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In a Bad State
 In a Bad State

Responding to State and Local

Budget Crises

DAVID SCHLEICHER
 Oxford University Press is a department of the University of Oxford. It furthers the
University’s objective of excellence in research, scholarship, and education by publishing
worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and
certain other countries.

Published in the United States of America by Oxford University Press

198 Madison Avenue, New York, NY 10016, United States of America.

© Oxford University Press 2023

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, without the prior permission in
writing of Oxford University Press, or as expressly permitted by law, by license, or under
terms agreed with the appropriate reproduction rights organization. Inquiries concerning
reproduction outside the scope of the above should be sent to the Rights Department,
Oxford University Press, at the address above.

You must not circulate this work in any other form and you must impose this same
condition on any acquirer.

CIP data is on file at the Library of Congress

ISBN 978–0–19–762915–4
eISBN 978–0–19–762917–8

DOI: 10.1093/oso/9780197629154.001.0001
For Amanda, Charlie, and Nate
 CONTENTS

Acknowledgments

PART I WHY IS IT SO HARD TO GET OUT OF A BAD

STATE? AN INTRODUCTION TO THE PROBLEM OF STATE
AND LOCAL FISCAL CRISES

Introduction: Why Is It So Hard to Get Out of a Bad State?

PART II WHEN WE’VE BEEN IN A BAD STATE: THE

THEORY AND HISTORY OF FEDERAL RESPONSES TO
STATE AND LOCAL FISCAL CRISES

1. What Has Already Been Said about Federal Responses to State

and Local Budget Crises? What Has Been Left Out?
1.1. STATE AND LOCAL GOVERNMENTAL MORAL HAZARD OR THE PROBLEM
OF “SOFT BUDGET CONSTRAINTS”
1.2. STATE FISCAL CRISES AND MACROECONOMIC STABILIZATION
1.3. STATE BUDGET CRISES, INFRASTRUCTURE, AND DEVELOPMENT
1.4. AVOID MORAL HAZARD, ALLEVIATE RECESSIONS, AND/OR BUILD
INFRASTRUCTURE: PICK TWO, BUT NOT THREE
1.5. APPENDIX TO CHAPTER 1: THREE METHODOLOGICAL NOTES
2. State Debt Crises through the 1840s
2.1. HAMILTON, THE ASSUMPTION OF STATE DEBTS, AND MORAL HAZARD
2.2. THE STATE DEBT CRISES OF THE 1830S AND 1840S
3. The Dual Debt Crises of the Second Half of the Nineteenth
Century
3.1. THE RAILROAD BOND CRISES
3.1.1. Railroad Bonds in the Courts
3.1.2. Railroad Bonds and Local Government Law
 3.1.3. America’s Urban Civic Infrastructure: “The
Achievements of Government . . . Rivaled the Feats of the
Old Testament God”
3.2. THE OTHER DEBT CRISIS OF THE 1870S: SOUTHERN STATE POST-
RECONSTRUCTION REPUDIATION AND THE “ODIOUS DEBT”
DOCTRINE
3.3. CONCLUSION
4. State and Local Debt Crises in the 20th Century
4.1. STATE AND LOCAL FISCAL CRISES DURING THE GREAT DEPRESSION
4.1.1. The Creation of Chapter 9 Municipal Bankruptcy
4.1.2. When a State Goes Broke: Arkansas in the 1930s
4.2. WHEN BIG CITIES GO BROKE
4.2.1. New York City: Ford to City, Drop Dea . . . Well, Wait
a Minute
4.2.2. Bailouts without Moral Hazard: The Case of
Washington, DC
5. The Great Recession and State and Local Fiscal Crises
5.1. THE AMERICAN RECOVERY AND REINVESTMENT ACT
5.2. BUILD AMERICA BONDS
5.3. THE END OF STIMULUS AND THE RISE OF THE PENSION CRISIS
5.4. MUNICIPAL BANKRUPTCY IN THE GREAT RECESSION AND THE
PUERTO RICO CRISIS
5.4.1. Chapter 9: A Quick Primer
5.4.2. Chapter 9 in the Great Recession
5.5. PUERTO RICO AND PROMESA
5.6. CONCLUSION
6. COVID-19, the CARES Act, the MLF, and the ARP
6.1. WHO CARES ABOUT STATES AND CITIES?
6.2. THE MUNICIPAL LIQUIDITY FACILITY
6.3. THE DECEMBER 2020 STIMULUS AND THE ARP
6.4. CONCLUSION: THE SECOND DRAFT OF HISTORY

PART III TOOLS FOR GETTING OUT OF A BAD STATE

7. An Introduction to the Principles for Responding to State and

Local Fiscal Crises
 8. Building Better Bailouts
8.1. TRADITIONAL CONSIDERATIONS WHEN BUILDING BAILOUTS
8.1.1. General or Specific?
8.1.2. Conditional or Unconditional?
8.1.3. Loans or Grants?
8.2. BUILDING BETTER BAILOUTS: ADVANCING PRUDENCE, MIXING, AND
SPREADING IN BAILOUT DESIGN
8.2.1. Conditions on General State and Local Crisis Aid
8.2.2. Conditions on Aid to Specific Jurisdictions in Fiscal
Crisis
9. Building Better Defaults
9.1. BUILDING BETTER DEFAULTS: REFORMS TO CHAPTER 9
9.1.1. Insolvency
9.1.2. Preferences
9.1.3. Financial Engineering
9.1.4. Chapter 9 and Overlapping Local Governments
9.2. BUILDING BIGGER DEFAULTS: STATE GOVERNMENTS AND CHAPTER 9
9.3. APPENDIX TO CHAPTER 9: THE CONSTITUTIONAL STATUS OF “BIG
MAC”S
10. Building Better Forms of State and Local Austerity
10.1 SEPARATING STATE AND LOCAL TAX BASES
.10.2 PENSION REFORM
.
11. Resilience, or Building a Better Federal System
11.1 ENCOURAGING INTER-REGIONAL MOBILITY
.11.2 THE TENTATIVE CASE FOR KEEPING THE MUNICIPAL BOND INTEREST
. TAX EXEMPTION
11.3 THE EFFICIENCY OF INFRASTRUCTURE SPENDING
.11.4 NATIONALIZING PARTS OF THE WELFARE STATE
.
PART IV THE CONCLUSION, OR WHY STATES ARE OFTEN
BAD

12. Why States Are Often Bad

Notes
Index
 ACKNOWLEDGMENTS

At a cocktail party in 2015, then-Yale Law School Dean Robert Post

introduced me to Dick Ravitch, the former lieutenant governor of
New York, chair of the Metropolitan Transportation Authority, a
central figure in the New York City fiscal crisis, and the éminence
grise of the world of municipal finance. I was, and am, a scholar of
state and local government law, focusing mostly on land use, urban
economic development, and election law. At the time, I had not
written much about state and local fiscal issues. But, after one
conversation with Dick, I realized I needed to fix that.
Dick and I started teaching a class together at Yale Law School
called “The State and Local Budget Crisis.” Doing so has been a
great education and pleasure. This book is very much the product of
interactions in class with the excellent students, Dick, and the variety
of people in the municipal finance world who have joined us over the
years. I’m not the first person for whom an encounter with Dick
Ravitch was a formative experience, nor will I be the last, but I will
be forever grateful for his vision, brilliance, focus, and kindness.
That said, there are ways in which Dick was pushing on an open
door. My brilliant wife Amanda Kosonen is an international law expert
and knows more than I ever will about sovereign debt and
international financial institutions (among many, many, many other
things). Her views on sovereign debt provided a lens into the
municipal debt world that I wouldn’t have had otherwise. This book
clearly bears the marks of her thinking.
They say when you scratch a scholar’s theory, you find a
biography. That is certainly true in this case. My parents—my mother
Linda Schleicher, my father Bill Schleicher, and my stepmother Ellen
Chapnick—taught me to care about local politics and, beyond that,
about the people who work for governments and those who rely on
government services. Mom and Dad both worked for municipal labor
unions in New York City, where the shadow of the 1970s fiscal crisis
was ever-present. The human costs of fiscal crises were apparent to
me, even at an early age. The other day I told Mom that I was
pretty sure she wouldn’t agree with everything in this book, but that,
no matter what, I always know that she is proud, loving, and
supportive of me. A child could ask for nothing more from his
parents. (Also, my mother is playing a game with my boys while I
write this—thanks Mom!)
While all of the book’s flaws are my own, many people contributed
to any successes it has. My editor at Oxford University Press, David
McBride, identified this project and then did an amazing job working
with me and shepherding the book into print. The rest of the team
that worked with us—Emily Benitez and Kavitha Yuvaraj particularly
—did great work. In addition, my publicist Michelle Blankenship
helped so much as well.
A group of brilliant research assistants helped me over the many
years I’ve been working on this book. Many, many thanks are due to
Rebecca Brooks, Adam Gerrard, Paul Healy, Adela Lilollari, Steffi
Ostrowski, Will Poff-Webster, Anirudh Sivaram, and Talia Stender.
Colleagues and friends provided a great deal of feedback and
advice. Steve Teles convinced me to write this as a book, rather than
as a series of law review articles, advising me both on the scholarly
content and talking me through some of my worries about it. I have
been working with my regular coauthor Rick Hills on land use
projects for years now; my thinking on all sorts of issues has been
deeply shaped by his intense and sometimes manic intelligence. Bob
Ellickson has been a mentor, a great commentator, and, perhaps
most importantly, a role model for how to do scholarly work. Others
who provided extremely useful comments on the manuscript or
otherwise provided feedback include Bruce Ackerman, Nicholas
Bagley, Vincent Buccola, Aure Chaudhury, Peter Conti-Brown, Justin
Driver, Christopher Elmendorf, Brian Feinstein, David Fontana, Brian
Galle, Heather Gerken, Clayton Gillette, Edward Glaeser, William
Glasgall, Tracy Gordon, Daniel Halberstam, Andrew Haughwout,
Daniel Hemel, Don Herzog, Noah Kazis, Daryl Levinson, Adam
Levitin, Zachary Liscow, Yair Listokin, Julia Mahoney, Gregory Makoff,
E. J. McMahon, Gabe Mendlow, Thomas Meyer, Eloise Pasachoff,
Michael Pyle, Roberta Romano, Reihan Salam, David Skeel, Douglas
Spencer, Susan Wachter, Benjamin Wallace-Wells, David Zaring, Taisu
Zhang, and several anonymous reviewers. I also had several
wonderful conversations about the Municipal Liquidity Facility and
municipal finance more generally with Kent Hiteshew, which taught
me a great deal.
The book also benefited tremendously from comments at
workshops at the Antonin Scalia Law School, the Federal Funding
Issues Workshop, the Federal Reserve Bank of New York, Johns
Hopkins University, the Law and Macroeconomics Annual
Conference, the University of Michigan Law School, the Yale School
of Management, and the Yale Law School. One of the great
pleasures of teaching at Yale Law School is that the distinction
between students and peers is narrow. Students in my seminar were
assigned draft chapters and provided excellent feedback.
Speaking of Yale, there are many people at the Law School I need
to thank. Since my first day as a law student, Dean Heather Gerken
has been a mentor to me and has provided an example for how to
write insightful and important scholarship. I can’t thank her enough
for all of her support, as a dean, as a mentor, and as a friend. As I
mentioned above, Robert Post got this whole project started; he is
just a total mensch in addition to being a brilliant thinker. Jennifer
Marshall is a terrific assistant. Pascal Matthieu is a wizard with
grants. Joe Crosby Joe Crosbied things in the way only Joe Crosby
can do. Thank you!
Finally, I want to thank my family. They have had to listen to me
talk about things like sales tax bonds or Bridgeport’s history of fiscal
crisis for years. I can’t thank them enough for always doing so with
good humor and interest. My boys—Charlie and Nate—are just the
best, my favorite people. I can’t wait for them to read this. My wife
Amanda is amazing, my love and anchor. They are the most loving
and fun people I have ever met. None of this would have happened
without them.
 PART I

WHY IS IT SO HARD TO GET OUT OF A BAD STATE?

An Introduction to the Problem of State and Local
Fiscal Crises
 Introduction
Why Is It So Hard to Get Out of a Bad State?

Imagine this: Sometime in the late 2020s, while the President and
Congress negotiate over one bill or another, big news drops. The
Governor of Illinois and the Mayor of Chicago are going to hold a
joint press conference to announce that the state and the city are
flat broke. They are both going to default on their debts and slash
their budgets if Congress doesn’t do something quickly to help them
out of their dire fiscal straits.
Everyone in DC turns on their TVs to watch the press conference.
As soon as it ends, the cable networks go live to protests in Chicago.
Schools have closed for the day, disorder reigns, and garbage sits
uncollected, as teachers, police officers, and other public sector
workers take to the streets to oppose proposed layoffs and pension
cuts. On location, reporters interview storeowners in Springfield,
Illinois, worried that soon-to-be fired state employees will stop
spending money, destroying the local economy. The Twitter hashtags
#IllinoIsOver and #ChicaGoAway trend worldwide, as major
companies announce their plans to move their headquarters and
factories away from the state before severe tax increases kick in.
It’s a disaster. The President brings her advisers and
Congressional allies to the White House to formulate a response.
The Chair of the Council of Economic Advisers goes first: “We
can’t let Illinois or Chicago cut services to the bone and fire tons of
employees,” he argues. “It will crush the economy. State and local
layoffs will directly lower employment levels, and multiplier effects
will mean even more job losses. Not to mention the human suffering
caused by lost government services—higher crime rates, 40 students
in each classroom, more homelessness, and reduced healthcare! Tax
increases will destroy economic activity and encourage people and
companies to leave the state. Austerity is not a solution.”
A Senator from Texas interrupts: “No, no, no! The worst thing we
can do is give federal money to Illinois,” she says. “Why should my
constituents pay for Chicago’s mistakes? The state and the city
repeatedly refused to raise taxes or cut spending enough to balance
their budgets. If we give aid to Illinois or Chicago, every governor
and mayor in the country will know that she can spend wildly
without consequences. And lenders will know there is no risk in
providing money to irresponsible governments. Let Illinois cut
spending or let it default. Either way, bailouts are not the answer.”
The Secretary of the Treasury pipes up: “Whatever we do, we
can’t let Illinois default on its promises. State and local governments
build and maintain almost everything useful in this country—roads,
trains, sewer systems, you name it. To do so, they need to be able
to borrow money. If Illinois defaults, or if Chicago files for
bankruptcy, the municipal bond market might collapse. States and
cities around the country won’t be able to borrow, which will mean
they can’t invest in infrastructure. The future of the national
economy depends on Illinois avoiding default.”
What should the President and Congress do?
⋆⋆⋆
This scenario may seem far-fetched, but in March 2020 it looked like
we were in for a wave of state and local governmental defaults.
When the COVID-19 pandemic hit, a massive decline in economic
activity followed.1 Budget experts predicted both huge state and
local governmental revenue losses and large increases in demand for
healthcare and other social services because of the pandemic and
the recession.2
Defaults seemed possible, even likely. The last major recession,
the Great Recession of 2008, had been brutal on state and local
budgets.3 State and local governments laid off hundreds of
thousands of public employees, a loss of jobs so severe that it
substantially extended the length of the recession.4 Detroit and
several other cities were eventually forced to file for bankruptcy; the
Commonwealth of Puerto Rico effectively did so as well.
Some jurisdictions had substantially improved their fiscal situations
between 2008 and 2020, building up substantial “rainy day funds.”5
But others kept accruing more and more debt, often in the form of
underfunded pension liabilities and healthcare obligations for retired
public workers.6 In Connecticut in 2019, almost a third of the tax
revenue generated by the state went to making payments on debt
and retiree obligations.7 Connecticut was not alone—debt and
pension payments made up a huge portion of spending in states like
Illinois, New Jersey, and Kentucky as well.8
After what we saw following the Great Recession, the COVID-19
recession seemed sure to produce its own state and local fiscal
crises. The media ran story after story about impending disasters in
state budgets. Municipal bond markets seized up, creating questions
about the ability of state and local governments to borrow.9 State
and local governments laid off or furloughed more than a million
public employees, more than they had after 2008.10 Revenues
shriveled for many local governments, particularly those with
budgets reliant on tourism, the oil industry, car tolls, or mass transit
fares.11 The State of Illinois and New York’s Metropolitan
Transportation Authority were forced to borrow money from the
Federal Reserve.12 The leader of the Illinois State Senate asked
Congress for a $41B bailout.13
But a default crisis did not come to pass. The shock created by the
pandemic was very different in type from the crisis that hit in 2008.
High-income workers had largely stable incomes during the
pandemic and the stock market boomed, leading to consistent or
even increasing state income and capital gains tax revenues.14
Federal aid to individuals and firms helped preserve incomes despite
high unemployment.15 The bond market recovered after the Federal
Reserve, with Congress’s backing, created a facility for buying
municipal bonds.16 And, over the course of several pieces of
legislation, Congress provided an enormous amount of money to
state and local governments, flooding them with more federal money
than they lost in tax revenue.17 The result was state and local
budgets in 2021 were generally in better shape than they were
before the crisis; by 2022, many governments had huge budget
surpluses.
Despite flush budgets, however, the underlying structural
problems of state and local budgets have not been cured in many
places.18 It is possible some state and local budgets will be even
worse off in several years than they were previously, if governments
expand programs or cut taxes now in ways that will be difficult to
reverse when the gusher of federal aid runs out.
The easing of pressure on state budgets, though, provides the
country with some time to consider how it should respond to future
crises, whether they occur in individual jurisdictions or as part of a
national economic crash. This book is an effort to take advantage of
this lull to develop some new ideas about how federal officials and
voters alike should think about the problem of state and local fiscal
stress. The book will also propose some policies that can be enacted
to reduce the costs of such crises, acknowledging that state and
local fiscal crises will inevitably occur in a country with 50 states and
thousands of local governments.
Because a true nationwide state and local governmental default
crisis seemed possible, Congress was forced to wrestle with how to
respond. At the height of the COVID-19 pandemic and associated
recession, there was a great deal of public discussion about state
fiscal issues. Ideas like creating a bankruptcy code for state
governments and federal aid to states took turns dominating
headlines.19
But the sides in these public debates often seemed to be talking
past one another. Republicans claimed state fiscal aid amounted to
“blue state bailouts,” despite the fiscal situation being as bad in
many Republican-dominated states as it was in Democratic-
dominated ones.20 Republicans also pooh-poohed the
macroeconomic and social costs of state and local governmental
layoffs, waiting until after November 2020 to allow a vote on a
second large state and local aid package, even though a Republican
president’s re-election chances surely would have been buoyed by a
better economy.21 Democrats argued there would be huge negative
economic and social outcomes if state and local aid was not offered,
and persisted in these claims well after state budgets had recovered
substantially.22 They also claimed that disaster would unfold if states
were given the power to file for bankruptcy, without revealing much
understanding of how sovereign bankruptcy might work in
practice.23
That these debates were unedifying, though, was not the fault of
politicians or journalists. Scholarship and elite discussion around
these issues has not helped them, missing many of the real concerns
created by state and local fiscal distress. Experts have not done a
good job explaining the true stakes of a state or large city default,
nor have we laid out the full set of options available to federal
officials in a crisis of this type.
The goal of this book is to provide a clear theory about the
challenges federal officials face when a state or city nears default
from the perspective of those officials, regardless of their party or
ideology. That is, it will try to explain what federal officials faced with
a state or local fiscal crisis can and cannot do. The goal is to make
federal officials ready when and if such a crisis comes to pass, and,
just as importantly, to provide all of us judging their decisions with
some perspective. Although it will draw on economics, political
science, law, and history, this book will do so in service of providing
a practical guide to understanding the difficult choices that federal
policymakers face in responding to state and local fiscal crises.
Further, looking at the role played by the federal government during
state and local budget crises will provide some lessons about how
we might reform our federal system more broadly.
Fortunately, or unfortunately, there is a lot of historical material to
draw on. Crises much like the one I asked you to imagine above
have happened several times in American history (without the cable
news coverage or Twitter hashtags!). All three branches of the
federal government—the President, Congress, and particularly the
federal courts—have played important roles in developing policy
toward states and cities on the edge of, or after, defaults.
Some of this history is well known. Federal responses to state
fiscal crises generated some of the most famous disputes in
American political history. These include the debate over the
assumption of state debts in Alexander Hamilton’s first financial plan
as Secretary of the Treasury (famously captured by Lin-Manuel
Miranda in “Cabinet Battle #1” in the musical Hamilton) and the fight
over Southern state debts at the end of Reconstruction after 1876.
But other federal responses to state and local debt crises, even
very dramatic ones, are little remembered. President and former
victorious Civil War Union general Ulysses S. Grant threatened to
send federal troops to the stalwart Union state of Iowa in the 1870s
to force small towns to make good on their bonded debt.24 In the
late 19th century, state legislatures effectively disbanded several
major city governments, a practice that became known as “corporate
suicide,” to help them avoid claims by creditors until the Supreme
Court stepped in and stopped the practice. The State of Arkansas
once played a role in global capital markets much like the one
Argentina does today, defaulting on its debts three times between
the 1840s and 1930s.
Other federal responses to local fiscal crises are misremembered.
For instance, in the mid-1970s, the New York Daily News famously
described President Gerald Ford’s position against providing aid to
New York City as “Ford to City: Drop Dead.”25 While the headline
stuck in our collective memory, President Ford supported legislation
that provided federal loans to New York City only a few months after
that headline ran.
While there have been many state and local fiscal crises in
American history, the federal government has not developed a
single, consistent formula for addressing them. What history reveals
is that the federal government does not have any good options when
addressing state and local fiscal crises. As a result, it has cycled
between responses that are bad in different ways.
 When faced with a state or local fiscal crisis, federal officials
generally want to achieve three different things. They want to (1)
avoid the macroeconomic and social harms associated with state and
local spending cuts and tax increases during recessions; (2) avoid
creating an expectation on the part of state and city governments
that they will get bailouts in the future, as they might therefore
refuse to enforce fiscal discipline, what economists call “moral
hazard”; and (3) preserve the ability of states and cities to borrow
money in order to build infrastructure and make other debt-financed
investments.
But the federal government cannot achieve all three of these
things. It can achieve two of them, but not three. That is, it faces a
trilemma.26
Here’s what it can do.
The first option the federal government has is providing money to
deeply indebted states or cities. The federal government can take
advantage of its vast taxing powers, immense borrowing capacity,
and ability to print money to just pay off the creditors of a state or
city. States and cities that receive bailouts do not need to lay off
public workers, cut valuable social programs, or raise taxes, reducing
the harm to the broader economy and service recipients. State and
local bailouts do not require corresponding cuts at the federal level,
because the federal government, unlike states or cities, can easily
run deficits in a recession. Bailouts also encourage state and local
governments to borrow to invest in infrastructure, as lenders will be
comforted by what amounts to a federal guarantee for state debts,
and thus be willing to loan to states and municipalities at lower
rates.
But providing bailouts has an obvious downside: creating moral
hazard among states and localities. State and local officials around
the country may think future debts will be paid for by the federal
government and be reckless going forward. Bond markets may cease
to differentiate between good and bad credit risks, lending to both
responsible and spendthrift governments at similar interest rates, as
investors increasingly believe that the federal government is
providing a backstop for their loans. The easy availability of credit
removes pressure from politicians to budget responsibly. Further,
residents and politicians from other states may resent having their
tax dollars going toward services provided in the state receiving the
bailout.
Political scientist Jonathan Rodden has shown that national
governments around the world rarely provide bailouts to subnational
governments without also imposing severe conditions on their ability
to make fiscal policy choices in the future.27 Otherwise, bailouts lead
to too much moral hazard and/or inter-state conflict. This was borne
out recently. The huge state and local aid package in President Joe
Biden’s American Rescue Plan in 2021 barred states from using
federal funds to cut taxes and put limits on the uses for which the
money could be spent (although these limits were challenged in
court). Repeated bailouts would lead to subnational governments
losing much of their independence as fiscal entities.
Put another way, federalism as we know it is inconsistent with the
regular provision of bailouts to states and cities.
The second option the federal government has is to encourage
states and cities to pay their debts, using political and financial
pressure to overcome subnational jurisdictions’ legal protections
against creditor lawsuits where necessary. If state and local
taxpayers are forced to dig deep to pay their debts, moral hazard
ceases to be a concern. And the municipal bond market would be
strengthened, as lenders would know that they will get paid back
even when times are tough.
But forcing states and cities in a fiscal crisis to pay their debts
without federal aid has negative macroeconomic and social
consequences. States and cities cannot easily run deficits—they can’t
print money and they have state constitutional and market-based
limits on their ability to run deficits or issue debt. The only way a
jurisdiction in fiscal crisis can meet its obligations is to cut important
services, lay off public workers, and increase taxes. As most state
and local fiscal crises occur during recessions, these cuts are
particularly economically painful, destroying jobs and economic
activity when unemployment is already high. Further, cutting state
and local spending in a recession reduces the availability of
redistributive government services when they are most needed, less
Medicaid spending and fewer homeless shelters when people are
most likely to lose their private-sector health insurance or homes.
State and local austerity can turn recessions into depressions.
The third and final option is that federal government can allow,
enable, and encourage states and cities to default on their debts, or
in some cases, file for bankruptcy. This makes creditors—
bondholders, pensioners, and contractors—bear at least some of the
cost of fiscal crises, rather than having current federal or state
taxpayers bearing the whole burden. As a result, defaults do not
create expectations of future federal bailouts or do as much short-
term macroeconomic harm as harsh austerity would.28
But defaults reduce the willingness of lenders to finance state and
local investments, and thus increase the costs of future
infrastructure projects. The United States has always relied on state
and local governments to build and maintain most of our civic
infrastructure. Because members of Congress are elected from
geographically based districts, Congress faces real challenges in
directly funding new infrastructure without it devolving into pork-
barrel compromises that have little to do with real needs for new
investment. Further, the informational burdens associated with
making decisions in Washington about the infrastructure needs of a
continent-sized country makes federal delivery of new infrastructure
difficult. While Congress does pass infrastructure bills, it has never
provided a majority of the money spent on infrastructure in this
country when operations and maintenance are taken into account.
Only rarely, like during the height of the interstate highway system,
has the federal government even provided a majority of the capital
funding for even particular types of infrastructure like roads. Even
when Congress gets it together to pass a large new infrastructure
funding bill, as it did in with 2021’s Infrastructure Investment and
Jobs Act, most of the money takes the form of grants to state and
local governments, and often requires state and local governments
to “match” federal spending with spending of their own.29
Congress’s structural challenges force it to rely on state and local
governments to build and maintain most of our necessary
infrastructure. Building infrastructure requires debt. A state or local
government will borrow to pay for the construction of, say, a bridge
and then pay the money back over the bridge’s useful lifetime, the
same way ordinary people take out mortgages to buy houses they
plan on living in for a long time.
State and local defaults make lenders less willing to buy municipal
bonds, both from the jurisdiction that defaults and from others. The
economy depends on our ability to provide transportation, education,
and basic services like water and energy. All of those things depend
on states and cities being able to borrow at reasonable rates.
Defaults reduce the country’s capacity to invest in the future.
In a state or local fiscal crisis, there are three bad outcomes—
moral hazard, austerity-induced macroeconomic crisis, and reduced
future investment in infrastructure. At best, the federal government
can prevent two of them. It has to pick its preferred poison. That’s
the trilemma.
Over the course of American history, the federal government has
made different choices along the trilemma. The federal government
provided bailouts in Hamilton’s assumption of state debts; to
Washington, DC, in the 1990s; and, arguably, to states and localities
in 2008 and again in 2020–2021. The federal government did
nothing to stop states from (and, at times, actively aided states in)
defaulting on creditors in the 1840s and again in the 1870s. The
federal government also enacted a municipal bankruptcy law in the
1930s, which cities like Detroit and Stockton, California, used after
the Great Recession of 2008. And the federal government forced
jurisdictions to engage in painful austerity to pay off their debts in
the repeating “railroad bond” crises of the second half of the 19th
century and following the State of Arkansas’ road debt default of
1932.
 Whatever choices the federal government made in each situation
had their predicted downsides. Bailouts did create moral hazard,
largely by encouraging bond markets to lend to state and local
governments without much regard for their fiscal soundness.
Austerity in fact harmed the economy during already painful
recessions and produced social costs from declining service quality.
State and local defaults caused investors to reduce future lending,
limiting infrastructure investment and economic growth in whole
regions of the country.
That the federal government would choose different options at
different times is natural. Partisan politicians will want to make
choices that help their friends and not their opponents. Liberals and
conservatives will not put the same weights on the downsides along
the trilemma. External factors like the state of capital markets or the
broader economy often made one choice or another more or less
attractive.30 And the federal government is often not unitary in its
response. There are lots of people in the federal government, and
they do not always push in the same direction.
There isn’t a right answer, only differently bad options.
This book will not seek to explain the politics of why different
actors made the decisions they did.31 Instead, it will show that all of
them faced a common set of tradeoffs. The trilemma cannot be
avoided. There’s no way out of the problem, beyond very radical
changes to our constitutional and institutional system.32 And in a
crisis, no one has that kind of time.
So what should the federal government do if an Illinois or a
Chicago nears default?
Faced with such a crisis, politicians and voters will have to make
decisions about which bad outcome from the trilemma they can live
with. How they make those decisions will turn on some very deep
questions of political and moral philosophy, like how they weigh the
likelihood of benefits in the future against costs today, or how much
they value the practical fiscal independence of state governments
from federal oversight. Also, there is no reason to believe that there
is a single right policy response to all state and local fiscal crises, as
the state of the economy and credit markets at the time of a crisis
should all factor into whatever decisions the federal government
makes. A book like this one can’t answer those big moral and
political questions, nor can it provide timeless advice in advance of a
particular crisis.
Instead, the book will explain what the tradeoffs are, but leave the
actual weighing of those tradeoffs for you.
But while this book cannot answer which leg of the trilemma
policymakers should choose in any given crisis, it can and will
provide advice on how to design responses. No matter whether they
choose bailouts, austerity, or defaults, federal officials can shape
their policy responses in ways that are better or worse.
In designing their policy responses, there are four basic principles
that should guide federal officials’ decisions. These four principles
are prudence, balancing, spreading, and resilience. No matter which
leg of the trilemma they choose, policymakers should seek to build
these four principles into their crisis responses.
Prudence: To paraphrase the movie War Games, state fiscal
crises are a strange game—the only way to win is not to play.33 The
best way to avoid the costs of the trilemma is for states to budget
responsibly. Federal officials should take steps during state fiscal
crises to encourage states to be more fiscally responsible going
forward. They can do so in a number of ways. For instance, federal
officials could empower the bond market to monitor state budgets
more closely by changing securities law to require states and cities
to provide more information about their budget process to investors.
Or the federal government could condition federal aid on changes in
the accounting standards states use when passing their budgets. If a
city defaults, the federal government can wait to provide aid until
after the state government has imposed substantial reforms to the
city’s budget process going forward.
Whichever tack it takes, the federal government is well situated to
encourage greater fiscal responsibility in states. And it has a clear
incentive to and justification for doing so, the desire to reduce the
size or even the need for future bailouts.
 Balance: If a crisis does land on the federal government’s
doorstep, the President, Congress, and federal judges will all need to
make decisions about how to respond. What relatively recent state
and local debt crises have shown is that, while the trilemma is
unavoidable, the federal government does not have to make stark
decisions. Rather than all of one or another, the federal government
can encourage states to engage in some austerity, permit limited
defaults, and create a little moral hazard through small bailouts.
Mixed policies are likely to be superior, as there are increasing
marginal harms along each leg of the trilemma.
Federal law has already created some tools for producing balanced
solutions, and it could develop more. For instance, municipal
bankruptcy law provides a forum for judges and governments to
balance the competing interests of creditors and service recipients.
Judges in municipal bankruptcy cases are forced to decide whether a
city government’s services have declined to the point that the city is
“service delivery insolvent,” making it okay to ask creditors to take
losses. Currently, though, bankruptcy is only available for local
governments and is infrequently used. Congress could make it easier
for local governments to get into bankruptcy court. It should also
make it possible for state governments to file. Bailouts that come
after bankruptcy filings, or that are conditioned on the creation of
fiscal control boards, would help balance the problems of moral
hazard and cuts for service recipients.
Spreading: Most Americans are represented by many overlapping
subnational governments—a state, a county, a city or town, a school
district, and a whole bunch of other special districts governing things
ranging from mass transit to mosquito control. When a place suffers
from an economic crisis or when groups of local politicians are
profligate, often many of these overlapping governments suffer fiscal
crises at the same time. In a crisis, these overlapping governments
compete for resources, fighting each other for subsidies from higher
levels of government and greater shares of the local tax base, rather
than trying to solve their common problems.
The federal government can encourage jurisdictions to spread
losses across types of creditors and stakeholders by pushing
overlapping governments to address their crises simultaneously. As a
legal matter, these governments are independent from one another.
But, in practice, they are just different agents of a common set of
principals (the voters and taxpayers they represent). Rather than
letting overlapping governments engage in wasteful competition, the
federal government should encourage as many related governments
as possible to adopt an emergency footing and to make sacrifices at
once. Doing so—by providing aid to many different levels of
government at once or through reforms to municipal bankruptcy law
that would allow simultaneous and related filings—would reduce the
size of the losses any one set of creditors or stakeholders would
have to take.
Resilience: Beyond the specifics of responding to a given crisis,
the federal government should adopt policies that will make the
country more able to deal with inevitable economic shocks and state
and local fiscal crises. For instance, the federal government can
make defaults in one jurisdiction have less effect on borrowing by
other jurisdictions. Much-criticized federal and state income tax
exemptions for interest on municipal bonds encourage the
development of domestic and state-specific investment pools for
municipal bonds. This reduces the “contagion” effect a default in one
place can have on borrowing by others.
Also, the economic harm of fiscal crises will be smaller if localized
economic crises lead unemployed people to leave declining cities and
regions. The federal government can incentivize states to reform
their housing and labor regulations to make it easier for poor people
(and not just rich ones—who leave regardless) to move to
economically thriving cities and regions. The federal government
could also nationalize some social welfare programs, like Medicaid,
that are currently jointly run with states. Doing so would remove
some of the pro-cyclical pressure on state budgets and make
mobility across regions easier.
No matter how the federal government responds to a fiscal crisis
in an Illinois or a Chicago, many people will be unhappy. But it is
possible that the federal government can make a fiscal crisis in a
major state or city a painful but manageable problem, rather than an
unmitigated disaster. This book will show how federal officials can do
just that.
⋆⋆⋆
The rest of the book will be organized as follows.
Chapter 1 will review how scholars have addressed the question of
how the federal government should respond to state and local fiscal
crises. While there is much high-quality work in the field, the
literature has mostly ignored the long-standing federal interest in
state and local governments having access to credit to build
infrastructure and make other investments. Further, the fiscal
federalism literature has not focused on the crucial role played by
federal courts in responding to state fiscal crises. This chapter will
explain how the trilemma works.
Chapter 2 will discuss two of the best-known state fiscal crises in
American history. It will start with Alexander Hamilton’s plan for the
federal government to assume state debts following the
Revolutionary War. And it will then address the default crisis of the
1840s, when Congress decided not to assume state debts, allowing
eight states and the territory of Florida to default. It will argue that
existing scholarship has not fully explored the implications of these
two events. The literature has treated the refusal to provide bailouts
in the 1840s, and the state balanced budget rules that followed, as
an unmitigated success in the battle against moral hazard. But it has
ignored the effect the defaults had on the willingness and capacity of
state governments to borrow to build infrastructure.
Chapter 3 will discuss the rest of the 19th century. In particular, it
will focus on two key episodes: the local government “railroad bond”
crises that recurred regularly from the 1860s through 1880s, and the
post-1877 defaults by newly empowered white-dominated state
governments of the South on debt incurred by mixed-race
Reconstruction-Era governments. The federal government, and
particularly federal courts, responded to these two crises in radically
different ways. The long-run effect of these different responses
reveals how the trilemma works. Many cities and counties were
forced by the Supreme Court to pay back the debts they incurred
trying to encourage railroad construction. The Supreme Court
pushed its powers to their limits in order to protect bondholders. The
tax increases and spending cuts needed to pay back railroad debt
created lots of economic pain, extending recessions and removing
important local services. But these judicially created protections for
investors also preserved confidence in the bond market. This set the
stage for a period in which cities were able to borrow huge amounts
to build world-leading infrastructure, including everything from the
reversing the Chicago River to building the Brooklyn Bridge. In
contrast, newly white-dominated southern state governments were
allowed to repudiate the debts accumulated by Reconstruction-era
mixed-race governments. They were aided by an aggressive
Supreme Court, this time creating modern sovereign immunity
doctrine to protect these “redeemer” governments from having to
pay their debts to bondholders. These decisions alleviated economic
harm in the short term, but also meant that these states could not
borrow easily, making it hard for them to build economically
essential infrastructure.
Chapter 4 will take the story forward to 20th century, discussing
the lack of bailouts in the Great Depression, the creation of
municipal bankruptcy law, the Arkansas road debt crisis of 1932, and
the New York City and Washington, DC, fiscal crises. These stories
will show that rather than choosing one answer to the trilemma, the
federal government adopted policies that mixed elements of all three
approaches.
Chapter 5 will discuss the Great Recession and the municipal
bankruptcies that followed. Its central argument will be that the
mixed federal policies we saw in the 20th-century crises were
extended and given institutional and ideological shape after the
Great Recession, with policymakers and bankruptcy court judges
wrestling with the tradeoffs of the trilemma directly.
Chapter 6 will discuss federal responses to state and local fiscal
distress following the COVID-19 pandemic and the recession that
followed.
 Chapters 7 through 11 will develop principles for how the federal
government should respond to state fiscal crises. They will show that
bailouts, austerity, and defaults are families of policies. Inside each
of these umbrellas, there are difficult choices to make about how to
structure federal policy. But the four principles of prudence, balance,
spreading, and resilience should guide policymakers, no matter how
they weigh the harms along each leg of the trilemma.
Chapter 12 will serve as a conclusion, focusing on why structural
failures in state politics make fiscal crises more likely.
 PART II

WHEN WE’VE BEEN IN A BAD STATE

The Theory and History of Federal Responses to
State and Local Fiscal Crises
 1
What Has Already Been Said about Federal
Responses to State and Local Budget Crises?
What Has Been Left Out?

⋆⋆⋆
Scholars writing about how the federal government should respond
to state and local fiscal stress fall into roughly two camps. One group
argues that federal bailouts create excessive moral hazard. Another
group argues that federal aid is instead a necessary form of
macroeconomic stimulus given the pro-cyclical nature of state
budgets. While this debate is important, it is incomplete.
This chapter will show that there is another consideration that has
often been the dominant concern in federal responses to state and
local budget crises: maintaining the ability of states and cities to
borrow to build infrastructure and make other investments. It will
explain how these three interests—avoiding moral hazard,
stimulating the economy during recessions, and preserving state
capacity to borrow—interact, laying out a “trilemma” at the core of
federal responses to state and local budget crises.

1.1. State and Local Governmental Moral Hazard or

the Problem of “Soft Budget Constraints”
One major school of economists and political scientists studying
state and local budget crises focuses on the question of whether
state and local governments face “soft budget constraints” or “moral
hazard.”1 The basic idea is straightforward. If the federal
government provides bailouts to states and cities in crisis, politicians
in those jurisdictions and others will begin to expect them, and thus
refuse to budget responsibly in the future.
While the idea is simple, the implications are dramatic.
The leading figure in this branch of the fiscal federalism literature
is political scientist Jonathan Rodden.2 The period from the 1980s
through the early 2000s featured several national economic and
financial crises set off in part by excessive subnational borrowing,
most prominently in Argentina and Brazil.3 Many countries that
allowed their provinces to borrow extensively ended up having to
bail them out. Countries as varied as Germany, Italy, Nigeria, Russia,
and South Africa faced problems due to excessive subnational
borrowing.
Why does this problem occur? Rodden notes that many classic
arguments in favor of federalism—from Alexis De Tocqueville and the
Federalist Papers to Charles Tiebout and Barry Weingast—imagine
that devolving fiscal authority to subnational entities will result in
greater fiscal discipline and wiser spending.4 If state and local
governments are mostly left alone to tax and spend, they will make
people happier than if the federal government does it, the argument
goes. Subnational governments will not waste as much money
because of the threat of exit by overtaxed residents and the greater
responsiveness of state and local elections.5 Under these theories,
the national government’s proper role is to provide national public
goods and to address inter-state externalities. But, otherwise, states
and cities should be left alone to provide public services because
they will do so more efficiently and popularly.
What these theories about the benefits of federalism leave out,
Rodden argues, is the likelihood that, in a pinch, subnational
governments will ask the federal government to bail them out.6 If
the federal government shows any real willingness to bail out
subnational governments, subnational officials will realize that they
do not face a hard limit on how much they can spend. State and
local governments can keep spending and/or not taxing, relying on
the willingness of the federal government to make up the difference
when times get tough. Using economist Janos Kornai’s famous term
describing the finances of business firms backed by the government
in socialist countries and those transitioning to market economies,
their budget constraints aren’t hard but “soft.”7
If the federal government offers a bailout to one subnational
government, all other subnational governments have an incentive to
become fiscally reckless themselves. Not only will they expect a
bailout themselves if things go badly, subnational governments will
not want their taxpayers to end up being stuck paying for services
elsewhere. (Bailouts are paid for out federal government revenue
and thus from taxes paid by all residents, even as bailouts only
benefit residents of governments who get them.) As a result,
bailouts create a need for future bailouts. This is the problem of
“moral hazard.”
If the federal government offers bailouts, the supposed benefits of
federalism will not be on offer. Subnational governments will
compete with one another to be more profligate, not to be more
prudent. Bailouts—or rather the expectation of bailouts—can bring
down the whole system of fiscal federalism.
Seems bad! So why would the federal government ever offer
bailouts? The difficulty comes from the fact that many federal
officials will want very badly to bail out bankrupt states and cities.
After all, the people who live and vote in subnational governments
also live and vote in the country as a whole. National-level politicians
will not want to see them suffer—failing to bailout subnational
governments will mean that their constituents lose services and see
higher taxes. Interest groups powerful at the subnational level can
also lobby federal officials. And subnational officials are usually part
of the same political parties and groups as national-level ones.
Turning down a state or local government in need can be quite
difficult.
Rodden shows that, to get out of this pickle, after providing
bailouts, national governments often take control over subnational
governments’ fiscal affairs. The national government will pass taxes
and then distribute money to subnational governments, rather than
letting subnational governments set tax levels for themselves.
National governments that offer bailouts also regularly impose strict
spending and borrowing limits on subnational governments to
reduce the moral hazard problem in the future. These steps address
the problem of moral hazard, but mean abandoning benefits
traditionally associated with fiscal federalism.
The result, Rodden argues, is that there are two stable equilibria.
Either the national government makes a credible commitment not to
bailout subnational governments, overcoming the political difficulty
of saying no to a suffering state or city,8 or the federal government
does most of the taxing and heavily monitors subnational spending
and borrowing, foregoing the benefits of fiscal federalism.9
The worst of all worlds is the intermediate case, where the federal
government cannot impose discipline on subnational governments
but also lacks the discipline itself to refuse to bail out those
governments when they run into trouble.

The real fiscal danger in the twentieth century was not . . . divided
sovereignty . . . but rather a murky semi-sovereignty that comes about
when a politically-constrained center dominates taxation but not spending
and borrowing.10

Countries that want the benefits of fiscal federalism need to make

firm commitments to not bail out subnational governments and to
make these commitments clear to capital markets.
In places like the United States, Canada, and Switzerland, Rodden
argues, the national government mostly has refused to bail out
subnational governments.11 As a result, lenders treat subnational
governments in these countries like they are independent entities,
looking at their tax bases and spending patterns when determining
how much to lend and at what interest rates.12 In contrast, in
countries with mostly nationalized fiscal systems, the bond market
treats subnational debt the same way it treats debt issued by the
national government. Interest rates on subnational bonds are the
same as interest rates on national government bonds, because
lenders know that the federal government is effectively insuring
state and local debt.
Other major figures understand the problem of state and local
budget crises in roughly similar terms.13 Economist Robert Inman
argues that the first lines of defense against state governmental
profligacy are structural factors like political parties that can
constrain wayward state officials, a mature banking system that can
differentiate between the credit risks of different states, and a
mobile population that can punish wastrel state and local
governments. When and where these don’t exist, legal limits on
state debt issuance in state constitutions and a federal policy of not
providing bailouts can collectively help ensure that states don’t
spend too much and tax too little.
In practice, some combination of these limits has worked in the
United States; Inman argues that, at least as of 2010 or so,14 “U.S.
local governments do face a mostly hard budget constraint.”15
However, legal scholar Michael Greve and others have worried that
recent developments mean that hard budget constraints are a thing
of the past. According to Greve, the bailout of the banking industry
during the Great Recession made arguments against state bailouts
more difficult. Further, because a great deal of state debt is now in
the form of underfunded public pensions, popular support for public
employees makes bailouts more popular, lest states default and
destroy the retirements of teachers and cops.16 Others argue that a
state default might create a systemic financial failure, bringing down
other institutions like banks or major investors with it, making state
bailouts more likely.17
Thus, when faced with a subnational fiscal crisis, the federal
government may choose to provide bailouts even if officials
understand that doing so creates substantial risks.
Notably, in 2020–21, the federal government’s tool kit for
responding to state and local fiscal pressures created by the COVID-
19 pandemic and recession leaned very heavily on state and local
aid. The aid did not take the form of jurisdiction-specific bailouts, but
rather large amounts of aid given to all states, plus money given
directly to cities, counties, school districts, and transit agencies.18
Aid given to all jurisdictions does not have quite the same potential
to create moral hazard, as it does not provide as powerful incentives
to be profligate (states get the money regardless of whether they
were heavily indebted). But it does reduce the risk of disaster, and
thus reduces some incentives to be fiscally responsible.
As Rodden predicted and as will be discussed in Chapter 6, that
aid came with substantial conditions, reducing state and local
government’s fiscal autonomy even as it filled their coffers. The
original major aid package, the CARES Act of 2020, included rather
strict restrictions on what the money could be spent on.19 The
American Rescue Plan (ARP), passed in 2021 after President Joe
Biden came into office, relaxed the restrictions on what the money
could be spent on, but included limits on the ability of states to take
advantage of the new revenues to cut taxes.20
Even so, the aid seems to have created some moral hazard.
Lenders have been willing to offer money even to the riskiest
municipal borrowers at increasingly good rates, suggesting they
believe a continuation of federal aid is likely.21 Many fiscal experts
and politicians have become worried that federal fiscal aid has been
a “sugar high,” that state and local officials have used to create new
programs, continuing spending, or cut taxes, even though the
federal aid will run out.22
It is worth noting, though, that the extent of moral hazard varies
over time and is contingent on the politics of the era. For moral
hazard to exist, state or local politicians have to believe that a
bailout the federal government provided to some other jurisdiction
years ago should influence their budgeting decisions today.
This relies on two assumptions. The first is that state and local
officials are far-sighted enough when making spending and taxing
decisions to even consider the possibility of a bailout in the future.
Often, the explanation for why states and cities get into fiscal
trouble in the first place is that politicians have short time horizons.
Politicians want to see the benefits of spending or cutting taxes
today when campaigning for re-election, but do not expect to be in
office when debts come due. But, like the harm of bearing debt, the
benefit of a potential bailout will come in the distant future. It is by
no means obvious that today’s politicians care at all about a
potential benefit available that far in the future.
The other assumption moral hazard theories rely on is that state
and local politicians must think a bailout given to some other state
or local government in the past is evidence that their government
will get a bailout in the future. There are reasons to doubt this
assumption as well. Places are different from one another, and times
change. Maybe a prior bailout came because that government’s
mayor or governor was in the same party as the president or the
speaker of the House. Maybe it came because the federal budget
was particularly robust at the time. Or perhaps the majority leader of
the Senate at the time just did not believe in moral hazard. Given
how contingent decisions to offer bailouts can be, it is not exactly
clear what lesson, say, the mayor of Chicago today should take from
the bailout of Washington, DC, in the 1990s.
Rodden offers evidence from other countries that bailouts do in
fact lead to state and local profligacy. But even this is not
determinative, as the time horizons of politicians may change over
time and countries are different from one another. However, even if
one rejects the idea that state and local politicians have sufficiently
long time horizons to care about bailouts or are able to draw clear
inferences from past actions, Rodden’s argument still has force
because of the influence of the bond market on incumbent
politicians.
Bailouts limit the degree to which the bond market or other
lenders pay attention to governmental budgets when lending.23 That
is, the bond market may pay attention to bailouts even if politicians
don’t. There is lots of evidence that this is the case. In jurisdictions
where bailouts are common, lenders do not demand a premium
when lending to fiscally imprudent subnational governments. But, in
the United States, lenders differentiate between jurisdictions
because they believe that states and cities represent different credit
risks. This has an effect on how politicians write budgets. If
profligacy leads to increased borrowing costs in the short-run, it
creates costs that are on the radar of politicians, even those with
short time horizons. Similarly, the risk that credit-rating agencies will
create bad headlines for incumbents by issuing downgrades of state
and local bonds encourages greater responsibility. In contrast,
bailouts reduce bond market pressure on incumbent politicians to be
prudent. One can believe that moral hazard exists as a phenomenon
even if you don’t think politicians take lessons from previous federal
bailouts, because of the influence of the bond market.
Even if a bailout for one government does not guarantee a later
bailout for a different government, it surely makes it seem a bit
more likely, if only by removing the stigma surrounding bailouts. A
bailout for one jurisdiction can affect other jurisdictions even if it
isn’t certain that the next jurisdiction will get a bailout. The
increased likelihood of a bailout will affect both the probabilistic
beliefs of officials and beliefs among lenders about how much risk
they bear. For instance, when Detroit was not given a federal bailout,
interest rates on debt for the fiscally troubled Commonwealth of
Puerto Rico increased substantially, suggesting markets reduced
their beliefs about the likelihood of a bailout, despite the
dramatically different situations playing out in each jurisdiction.24

1.2. State Fiscal Crises and Macroeconomic

Stabilization
The other common way of thinking about federal aid during state
and local fiscal crises is that it is a way to achieve macroeconomic
stabilization during recessions.
Textbook Keynesian economic theory suggests governments
should run deficits during recessions to goose the economy. But
states and cities have trouble running deficits. State constitutions
require balanced budgets and limit the issuance of debt.25 States
and cities can’t print money to finance their debts—only the federal
government can do that. And credit markets won’t lend to states and
cities in the same way they lend to the federal government because
state capacity to tax is more limited.26 In theory, states and cities
can save in advance of recessions and then spend down their
savings to help alleviate macroeconomic problems. They do this to
some extent, but their “rainy day funds” are rarely large enough to
fully cover fiscal losses in severe recessions.
As a result, in economic downturns, states are forced to make
budget cuts and raise taxes. As macroeconomic policy, this is
extremely counterproductive. State and local cuts reduce aggregate
demand and increase unemployment, extending recessions. For
instance, after the Great Recession, private sector employment
returned to its pre-recession peak in April 2014. But public sector
employment still had not recovered to its peak until after 2018.27
These massive losses in public employment help explain why the
broader economic recovery following the Great Recession was so
slow.
Further, cutting state budgets during recessions harms low-income
households as economic conditions worsen. For obvious reasons,
people with lower incomes are more reliant on social welfare
programs, particularly during recessions.28 A large part of the federal
welfare state depends on state governments picking up part of the
bill. The federal government has established a large number of
“cooperative federalism” programs for which the federal government
and states share funding responsibility—most notably Medicaid.29 In
other policy areas involving redistribution, like services for the
homeless or redistribution through schools, states and localities
provide either most or almost all of the funding.
States need to balance their budgets when revenues fall during
recessions. As a result, they face pressure to cut social welfare
programs at the exact moment when they are most needed.30 Or,
because state spending is matched by federal spending in
cooperative federalism programs, states end up cutting the rest of
their budgets to the bone to pay for the increased demand for social
welfare during recessions. Another option is raising taxes, destroying
economic activity when it is most endangered by weak demand.
 To avoid these bad results, some scholars argue the federal
government should be in the business of countercyclically aiding
state and local governments, providing money to them in recessions
and/or taking over welfare programs.31
These arguments apply to the ordinary pressure state and local
budgets face during recessions. But solvency crises in individual
state governments are just extreme versions of the same story.
States and localities almost always face their worst budget pressures
during recessions. When forced to the brink, states and cities have
to cut the most essential programs—increasing school classes to
intolerable sizes, taking police off the streets during crime waves,
removing healthcare benefits from those in need at the worst time.
Further, states and cities are not necessarily morally blameworthy for
their fiscal crises. The national economy lurches for all sorts of
reasons completely unrelated to the decisions of state and local
policymakers, creating pressure on state and local budgets.32
As a result, these scholars argue that we should not think of
federal interventions during state and local crises as creating soft
budget constraints, but instead as a method for protecting the
welfare state and engaging in macroeconomic stabilization during
recessions.
In theory, of course, the federal government could just offer more
stimulus to individuals to counteract any negative effect of state
retrenchment, either through more federal spending or through
looser monetary policy. The Federal Reserve could just print money
and drop it from a helicopter in amounts large enough to counteract
the macroeconomic effect of state and local cutbacks. Doing so can
even help state budgets. In 2020, aid to individuals and firms helped
buoy incomes, which limited the fiscal losses faced by states and
cities.
But, as law professor and economist Yair Listokin notes, one
cannot simply assume federal fiscal or monetary policy will be
sufficient to fight recessions—over the course of history, it often has
not been.33 Further, aid to states and cities is one of the most
effective tools of recession fighting, directly supporting employment
in ways other forms of macroeconomic policy do not. Such aid may
have drawbacks, but so do other types of spending during
recessions.

1.3. State Budget Crises, Infrastructure, and

Development
These two groups of scholars—those who focus on “soft budget
constraints” and those who study the problem of pro-cyclical state
spending—both provide a great deal of insight and wisdom.
However, both groups leave out a central part of the story: the
federal government’s long-standing and extensive support for state
and local debt.34
If the federal government were exclusively concerned with moral
hazard, it would be very skeptical of state debt. After all, if states
have lots of debt going into recessions, they are more likely to have
fiscal crises and ask for bailouts. Similarly, if the federal government
were mostly concerned with pro-cyclical state budgets worsening
recessions, it would be skeptical of state debt in good times. It
would instead encourage states to save when the economy is good,
so they have a cushion when the economy is bad.
But the federal government is and has long been aggressively in
favor of state and local debt. Federal law directly subsidizes debt by
making interest on state and local debt exempt from income taxes.35
The federal government also offers a huge array of subsidized direct
loan programs to states and cities.36
The federal government’s traditional reason for wanting state and
local governments to take out debt is its desire to have them build
public infrastructure. Both historically and today, states and local
governments build, maintain, and own most of our infrastructure—
roads, rail, water, sewers, school buildings, and so forth.37 Even
when Congress decides to spend large sums of money on
infrastructure, as it did in 2021’s Infrastructure Investment and Jobs
Act, it does so through grants and loans to state and local
governments, and often requires those governments to put up
matching funds, amplifying federal spending.38
That is, state and local governments make most of the
investments that form the backbone of the American economy.39
There is a good reason for this. In a country as large as ours, it is
difficult for the federal government to determine where and when
key pieces of public infrastructure should be built. Bureaucrats and
politicians in Washington, DC, just do not know which sidewalks and
sewer mains in towns in Oregon and Maine need replacing. As we
will see in Chapter 4, the ability of American cities to build
infrastructure without asking for permission from DC was an unsung
part of the great urban economic growth of the late 19th and early
20th centuries.
Further, political scientists like Barry Weingast and John Ferejohn
have long argued that our system of districted elections and state
representation in Congress leads to “distributive politics” norms
when it comes to infrastructure.40 Each member of Congress pushes
for projects in his or her district. From the early Republic,
congressional spending on infrastructure has tended to be spread
out among projects in every district or state, rather than providing
money for the best projects.41 Historically, when Congress directly
funds infrastructure, it is mostly pork-barrel spending.
Two modern forces have served to alleviate Congress’s inability to
fund infrastructure. First, powerful and ideologically sorted political
parties limit pork-barrel spending. “Distributive politics” is one way to
create a majority coalition, buying support with district-specific
projects. But strong political party leadership is another, as Mat
McCubbins and Gary Cox argue.42 Rather than providing some
projects to everyone, the party that controls Congress may seek to
improve the country as a whole and take credit for it as a party.
However, while our modern ideologically sorted Congressional
political parties have limited pork in many ways, they have not led to
the federal government actually building lots of infrastructure. Part
of the explanation for this is congressional gridlock. But even during
periods of one-party control of Washington, Congress often finds
passing transportation bills difficult. Even when it does, as it did in
2021, federal spending supplements state and local spending,
particularly when operations and maintenance are considered.
The other major trend aiding federal infrastructure spending is
growing executive power. Congress can and does delegate project
selection to administrative agencies, giving the president and expert
civil servants the power to choose projects. This helps over
overcome the pork problem, as the President has a national, not
local, constituency. Indeed, the Infrastructure Investment and Jobs
Act put a large sum (although a substantial minority of the total
spending) into competitive grants controlled by the Transportation
Secretary.43 But Members of Congress lobby to influence these
agency determinations as well. Further, worries that the President
will use spending to entrench his political coalition (or not share the
goodies widely) reduces Congressional incentives to delegate to the
President.
So, while in theory the federal government could fund or build
necessary public infrastructure, in practice it cannot do so regularly
and well. There are famous exceptions to this, like the interstate
highway system.44 But these are exceptions to a more general rule.
The political structure of the federal government is just not set up
well to fund or build infrastructure directly.
Although it faces challenges in doing so itself, federal officials
often very much want to encourage growth. As a result, Congress
needs to find someone to produce needed infrastructure.45
The obvious alternative to the federal government building on its
own is to let states and cities build infrastructure. Even though state
and local governments are in many ways better positioned to plan
and build infrastructure, they face challenges paying for it. State and
local governments can only tax so much, due to concerns about exit
(if taxes get too high, people and businesses may leave).46
Further, states and cities not only need revenue to build
infrastructure but also need access to credit. Infrastructure is almost
always paid for with borrowed money. A bridge lasts a long time. It
doesn’t make sense to force today’s taxpayers pay for the entire
bridge, while tomorrow’s taxpayers get a free lunch (or rather, a free
bridge).47 Instead, states and cities spread the cost out by
borrowing money for construction and then paying it back over time.
But states and localities, particularly small ones, can face real
constraints on raising capital.48
As a result, the federal government can help meet the nation’s
need for infrastructure, despite its own problems in producing that
infrastructure, by working with state and local governments. It can
subsidize state and local investments in infrastructure and also
ensure that states and cities can finance those investments in capital
markets. The main way the federal government does this today
making the interest on municipal bonds—debt issued by state and
local governments—exempt from federal income taxes. The tax
exemption makes the interest rate on state and local bonds cheaper
and thus encourages states and cities to borrow and build.
This concern does not go away during state and local fiscal crises.
During crises, the federal government has often acted to promote
future development and investments in infrastructure by states and
cities by protecting creditors.49 Ensuring that creditors get paid back
makes them more willing to lend in the future, and at lower cost.
Further, protecting creditors stops the problem of “contagion,” or
situations where a default in one state or city leads lenders to refuse
to lend to other states or cities. If loans are regularly paid back,
even when things look dire, lenders are more likely to offer credit at
lower rates to more places.50
To understand how the federal government has behaved during
state and local budget crises, it is essential to recognize that
concerns about infrastructure development have often been a
central part of federal policies toward states and localities in fiscal
crisis. The need for state and local governments to build public
infrastructure has been a real policy concern, just as worries about
moral hazard and pro-cyclical fiscal policy have been.
1.4. Avoid Moral Hazard, Alleviate Recessions, and/or
Build Infrastructure: Pick Two, But Not Three
The three goals of the federal government during state and local
fiscal crises—avoiding moral hazard, alleviating recession, and
promoting future infrastructure investment—present inherent
tradeoffs. In economic crises, policymakers have to make choices
about which goals to prioritize and which to sacrifice. As a
theoretical matter, one can understand the problem facing federal
officials looking at state and local budget crises as presenting an
inescapable trilemma.
A graphical representation of the trilemma can be seen in Table
1.1.51

Table 1.1 The Fiscal Federalism Trilemma

Goals Avoid moral Fight Promote future

Federal Policies hazard among recessions infrastructure
states and investment by states
localities and localities
Provide bailouts to heavily No Yes Yes
indebted states and
localities
No bailout; make state Yes No Yes
and local taxpayers pay
(i.e., help bondholders
recover debts)
No bailout; encourage Yes Yes No
states and localities to
write down debt

When faced with state and local budget crises, the federal
government has three basic options.
If the federal government wants to avoid creating moral hazard
problems or macroeconomic headwinds, it can refuse to offer
bailouts and either encourage or provide a mechanism for the
writing down of debt. That is, it can make creditors eat the losses.
The downside of doing so is that it will roil municipal bond markets
Another random document with
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 The banks of the lake were covered along their entire length by those very apes who had so
pitilessly tormented, jeered at, and beaten me.—Page 36.

The banks of the lake were covered along their entire extent by those very
apes who had so pitilessly tormented, jeered at, and beaten me. They had all
been kneeling just as I had knelt, had all risen at the same time as I had done,
and there they were with their muzzles dripping with water. When I thought I
had lost them, they had no doubt followed me in silence through the wood, by
the aërial route of the tall branching trees, and on seeing me kneel down to
drink had imitated all my actions. Although my limbs ached with fatigue, and I
was sore from head to foot from the innumerable blows which I had received,
and although I began to experience serious inquietude, on finding myself,
since my shipwreck, in the midst of this constantly increasing crowd of apes, I
could not restrain a burst of laughter on seeing with what burlesque fidelity
they reproduced my most trifling gestures, my most accidental attitudes, and
even my involuntary movements. A new stupefaction took possession of me at
finding my burst of laughter immediately echoed by thousands of similar
cachinnations. Unable to control myself, I laugh my loudest, they, in their turn,
laugh louder still. This comedy threatened never to come to an end. Terrified
at the unaccustomed noise, the birds, hidden in their nests of moss, dispersed
among the ferns, swarming through the network of creepers, or asleep under
the leaves, the great, the small, the invisible birds—birds whose names are
known only to the Creator, and of whose fantastic shapes and plumage the
most comprehensive human language could scarcely give an idea—birds clad
in brocade, like the ancient doges; others with triple embroidered collars, like
the princesses of the middle ages; others, the plumage of whose tails flashed
forth as many rays as the sun himself, rose, flapped their wings, and took to
flight, streaking the sky in frightened curves at the universal thunder of
laughter which rent the air. The apes themselves, accustomed as they were to
similar commotions on the part of the feathered tribe, were, nevertheless,
astonished at the strangeness and novelty of the sight. They stood up on their
hind legs in order to enjoy it the more thoroughly. It was then that I remarked
something which had before escaped my notice: many of my hairy
persecutors wore a kind of narrow red collar, the meaning of which I could not
at first possibly understand. A brief reflection, however, made everything clear
to me. Each of these red collars was a fragment of the cravat which I had
resigned to my tormentors, and which, true to their imitative instincts, they had
tied under their chins; I never saw anything more comical than this piece of
finery with which several of the apes were strangling themselves, in tying it so
tightly that it could not come undone, or be stolen from them by their jealous
comrades. These apes in their scarlet cravats presented a spectacle which,
under circumstances more propitious to one’s personal security than those in
which I at present found myself, I should no doubt have enjoyed immensely.
I had managed to quench my thirst, but my hunger had not been appeased.
Far from it in fact, since the satisfaction accorded to the one sense only
rendered the other more imperious. My hunger had increased considerably
during the last quarter of an hour, for I had noticed on the trees, by the brink of
the lake, certain fruits of a bright golden colour, fruits delicious to behold, and
no doubt more delicious still to the taste, but situated so high, that never man,
even though he were a sailor of Java, could hope to reach and gather them.
The trees were from 180 to 200 feet high, with no other branches shooting out
from their tall stems except those which clustered together at the summit, with
perfectly smooth barks, and offering not the slightest point of support for either
hand or foot for three-fourths of their entire height. My eyes coveted this fruit,
my stomach yearned for it; but how was I to obtain possession of it? After all
manner of sterile calculations as to how this was to be accomplished, I
decided to throw, with my utmost strength, a few sharp flints into one of the
trees, in the hope of detaching some of the fruit from its stalk and bringing it to
the ground. I knew that I was sufficiently adroit to hit the fruit at which I aimed,
but for all that it did not break off as I anticipated. The flint, after striking it,
bounded from branch to branch with a loud noise—the slightest thing, it must
be remembered, produces a loud noise in these solitary isles, the silence of
which has not yet been broken by the restless activity of man—encountering
in its fall quantities of large leaves lightly joined to the branches of the tree by
their juicy stalks. The apes, who had been intently watching all my
movements, scarcely awaited the descent of the first stone, before they
collected together all the flints they could, and flung them one after another at
the topmast branches of the trees. The noise thus made sounded for all the
world like the crackling of hail and grapeshot. Delighted with their occupation,
they formed as it were a chain, and passed the stones rapidly from hand to
hand, so that those who preferred to throw might not be kept waiting. One
hears of entire fields of maize being consumed in a few hours by voracious
locusts coming from Lybia; here, in a few minutes, fruit, leaves, and branches
were detached from the group of trees into the midst of which my flint had
taken its useless flight. The banks of the lake were covered with them to such
a degree, that I had only to stretch out my hand to grasp any quantity of the
fruit which I was dying as it were to taste. The very instant that the apes, to
whom I was indebted for this abundant harvest, saw me carry one of these
fruits to my mouth, they imitated my example all along the line. A thousand
arms were carried to a thousand mouths. The manœuvre was executed as
though in obedience to a military command, and with all the precision of
Prussian discipline. I raised my elbow—the elbows of the apes were
simultaneously raised. I spat out a pip—the air was riddled with pips. The
echoes of the lake repeated naught but the ludicrous snapping and clattering
of jaws. In a few moments its surface was half hidden by masses of rind
stripped from the fruits which I and the apes had devoured with burlesque
unanimity.
Although I was now completely at the mercy of chance, and destined
perhaps to escape one danger only to fall into another still greater, I
nevertheless desired to free myself from the odious restraint in which I was
held by this accursed assemblage. It was not without fear, moreover, that I
saw the day draw in and the night approach. I had no desire to find myself,
during the hours of darkness, beset by this legion of demons, whose
capricious surprises are not restrained within the same limits which bound the
human imagination. I had every hope that the next day might bring me in
contact with some of the native population, since the island was evidently not
a desert. If I could only penetrate some distance inland, I should no doubt
come across human habitations; but, meanwhile, it was necessary to pass
through this dreaded night. In my feverish anxiety, increased by the intimate
knowledge which I possessed of the cruel ways of these detestable animals,
the idea occurred to me that, since they were so obstinately bent on exactly
copying all my movements, the best thing to be done was for me to pretend to
go to sleep. If I were clever enough to get them off to sleep by the mere force
of imitation, I might so far profit by their lethargy as to escape from their
surveillance and penetrate to the interior of the island. I was ignorant, it is true,
of its extent and shape; but in a whole night’s journey I could certainly make
sufficient way to put ten or twelve leagues between them and me. The idea
appeared a good one, and I immediately proceeded to put it into execution.
I commenced by collecting several armsful of dry leaves, which I made a
point of putting down with all the noise possible, so as to provoke the imitative
attention of my guards. And, precisely as I thought, the entire troop
immediately rushed forward, and with the most comical precipitation,
proceeded to collect armsful of dry leaves, and spread them, as they had
seen me do, like straw upon the ground. Delighted with this commencement, I
afterwards heaped up a certain quantity of leaves at the foot of a tree where I
had chosen a spot for my couch; they immediately did the same. Preparations
for slumber being completed on both sides, I extended myself leisurely on my
bed. This time my imitators did not move, which was of course a bad sign.
There was evidently an unpleasant hitch in the development of the plan by
means of which I had hoped that my tormentors would fall into my trap. With
their feet buried in the leaves, with outstretched necks and muzzles turned
towards me, and with eyes fixed steadily upon me, they followed eagerly the
slightest movements of my body, but not one of them laid down as I had done.
I began to think that they distrusted me; nevertheless, I pursued my project so
as to know for certain what I had to expect. I therefore stretched out my arms
as a man does who is about to fall asleep; I gaped once or twice as wide as I
possibly could, and at length closed my eyes. Of these three movements, they
imitated only one; they gaped enough to dislocate their jaws, but that was all.
I had taken particular care to keep my eyelids lowered, whereas they kept
their eyes completely open. I had even carried the pretence of sleep so far as
to snore; nothing, however, came of it. Not a single ape, big or little, yellow,
black, brown, or grey, fell into the snare.
At length something like a truce was arranged between us. It was at this
moment that the idea, which had occurred to me during the thrashing which I
had received, came into my mind again. I fancied I could distinguish among
this crowd of apes, so attentive in watching my slightest movements, certain
faces which were not entirely unknown to me. The first time this strange idea
occurred to me I passed it by as the offspring of a troubled brain, but now I felt
impressed by its reality.
For a quarter of an hour, and such quarters of hours are centuries, I acted
this farce of sleep, and to my disgust discovered that I did not succeed in
making a single dupe. All at once, when my eyes were scarcely half open, I
perceived two of the biggest apes of the troop coming towards me. They did
not approach me walking on all fours along the sand, but after the fashion in
which they invariably move about in the wandering and vagabondising kind of
life they lead in the woods, that is, by swinging from tree to tree, from branch
to branch, and scarcely making more noise than a bird. Having arrived above
my head, and God knows if I had them a single instant out of my sight, they
slipped down without the slightest noise to the ground, and immediately
moved with the same silent precautions, one to my right hand and the other to
my left.
Having taken up their positions they remained perfectly immovable for
several minutes.
I had to do with two hideous ourang-outangs whose prodigious strength and
agility were shown by their short and compact bodies and sinewy limbs. I
judged, from these characteristic signs, that they were capable of easily
overcoming ten unarmed men. After having carefully observed me, in fact
studied me, and one may say, surveyed me all over with a gravity at once droll
and magisterial, as though to assure themselves that I was really asleep, one
of the two ourang-outangs placed himself at my feet.
The ourang-outang on my right now commenced smelling me under the
nose after the fashion in which deer sniff each other, then he examined my
hair most attentively, evidently with intentions which my English habits of
cleanliness rendered altogether unnecessary. The other ourang-outang having
first of all pulled off my shoes, next amused himself with the ingeniousness of
a child who wishes at any cost to discover how it is that his spring doll raises
and lowers its arms, by bending my toes backwards and forwards, appearing
perfectly astonished and somewhat indignant, that a man was as well formed
as an ape. These two terrible valets-de-chambre bent upon bestowing their
attentions on my person caused me the most frightful distress; for the ourang-
outang at my feet, induced, no doubt, by his success with my shoes and
stockings, next essayed to pull off my trousers. I would willingly have let him
done so, but the ourang-outang at my head opposed him with all his strength,
evidently desiring to relieve me of these garments in his own way; a way, I
may observe, in which it is perfectly impossible for trousers to be removed.
There were first of all some sinister tuggings, then the strife gradually became
sullen and obstinate; and at last it was something terrible. I was conscious of
this from the successive giving way of buttons, and from the stretching and
cracking of the garments under the efforts of these two formidable
antagonists, whose field of battle would, in a few moments, most likely be my
own body; which would become a prey to their remorseless instinct of
destruction, and be torn to pieces by their long, sharp fangs and harpy-like
claws.
My death seemed inevitable—I resolved to defend my life to the utmost of
my power, and with this view gently slipped my hands into my pockets and
drew forth my two pistols without arousing the slightest suspicion. As matters
were progressing very fast, I forthwith pointed one of them towards the
ourang-outang at my feet, and the other towards his companion at my head,
hoping that if I were forced to fire I might succeed in killing both my
persecutors, whose deaths would, as a matter of course, be immediately
followed by my own. The fate which would await me after this double murder
was certainly not doubtful. The two or three hundred apes who were present
as spectators of this sight would certainly tear me into more pieces than they
had torn my cravat. The fatal moment seems to be approaching! My nether
garments give way—I place a finger on each trigger. When all at once a shriek
is heard, such a shriek as only a locomotive with its breath of fire can send
forth from its iron-bound breast; and which was prolonged from echo to echo
like claps of thunder rolling down a valley.
 CHAPTER III.
I am attacked with delirium.—I set out on a journey of discovery in the dead of
night.—I encounter a boa, and a bat with gigantic wings.—I reach the sea
shore.—Simplicity of the oyster; acuteness of the Ape.—I hoist a signal, and
then fall asleep from sheer exhaustion.

I open my eyes and perceive this crowd of apes all flying off, in the
same direction, with the rapidity of a cannon-ball. Thousands upon
thousands of tails streak the horizon. These at length disappear, and
fainter and fainter grows that chattering noise with which they have
sought to excite one another to triple their speed, till at last it sounds
merely like a tingling in the ear when one is troubled with a rush of
blood to the head. The air is pure, the earth has already recovered
its serenity, as after the disappearance of some fetid mist; I spring to
my feet, I breathe freely, I feel as though I were born again! But
whence came this marvellous shriek? and what strange creature had
given utterance to it? Was it a leopard wounded to death? Was it
merely some amorous tiger? Was it a human being? No, it could not
have been. And how came it, too, to be so generally comprehended?
How was I to discover this? Of whom could I inquire? Silence and
solitude had in the twinkling of an eye taken the place of the frightful
tumult and the savage and grotesque scenes of a few moments
before, but did this shriek signal the fall of the curtain, or merely the
conclusion of an act of the drama? Was it, in plain words, an end or
only a momentary suspension—this spontaneous dispersion of all
the monsters, who had left me as it were by a miracle? Night was
approaching; in fact, it had already set in. What was I to do? What
was to become of me in the midst of this scattered colony, among
unknown hordes which my imagination pictured as only the more
frightful, the longer they delayed to show themselves!
I might remain very well where I was till the next day, but had I not
reason to fear the return of my enemies, who would reappear more
determined than ever to torment me with their inexhaustible tricks,
and more particularly so now that they knew how much my superior
they were both in boldness and strength? On the other hand, where
could I go without encountering the risk of being devoured by the
thousands of wild animals which doubtless lay crouching, swollen
with rage, within the shadow of these almost impenetrable jungles?
The waverings of my mind brought on a burning fever, which
caused my brain to throb, like the booming of a large bell, or the
roaring of the billows breaking upon a rocky shore, and made me
fancy at times that I could hear sounds similar to those which come
from great centres of population; such, indeed, as I had heard in the
neighbourhood of Goa and Macao. Shipwrecked people, it is well
known, have these singular hallucinations. They are like clocks
which have been set wrong, and keep on going—the hands
traversing the dial, but no longer marking the correct time—and
which strike at hazard.
During the continuance of this delirium, a bright red streak all at
once tinted the horizon, dividing it like a cut made with a knife in the
rind of a pomegranate. Suddenly this crimson line appeared to be
swollen at a particular point, and a globe of fire rose majestically in
the sky. It was the moon, which was nearly at the full. I believed that
it was rising for me alone, so much calm did it seem to bring me,
while enveloping me with its beautiful light. I took courage. My blood
flowed more tranquilly through my veins. I reasoned on my situation
with sequence and lucidity, and proved to myself that there was no
serious reason for my remaining any longer in the place where I then
was. My resolution was soon taken, and I proceeded to arm myself
with the stoutest bamboo I could find on the border of the lake, to
serve me for a defensive weapon in case of necessity. I then set
about to determine whether this vast sheet of limpid water, which
was spread before me, had, as was probably the case, some outlet
through which it emptied itself into the sea. To be enlightened on this
geographical problem was of the utmost importance to me.
Large sheets of water, although there are notable exceptions in
Oceania, generally fall into the sea; if the lake therefore, on the
banks of which I then was, had an important outlet, I was certain, by
following the course of it step by step, to arrive at the sea. And as it
is rarely the case that there are not certain spots on the banks of
these streams where the native population, guided by the instinct of
want, have raised their huts, I was equally certain to meet with these
villages on my way. To discover this outlet I determined, if necessary,
to make the circuit of the lake without deviating at all in my course,
spite of the jungles which threatened to prevent me. After walking for
about an hour a confused noise suddenly brought me to a standstill.
I listened, then hastened in the direction whence the sound
proceeded, and found it gradually growing more and more distinct,
until at length I recognised the murmur of a considerable cascade.
What I was in search of was evidently here. The waters of the lake
fell into a second and lower basin which, growing narrower a little
further on, became the stream on which I had counted. I followed the
course of this natural canal, but not without encountering strange
difficulties by the way. It was not an easy thing, as one may well
believe, to continue walking for any length of time along a bank
composed of spongy vegetable remains, on which it was altogether
impossible to place one’s feet without sinking up to the knees, and
which was at times entirely hidden by a layer of fibrous shoots,
creepers, bamboos, and mimosas interwoven and crossed one over
another with so much tenacity that they formed a kind of archway,
beneath which I was forced to pass by, crawling along on my hands
and knees. It was in one of these dark tunnels, while placing my
hands on the ground so as to draw myself along, that I seized hold of
something round and slippery and cold as ice, whilst, at the same
moment, a wing struck me in the face, producing a double sensation
of horror. The cold, round, slippery thing was a serpent; the blow on
my face was caused by a hideous bat with slimy wings three or four
feet in breadth. I still shudder when I think of this frightful meeting.
For several hours I advanced thus towards an unknown goal,
feeling more and more persuaded, as I proceeded, that the portion of
the island already traversed by me, under the perilous conditions
which I have just endeavoured to relate, was not inhabited, unless,
indeed, it happened to contain other lakes and water-courses, a
probability which was extremely doubtful, considering the small
extent of the islands composing the group, in the centre of which I
had been shipwrecked. I concluded, therefore, that no inhabitant of
the island was likely to be met with at any considerable distance
from this stream, along which, so far as I had traced its course, there
were no signs of human habitations to be seen. I concluded,
moreover, from a parity of reasoning, that the island did not contain
many wild beasts, since, as is well known from the testimony of
travellers and naturalists, they frequent by preference the muddy
banks of rivers, where they are certain to find, during the heat of the
day, coolness, shade, and, above all, numerous prey for which they
lie in wait, and, during the night, almost inaccessible retreats to
which they can retire.
When I perceived above me the open sky, and some leagues of
clear ground, both to my right hand and my left, the day was
beginning to break. The violent exertion I had undergone, joined to
the sudden freshness of the air, and the lightness of my yesterday’s
repast, since fruit, however good and luscious it may be, is scarcely
sufficiently satisfying to stomachs accustomed to the endless variety
of food—the result of a high state of civilisation—had made me as
ravenous as a tiger. I have never regretted so much as I then did,
that Providence had not reserved to us, for seasons of difficulty, the
means of living on grass and plants like animals of the herbivorous
species, or endowed us like others with the faculty of seizing our
prey. In the primitive ages of the world we were endowed perhaps
with a less exclusive organisation; but, however this may have been,
I was dying with hunger in the midst of a paradise of plants, ferns,
and roots, which a horse or an ox would have considered the rarest
of delicacies. Whilst I was absorbed in these reflections, it was
gradually becoming lighter; objects began to stand out from the
background of delicate violet, tinted with yellow, which is the
forerunner of dawn in Oceania and southern China. A cool wind
swept across the earth, the sharpness and tempering quality of
which convinced me that it had already passed over the sea, which I
would have wagered my existence was not far distant. Other signs
confirmed me in my belief; the trees were neither so thick together
nor so large; the heath, which was more stunted in its growth, was
gradually becoming more scanty. When the sun showed itself above
the horizon, I had only to exclaim, “There is the sea!” and I very soon
did so.
The sea was scarcely two hundred yards from me when I first
caught sight of its tiny waves—the same waves that were yesterday
so furious—whitening a complete bend of the shore. Supposing
some degree of regularity in the form of the island, this bend would
give it, according to my calculations, a circumference of thirty
leagues. Moreover, admitting, what I was satisfied of from
observation, that the journey I had made during the night was half
the diameter of the entire island, that is, five leagues, which is the
average size of the islands of this group. After having assured myself
that the one half of the island was uninhabited along the banks of the
stream which I had already traversed, I still entertained a hope that I
might meet with a village on the sea-shore the inhabitants of which
might possibly be fishermen, a common enough profession among
the Malays; or they might perhaps do a little trade by means of
barter, which is a much less common profession; or they might be
pirates, a profession which is usually joined to all others in these
savage regions.
I commenced my excursion along the sea-shore, in spite of the
fatigue which I was suffering. I knew that I had no time to lose, since,
if the sun once rose in the heavens, its intense heat would render all
bodily exertion impossible in this torrid zone, for at least ten hours to
come.
If for the first three miles I discovered no more traces of the island
being inhabited than I had met with during the previous evening, I
could scarcely doubt that my good friends the apes often visited this
locality. I recognised them by these signs. Thousands of oysters
were spread upon the beach; and at least two layers of these oysters
had been opened—not naturally, but with the aid of a little stone
placed between the two shells. Who had done this? Why, my apes,
of course. It is well known that oysters are a precious luxury to the
entire monkey tribe, who are obliged to be very cunning in procuring
themselves this treat, which is not without its attendant dangers.
How do you suppose they manage this? Why, by throwing a stone
between the two shells, at the precise moment that the oyster
chances to gape; in this manner they are sure of their prey, without
having to make an exhibition of themselves with their hands or their
muzzles caught in the powerful grip of the oyster, who has the
preservative faculty of closing his shell directly he is seized hold of.
As oysters furnish a far more substantial dish than any quantity of
tropical fruit, and as my plundering and wasteful apes had opened
more of these delicacies than they had consumed, I commenced my
repast with a joyful heart. These bivalves were hardly equal to real
Whitstable natives, or even to the oysters of Ostend; nevertheless,
five or six dozen were rapidly devoured. A tankard of bitter ale would
have been an acceptable accompaniment; but as this was not to be
had, I was forced to content myself with bumpers of pure water,
quaffed from the palm of my hand. My appetite was no sooner
appeased than, contrary to what is usual under similar
circumstances, my troubles of mind returned. Was I, I again asked
myself, about to be brought face to face with the inhabitants of this
island, either at the curve of some bay, or behind some projecting
mass of rock? Filled with this hope—or rather, with this fear—I
recommenced my explorations. But, after having ascended many
creeks, many little gulfs, on the banks of which the banyans
displayed their rich green foliage, I not only met with not a single
inhabitant, neither black, brown, yellow, nor copper-coloured—but,
during the long journey which I had performed, from five o’clock in
the morning until noon, at which hour the burning heat poured down
by the sun on my poor head forced me to halt, I had seen neither
junk, nor canoe, nor any kind of implement, no fragments of articles
in common use among beings of the slightest intelligence; in a word,
no single trace of man.
As it was impossible to remain for any length of time, at this hour
of the day, on this exposed coast, burnt up, as I was, by the sun, I
deemed it prudent to proceed a short distance inland. On leaving the
shore, I gathered, some hundred yards off, a stick of bamboo, the
straightest and tallest I could find; and, after having stripped it of its
leaves, I fastened to the end of it one of the two white handkerchiefs
which I had about me at the moment of abandoning the junk, and
planted it firmly in the sand. If some vessel should perceive this
signal—of which there was, I feared, but little chance, the island
being surrounded on all sides by reefs—it would be advised of the
presence of an unfortunate castaway, and would, perhaps, make an
effort to take him off.
The rude blows of the day before, the extraordinary fatigues of the
night, the mental troubles of all kinds which I had undergone during
the past three days, rendered that sleep which I hastened to enjoy
under the tamarind trees that grew between the sea and the more
wooded part of the island, most welcome to me. My eyes closed with
an unspeakable pleasure. My drowsiness resembled the calm of an
aërial voyage. The sea-breeze passed in long gusts through my hair,
after having swept over my body, and refreshed and revivified all my
limbs. The mixture of the strong vegetable odours by which I was
surrounded with the salt air of the sea, charged, as it was, with all
the mysterious exhalations of the Indian Ocean, formed a perfume,
at once so agreeable and so intoxicating, that I was conscious of its
influence even in my sleep.
I must have slept for a long time, since the sun, which was at his
zenith when I laid down, was precisely at the same point of the
heavens when I awoke, so that I had slept for four-and-twenty hours.
My awakening will never be effaced from my remembrance as long
as I live, owing to a circumstance which I recollect with sorrow and
regret, and with some degree of remorse.
 CHAPTER IV.
I have a very agitated dream.—During my waking moments I unconsciously commit a murder.
—At night time I encounter a strange apparition in the middle of the forest.—A great light
illumines the air.—I advance towards it, buoyed up with hope.—It suddenly disappears.—
The dawn discloses to me a most singular sight.—I witness the proceedings of a court-
martial the members composing which have each four hands.—Disgraceful corruption of
justice.—Ridiculous parody on the manners and institutions of the human race.

I had a dream during my sleep. In this dream I found myself in the midst of
those same horrid apes from whom I had so miraculously escaped the day
before. I was still in their power! Nothing seemed changed, neither the scene
nor the actors. The lake lay spread before me; the trees rose up and waved
upon its banks; the leaves and fruit, which had been broken off by the stones,
covered the ground. My two redoubtable ourang-outangs had not left me; one
was still at my feet, the other at my head. They continued those persecutions
of which my unfortunate garments were the theatre. After having torn them in
pieces through tugging at them and attempting to pull them off the wrong way,
they had uncovered my breast; and, after a minute examination of my skin,
directed their attention to my ribs, which they evidently wished to force apart
so as to see what they inclosed. With the view of solving this problem each of
them possessed himself of a large stone, and made preparations to break me
open, a proceeding to which they usually have recourse when they desire to
devour the inside of a tortoise or cocoa-nut. Two large stones were already
suspended over my breast; self-preservation before everything, thought I, and
fired at one of the two ourang-outangs and killed him; I am about to fire at the
other, when the noise of the first shot woke me up. On awakening, I find
myself in a perfect rage, almost mad with anger, and with a pistol grasped in
my hand. A group of apes are by my side; I point my pistol, touch the trigger,
one of them is hit, and falls. May the Almighty, in His goodness, ever preserve
me and mine from another night like this! The poor ape, who was no terrible
ourang-outang like that of my dream, but a peaceful vervet, dragged himself
bleeding to my feet. He was mortally wounded a little below the heart. Not
wishing to prolong his sufferings, I seized him by the tail, and, swinging him
round like a stone in a sling, dashed his head against a tree. The unfortunate
vervet was still alive. With what a touching glance he appealed to me as he
licked my hands, as though begging me not to put him to death, and prayed to
me with low, plaintive cries which I can still hear! In order to put him the
quicker out of his misery, I ran with him to the beach and plunged him into the
sea till he was suffocated. During this time, which appeared to me as long as if
I were undergoing the same tortures myself, his poor little eyes continued to
follow mine; his dying looks were at once a reproach and a prayer. Were I to
live a hundred years, this picture, in which suffering had elevated the instinct
of the brute to the level of the cruel intelligence of man, would never be
effaced from my memory. And these lines, which I have written with an aching
heart, are some kind of punishment for my needless crime, for this poor ape
had done no harm whatever to me.
Later I remembered what Buffon says of the vervet, “that it is one of the
most lively and amusing of apes; is scarcely as large as a cat; and has a
brown body, with flesh-coloured face and ears. The vervets are fantastic in
their tastes and affections, appearing to have a strong inclination for some
persons and a great aversion to others.”
I was far more distressed at my cruel action, although I hardly need have
been, since I had killed the vervet while I was still stupefied by sleep and
under the influence of a dream. When I returned to the place whence I had
fired the pistol, I was grieved to discover that the shot which had killed one
vervet had, unfortunately, wounded another of the group into the midst of
which I had so recklessly fired. All the other apes belonging to the same
species had assembled round their wounded companion, and were placing
their fingers in his wound, as though they wished to probe it. While some kept
it open, others brought leaves which they chewed and gently placed in the
wound itself. This last act upset all my preconceived ideas with regard to the
intelligence of these animals, so badly treated, by some naturalists, who have
confounded inferior kinds with species like those of the vervets, that almost
approach our own, falling into the same error as that ignorant observer who
placed in the same rank, under the pretext that they were both men, the cretin
of the Alps and the admirably-organised inhabitant of Italy or Greece. Since
this example of apes rendering one another mutual help in time of danger, and
nursing one another with the aid of special remedies known only to
themselves, has frequently come before my eyes, I have not hesitated to
relate one instance of which I was an eye-witness, in the hope of making the
reader share the surprise and interest which it awakened in me.
My poor apes at length retired, carrying with them their wounded
companion, and leaving me one sorrow more to add to those which already
oppressed me. I spent a miserable day, haunted by remorse for my crime. I
could not banish from my mind the piteous expression of these poor animals,
and the mingled look of goodness, gentleness, suffering, and resignation
imprinted in their features, so utterly distinct from those of other apes, from
whom they appeared completely separated, not by the mere effect of chance,
or by the boundary which the difference of genius had raised between them.
 When night came on I had already left the actors and the theatre of these
events far behind me. About midnight, on hearing, in a wood of mimosas, and
seemingly quite close to me, an indefinable rustling, such as the dry husks of
the bread-tree produce when driven about by the wind, I remembered all at
once that I had forgotten to reload my pistols. Before proceeding another step
I charged them with ball, and advanced cautiously towards the spot whence
the noise appeared to proceed. I approached slowly on tiptoe, holding my
breath, and with my heart beating violently, as I gently pushed aside the
thorny branches of the mimosas, and raised them again with the same
prudent caution. I stretched forth my neck, and by the light of the moon, which
shone as brightly as on the preceding evening, I perceived a skeleton
suspended from the branch of a tree—a skeleton, too, of huge size: its bones,
which were white as ivory, stood out from the dark green leaves with a power
of relief which added considerably to the terror of its aspect. As I watched it
swinging to and fro in the wind, the sensation which I experienced was by no
means an agreeable one, and a nervous shudder passed through my limbs.
Eventually I reasoned with myself, and decided not to draw too sinister a
conclusion from a circumstance which perhaps, after all, did not partake of
that degree of atrocity that my imagination had hastily pictured.
I now walked boldly up to the skeleton, and sought to catch hold of its foot,
but the foot proved to be a hand. The skeleton was evidently that of an ape—
an ape, too, of the largest kind; in other words, a gigantic mandrill. Yes, a
mandrill—that enemy of the baboon with whom it shares the empire of ferocity
and terror. I considered, from the size of the skeleton, that the ape to which it
belonged must have surpassed, in size and strength, all known examples of
this formidable species. But how came he to be suspended here, I asked
myself? And why was it that his skin had been entirely removed? Not the least
fragment of it was to be seen at the foot of the tree. Had he been flayed after
being hung, and had his death then been stamped with all the forms of a
degrading punishment?
As my reflections, under the shadow of this improvised gibbet, failed to
produce any kind of solution of the above enigma, I hastened to leave the
spot, pondering over in my mind as to the proportion of apes and men
occupying this spot of earth in the midst of the sea. One will easily
comprehend that my mind was constantly indulging in speculations—first of all
as to the probability of the island being inhabited, and then as to the particular
kind of people who dwelt therein.
Whilst I was asking myself these questions for the thousandth time, as I
walked straight on without knowing whither I was going, it seemed to me that
the light of the moon underwent, for some minutes, a notable diminution.
What, thought I, could possibly be the cause of this? I raised my head. The
moon’s disk was really clouded by a reddish mist, slightly tinted with grey. This
mist was evidently not a cloud. Moreover, in so pure an atmosphere, a cloud,
the sign of wind and tempest, would have passed over much higher in the sky.
At one time it seemed so low that it occurred to me it was some exhalation
from the lake, a vapour produced by the vast collections of vegetable remains
accumulated on its margin. To put an end to my doubts on this score, I
climbed up a tree, and there I discovered—victory and release from my
enforced captivity—that it was the smoke from a fire burning in the interior of
the island. A fire! The island was undoubtedly inhabited, then—inhabited, too,
by human beings, since man alone can procure himself fire, man alone knows
how to use it, and man alone has need of it. I was then among beings of my
own kind. I was saved—or perhaps lost! Nevertheless it was a fact that I was
among members of the human family. Acting on this conviction, I thought it
only prudent to slip a second bullet into each of my pistols.
Collecting together all my scattered faculties, I imposed upon them the task
of guiding me in the direction in which I supposed this fire to be, and the
object of which was now a source of some anxiety to me. Did it indicate one of
those extraordinary conflagrations, in producing which the savages of
Oceania have frequently no other motive beyond destroying, in a few hours,
vast tracts of forests, that they may gratify themselves with a most sublime
sight? Did it betray the presence of a band of pirates, arrived perhaps in the
island during this very evening, and sharing their booty by the light of some
immense fire which they had kindled in accordance with their prevailing habits
of destruction? Did it indicate the chief settlement of the native population,
who, during the hours of universal silence, were giving themselves up to
certain wild rejoicings, or were engaged in consummating some nocturnal
sacrifice under the mysterious light of the moon?
The hope that I was at length about to find myself among members of the
human family was dimmed by the reflection that these men would certainly not
be finished models of civilisation, for I was not ignorant of the fact that many
islands of Oceania have been, since the creation of the world, and are likely to
continue for a long time to come, nothing more than nests of cannibals.
Cannibals, however, do not always eat people any more than serpents always
sting them, so there was, at any rate, one chance in my favour out of
something like a score of chances against me. Moreover, hope does not
reason for itself like fear is apt to do.
Without stopping to admire the magnificence of the night, magnificent even
to me, accustomed as I was to the incomparable nights of the southern
hemisphere; without lending an ear to the different harmonies composed of
notes of a character utterly unknown to me, since it must not be forgotten that
every island of Oceania is a world apart, a complete universe in itself, often
having its flowers, its plants, its birds, its reptiles, and its human occupants,
different from the men, reptiles, birds, plants, and flowers of the island
adjoining; without pausing to examine anything, no matter however strange or
ravishing, I continued to advance in a straight line towards that part of the
island where I thought the fire which I had seen from afar must be burning.
At the end of three long hours I discovered it was by no means so easy to
arrive at this earnestly desired goal as I had pictured it. The surface of the
island being more or less undulating, whenever I descended into a hollow, or
had to cross some ravine which intercepted my path, I immediately lost sight
of the radiant glow which served as a beacon. On several occasions I had to
climb to the top of a tall tree before I could make certain that I was pursuing
the right direction. Unfortunately the fire was not always maintained at the
same degree of intensity, and there was one critical moment when, after
climbing to the topmost branches of the tallest tree I could find, I could
distinguish nothing but the merest spark. My most ardent prayers were that it
might not become totally extinguished before the break of day, but my
supplications were of no avail. The fire flickered for a moment or two, and then
went out. I could now only guide myself by certain signs; I was already in the
midst of a sea of creepers, with which the ground was carpeted, and I had to
pass through fibres of bamboo more or less impenetrable for a depth of at
least forty feet, and then, what long circuits I should have to take!
A discovery which I made at this moment went far to counterbalance the
discouragement I had just experienced on finding the light which I had
pursued with so much tenacity extinguished. This discovery affected me
considerably.
Soon after quitting the marshy plain of bamboos, from which I only emerged
after leaving some portions of my dress and skin as traces of my path, I found
myself once more on solid ground. While passing between the numerous
shrubs which covered it, and gave it the appearance of a vast natural orchard,
I came across some tempting-looking fruit. By chance, I tasted it, and
discovered from its flavour that it was evidently the produce of a regular
system of culture. There was none of that primitive harshness which all fruits
as a general rule possess till man has improved their flavour. This discovery
was a further convincing proof to me that the island was inhabited. It
reassured me and encouraged me in my hopes, since it was not only certain
that the island was inhabited, but that it was inhabited by men skilled in
agricultural pursuits, and consequently occupying no mean place in the scale
of civilisation.
At length the dawn appeared; the sky was scarcely lighted up by the first
rays of the rising sun ere the uproar which I had heard during the three