to be brutal: Many of the bonds are held by Puerto Rican retirees, either directly or as part of pension fund portfolios. Moreover, the island is a typical example of blue model governance, with a bloated state that doesn’t perform effectively, public sector unions out of control, and lots of poor people who depend on a government that doesn’t serve them very well. And on top of all this, there are no bankruptcy provisions that would enable an orderly restructuring.

Ultimately, bankrupt blue cities and states and their pension funds will troop to Washington with their hands out, begging for bailouts. Already we’ve seen a leading New Jersey state Democrat call for a $1 trillion federal bailout fund for pensions. The political pressures around the issue will be intense. Some (mostly Republicans) won’t want to give a single dime to the improvident fools and crooks who created this mess. Others (mostly Democrats) will insist on no-fault bailouts, arguing that social justice demands nothing less than an infinite willingness to pour money down ratholes, so long as those ratholes are Democrat-run.

What the country needs is something in between: relief for reform. Cities, counties, and states (or, as in the case of Puerto Rico, commonwealths) who can’t manage their debts anymore can qualify for limited help—but only if they undergo serious, life-changing reform. That may well mean the end of public unions, drastic changes in governance, haircuts all around, tax reforms, and other substantive changes. Forward-looking people in Congress should be thinking now about the legislation that would be needed to set up a framework of some kind to handle these cases. The legal issues are complex; courts have been upholding, for example, the inviolability of employee pensions under state constitutional provisions. It’s hard to see how federal bailouts would let those pensions go unchallenged.

But will anyone act before it’s a disaster?