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The Introduction lays out the challenges facing the federal government when a state or city defaults on its debts. When faced with a state or city in fiscal crisis, the federal government cannot avoid all of these three problems: moral hazard, worsening recessions, and reducing investment in infrastructure. This is the fiscal federalism “trilemma.” Whether it engages in bailouts, forces state austerity, or encourages defaults, the federal government must choose between bad options. The chapter ends by laying out some ways the federal government can act in advance to make state and local fiscal crises less common and less painful when they occur. |
