State and local governments today are, with few exceptions, in deep financial distress. While some governors can offer the recession, the housing crisis, or the loss of an important industry as an excuse for poor finances, many states are simply structurally insolvent. In this article, the authors discuss the primary cause of the states' long-term problems which are their bloated public sectors--particularly their public pension obligations. Public employees unions have wielded huge influence to gain perquisites for themselves at the expense of the public. Early retirement, job tenure, high wages, and generous defined-benefit pension plans have gained increasing attention from commentators and voters, though many public sector perks are intentionally shrouded and confuse the public debate. What has received far less attention is the pernicious effect of public sector union privileges on the provision of public goods in the United States. Public sector unions have greatly distorted state spending priorities and made it more difficult for states to devise innovative public goods that would benefit their citizenry as whole. The strong organizational rights of these unions, protected or abetted by statute and regulations, enables their outsized influence on public policy. But crisis is also opportunity. The dire straits of states offer the chance for entrepreneurial governors to abolish public employee union privileges, like the rights to strike, to collectively bargain, to seek binding arbitration, and to collect dues. Public employee unions are the great reactionary force in public life today, using their privileged position both to defend the rewards their members receive and to block innovation. As a result, this recession offers a political opening for both liberal and conservative governors. For conservatives, taking on public employee unions provides a way to eliminate inefficient spending and create a polity of low taxes and lean government. For liberals, it provides a way to redirect spending to effective public goods, like better educational outputs, that public employee unions frustrate. The authors contend that if both liberal and conservative governors moved against public employee unions, the public would have the best of all possible worlds, a demonstration project pitting a low-tax, small-government jurisdictions against a higher-tax, high-value public goods jurisdictions. It would create a fair fight between the attractive options that conservatism and liberalism can offer. Union contracts, however, prevent most state governments from nimbly responding to changing circumstances. This ossification short-circuits the beneficial competition among jurisdictions created by the federal system, which works best when there are not entrenched impediments to government innovation.