The folks in Madison, Wis., still know how to throw a humdinger of a political demonstration. Forty-plus years after students at the University of Wisconsin-Madison and other radicals set the standard for anti-establishment protests during the Vietnam era, the city nicknamed "the Berkeley of the Midwest" once again is the site of tens of thousands of angry protesters.

But it's more than just a little ironic that this time the demonstrators in Madison are protesting in support of the status quo, not against it.

They began Feb. 12 with a small demonstration outside the home of rookie Republican Gov. Scott Walker, who had just announced a plan to make teachers and most other unionized state workers contribute for the first time to their pensions and to increase their contributions to their health coverage. By Walker's reckoning those free or nearly free benefits simply cost too much for a state facing a budget shortfall this year of $137 million, and a $3.6 billion budget gap by 2013.

After the demonstrations moved to the state capitol and the ranks of demonstrators swelled into the tens of thousands, the media descended on Madison with their satellite trucks and front-line correspondents. Initially the teachers welcomed the attention. But they soon recognized that most residents of the Badger State-like most Americans-were outraged to learn what a sweet deal they and other public employee union members had. So the teachers shifted gears and agreed to Walker's demands on pension and healthcare contributions.

But they did not back off their opposition to Walker's plan to truncate their collective bargaining power and get the state out of the business of collecting union dues via paycheck deduction. That threatens to disrupt the symbiotic relationship between public employee unions (who are among the largest donors in U.S. politics, see sidebar) and the Democratic lawmakers who overwhelmingly are the largest beneficiaries of union political contributions. But the governor says it's necessary in order to achieve the vision of a smaller, more efficient government that taxes its people less. "Our state cannot grow if our people are weighed down paying for a larger and larger government," Walker said on March 1 when introducing a budget that he says would reduce Wisconsin's "structural" deficit by 90 percent. Despite state Senate Democrats fleeing the state for three weeks to deny the body a quorum, Walker and Senate Republicans were able pass an amended version of the reform plan that greatly reduces most state employees' collective bargaining rights on March 9 when they bypassed the need for a quorum by stripping the fiscal provisions from the bill. The vote ratcheted up the intensity of the already angry protesters in Madison.

Political conservatives, libertarians, and especially Tea Partiers are cheering Walker and governors in other states who also seek to rein in state spending and the power of government employee unions. They have longed for the day when government-federal, state, and local-is less intrusive and less costly. But liberals and unionists adamantly are opposed to any diminution of government's power. Gerald McEntee, president of the American Federation of State, County and Municipal Employees union, says governors are trying to "silence workers, lower their wages, cut their benefits and increase the likelihood that they will suffer injuries and fatalities at work. It's happening at breakneck pace and too little attention is being paid."

Union hyperbole? Maybe. But when the issue is understood that way, it's easy to see why the battle in Wisconsin has become such a big deal across the rest of America. Big Labor and its political allies are gearing up to preserve Labor's out-sized financial and philosophical influence and its powerful position in America's politics and economics. Meanwhile, governors and legislators-mostly Republicans but with some Democratic governors like New York's Andrew Cuomo-faced with big short-term revenue shortfalls and monumental long-term budgeting challenges, are seizing on Americans' growing concern over government's unbridled spending and its seemingly limitless reach into their personal, financial, and business lives.

No state has seen demonstrations on the scale of those in Wisconsin. But budget-cutting governors in Ohio, Indiana, Tennessee, Michigan, New Jersey, California, New York, Iowa, Oklahoma, and even Texas are facing vocal opposition from public employee unions and their supporters over the governors' plans for resolving the deepest financial crises to hit the states since at least the Great Depression. And make no mistake about it, the state budget problems are widespread, and they are big: It's easier to name the states that aren't expecting big tax receipt shortfalls this year (Alaska, Alabama, Arkansas, North Dakota, and Wyoming) than it is to list the 45 that are.

This year alone states face a combined $125 billion shortfall, as the effects of the recession that began in 2008-and technically ended in late 2009-hit states' budgets. In 2009 and 2010 many states used federal stimulus money to mask their budget gaps. Others borrowed money. Some did both. But, as with the federal budget, little real budget cutting took place at the state level over the last two years. In fact, most states' budgets grew. Now the stimulus money is running out, and borrowing more to fund daily operations-never a good idea-is especially risky for states already staggering under the weight of existing debt.

Still, simply balancing their budgets this year won't solve all the states' fiscal problems. They face even more daunting long-term financial pressures. Federal healthcare reform threatens to saddle them permanently with much higher bills for caring for their poorer citizens. The cost of providing state employees' healthcare coverage is skyrocketing too, as are required annual outlays for underfunded employee pension plans. And eventually all the debt that states like Illinois, California, and New Jersey piled on their books over the last couple of decades must be repaid. Many states in the Midwest, Northeast, and West also face an additional burden: shrinking tax bases as residents move to the South and Southwest in search of better employment opportunities, lower taxes, and more moderate costs of living.

Some states' financial predicaments are serious enough that some conservative lawmakers and policy wonks, most notably former House Speaker and potential 2012 presidential candidate Newt Gingrich, are floating the idea of legislation allowing states to reorganize their finances via a Chapter 11--like bankruptcy proceeding. States could use reorganization to break labor contracts, spread out interest payments on existing debt, and renegotiate contracts with thousands of vendors. But the idea likely isn't going anywhere soon. Labor fiercely opposes to the idea, and plenty of other conservatives, including some in positions of power, don't like it much either.

New House Majority Leader Eric Cantor, R-Va., and others think allowing states to use bankruptcy to escape their big financial obligations would create bigger problems than it would solve. They warn that the bond markets would be so soured that even states with relatively strong credit and healthy finances would be cut off from the debt markets. It also could push billions of dollars of losses onto bond investors-including millions of citizens whose retirement plans are heavily invested in supposedly safe state and municipal bonds-and trigger a potentially disastrous tsunami effect in the broader markets.

With aggressive new governors intent on keeping their states away from such a brink, Wisconsin and Ohio are getting the most national attention. In Ohio, a budget-cutting bill that restricts the collective bargaining power of public employees passed the state Senate on March 8 and is expected to be approved by the Republican-dominated state House. Echoing Wisconsin's Walker, Ohio Republican Gov. John Kasich told the legislature, "Frankly, folks, the provisions of collective bargaining reform are examples of what we want to do to allow [local officials] to control their costs"-a comment that prompted jeers from the gallery.

In Wisconsin, in the wake of the passage of Walker's reform plan, seething Democrats say Republicans committed political suicide by passing restrictions on collective bargaining. They discussed potential legal challenges to the new law and recall efforts against some of the GOP senators who voted for it. But as angry protesters flooded into the capitol building late in the evening of March 9, Walker, in a statement, stood by the same themes he and the other reform-minded governors have emphasized since taking office: "In order to move the state forward, I applaud the Legislature's action today to stand up to the status quo and take a step in the right direction to balance the budget and reform government."

Ten Largest Donors in U.S. Politics (as of Feb. 7)

Corporations aren't the only big-money givers to American political campaigns. Unions, including the public worker union AFSCME, give millions to promote bigger government. • ActBlue $51 million • AT&T $46 million • AFSCME $43 million • National Association of Realtors $38 million • Goldman Sachs $33 million • American Association of Justice $33 million • Int'l Brotherhood of Electrical Workers $33 million • National Education Association $32 million • Laborers Union $30 million • Teamsters Union $30 million

Rethinking assumptions

Efforts by Scott Walker, John Kasich, and other governors to rein in public employee unions' political influence are so controversial precisely because, when taken to their logical conclusion, they threaten to reverse the century-old trend of governments at every level extending their reach into every nook and cranny of society.

U.S. Rep. Paul Ryan, another reform-minded Wisconsin Republican who this year took over as chairman of the powerful House Budget Committee, tries to downplay the reforms being pushed in his home state by his long-time friend, the governor. "What's going on in Madison right now-there's a lot of confusion about how modest and moderate the Walker reforms really are," Ryan says. Under Walker's plan, teachers and most other state employees in Wisconsin would continue to have more collective bargaining power and more generous benefits than federal employees, he notes: "These aren't unprecedented reforms. They're not even draconian reforms. The problem we have in Wisconsin is we're running out of road to keep kicking the can down."

But Christian ethicist David Gushee of Mercer University in Georgia, who is not opposed to reduced government spending, nevertheless says that the reforms and budget cuts being sought by Walker and other governors around the nation just might be the big deal that liberals and Big Labor fear-and perhaps a bigger deal than the governors themselves realize.

"Let's assume for the moment that this is a chronic situation-that we will keep having these structural problems because we're spending more than we're willing to be taxed for. If that's so, I think we could be on the cusp of an opportunity to rethink the entire social contract that has existed in America for a very long time now.

"But to do that well," he adds, "virtually every American will have to be willing to suspend long-held assumptions" about the roles of government, individuals, and nongovernment institutions in society.

One man who may be leading the way in that process in Iowa is Chuck Hurley, an attorney and lobbyist who heads the Iowa Family Policy Center, an affiliate of Focus on the Family. Hurley is testing how willing churches and other groups are to take over some of government's responsibilities in serving the needy. He's trying to use his state's looming budget crisis to rally Christians, and perhaps others, to work with the head of Iowa's Department of Human Services to find alternative ways of providing some of the social services the state now renders. So far the response has been tepid.

"We have a standing invitation from the top welfare guy in Iowa to try and come up with solutions, to advance what I call 'welfare replacement,' to move away from bureaucratic, secular programs," Hurley says.

"Clearly the state-and not just Iowa but all the states and the federal government-cannot continue to spend the way we're spending," he says. "But I see this time as both a crisis and an opportunity. It's a crisis for government and taxpayers. But it's an opportunity for churches, and perhaps others like synagogues and other religious entities and good will organizations."

Hurley says that if just one "semi- to fairly-functional church of at least moderate size" were to step forward, others would catch the vision. "There'll be some trial and error," and perhaps some will get angry or become disillusioned as a result, he said. "But imagine in three years or so if 1,500 to 2,000 of the 5,000 functioning churches in Iowa were helping 2,000 to 10,000 families in this state. What a difference it would make, not only in the lives of those families being helped, but in the lives of the church members and others who get involved, and in state's budget."