5 ms·

Reading articles and seeing situations like this really makes me question whether public agencies, as a rule, should be allowed to use debt to finance projects.

Reading articles and seeing situations like this really makes me question whether public agencies, as a rule, should be allowed to use debt to finance projects. I'll begin by saying I have no aversion to debt whatsoever as a private individual or for an incorporated business. I own several rental properties, I'm probably more indebted than most. The thing about debt in general though, is that it makes the bad decisions a lot worse. And I think when you design a political system, you have to think about both the best outcomes possible, as well as the worst. Bad things happen. People make mistakes. Calculation errors occur. I'd gladly take a bargain where I could trade 5% of the upside for 50% of the downside. What I've realized is that most municipal governments are run by people of fairly average intelligence and drive. There just isn't a lot of incentive to kick the apple cart. They want to go home at 5, they're going to see the owner of the construction company whose project they dump on in the grocery store, etc. This is actually a feature, I don't really want too much innovation in how my government does things, I'd rather go with the tried and true for things like road design and water pipes, than something like the BART where they used a novel track gauge, and we're still paying for it 30 years later. I just think avoiding municipal debt can curtail some of the worst outcomes. It forces cities to save up for maintenance and really make hard choices about what gets maintained and what doesn't, and it also prevents can-kicking to later generations. You might not get a high-speed rail project, or a major bridge, without debt, but I wonder whether we'll ever get high-speed rail in California at all, after spending billions of dollars already [1] on it without anyone having taken a single trip. [1] https://www.govtech.com/fs/transportation/California-High-Speed-Rail-Project-to-See-Budget-Staffing-Cuts.html https://www.govtech.com/fs/transportation/California-High-Sp...

burlesona 6y ago
I've heard this idea before and I think there's something to it, but it's interesting because for it to function well you generally need to first build up a big savings account which you can then use to fund expensive things, otherwise you're extremely limited in what you can do. One variation I've heard would be for cities and states to not be allowed to issue debt, that only the federal government could do that. It would mean the local units of government (which actually run and fund most things) would have to operate on a balanced budget, and would provide a lot of robustness in the system relative to what we have now. If they needed a one-time bailout for some reason (natural disaster etc) the federal government could give funds to the local area, potentially issuing debt if necessary. Of course that doesn't provide any protection against federal debt binging... so I'm not sure how you'd square that. You don't really want to prohibit the federal government from taking on debt - for example, the largest debt the US ever accumulated was to fight and win WW2. But maybe there are strings you can attach. One such string that makes a lot of sense to me is the idea that you should never allow debt for operating expenses or maintenance. You would think that would be obvious and you wouldn't actually need a policy to enforce that outcome, but unfortunately it's common practice today to just issue bonds if you can't afford to maintain your municipal services.
- nicbou 6y ago
  I'm not American, so I might get American political culture wrong. Wouldn't this transfer a lot of power from the states to the federal government? Isn't that considered a bad thing?
  - eldavido 6y ago
    Great question. It's not that cut and dried. You could probably ask ten Americans what either the balance of power between the federal government is, OR what it should be, and get ten different answers. The reality is that, today, the federal government gets the lion's share of attention but the bulk of day-to-day stuff (roads, schools, police, utilities eg water) are run by state and local governments. BUT--and this is an important caveat--SOME (not a lot, but some) money for this is provided by the federal government through about 20 different mechanisms including federal block grants for education, federal highway funding, and other mechanisms. It's actually quite complicated, but to a first approximation, most local things are operated locally, financed mostly locally, but the federal government does kick in (fund) a little on certain things, in a way that's fairly haphazard and subject to the whims of politics, than any sort of tradition-driven or constitutional way. Incidentally, this is part of why the US's COVID response has been literally "all over the map". It's mostly in the hands of the states and you're seeing how 50 different political cultures deal with this crisis.
- eldavido 6y ago
  I think the psychology of spending actual cash, in a bank account, that could theoretically be spent on anything, is completely different from using debt to fund projects. A lot of my views come from operating perhaps the lowest level of "government" possible: a large HOA. Our CC&Rs prohibit entering into any contract (including debt) lasting more than a year. It works for us because the entire place is run by volunteers, many of them nonspecialists, who could do a lot of damage getting us into, say, a 10-year contract with Comcast that was too expensive, not negotiated well, etc. I think we expect our politicians to be superheroes. This might be borderline reasonable for large, well-funded federal agencies like the Federal Reserve, BLS, BEA, etc who can attract large numbers of truly great people, and pay them well. It's not reasonable to expect someone like Tim Geithner or Ben Bernake (a Princeton economics PhD) to run the finances of a small city or HOA. You're going to get part-time volunteers who know how to balance their checkbooks. Expecting these people to be perfectly rational decision-makers without formal accounting training, let alone knowing how to think carefully about how to analyze NPV, cashflows, and long-term liabilities, in the face of all kinds of local small-ball politics (e.g. trying to help their friend win a contract, or a personal vendetta against someone's project) is laughably far from realistic.
tonyedgecombe 6y ago
What I've realized is that most municipal governments are run by people of fairly average intelligence and drive. In the UK local government is heavily restricted in what they can do. My parish council gets to mow the grass and paint the village hall. As far as I can see that's about the limit of their abilities. The downside is some larger municipalities like Manchester or Birmingham have traditionally been ignored by London based politicians and civil servants.
bshanks 6y ago
Debt should be allowed but only when the legislature authorizes it with a 2/3s supermajority vote. Having a higher voting threshold for issuing debt than for other decisions will reduce the amount of debt that gets issued, while still providing a mechanism to issue debt in exceptional situations.
- eldavido 6y ago
  I like this. It's flexible enough that it could be used in times of true crisis, but it's also super-simple, a major under-appreciated aspect of policymaking. One thing you definitely DON'T want is a California-style "we can spend with majority but raising taxes requires a 2/3 supermajority". That has produced some truly horrific outcomes in government and needs to be repealed. https://www.westerncity.com/article/californias-two-thirds-legislative-vote-requirement-and-its-role-state-budget-process https://www.westerncity.com/article/californias-two-thirds-l...
tsss 6y ago
The government needs to be in debt to a certain degree. Debt is a zero sum game: If someone is saving, then someone else needs to make debt. Private house holds are always saving, they can not make debt. That leaves private companies, the government and foreign countries. Often private companies are also reluctant to make debt if times are not good, so the government has to invest to keep the economy from grinding to a halt. Some countries like Germany manage to save in all sectors, but this only works because they export their debt to other countries like Greece, which is unsustainable and ultimately caused the euro crisis.

burlesona 6y ago

I've heard this idea before and I think there's something to it, but it's interesting because for it to function well you generally need to first build up a big savings account which you can then use to fund expensive things, otherwise you're extremely limited in what you can do. One variation I've heard would be for cities and states to not be allowed to issue debt, that only the federal government could do that. It would mean the local units of government (which actually run and fund most things) would have to operate on a balanced budget, and would provide a lot of robustness in the system relative to what we have now. If they needed a one-time bailout for some reason (natural disaster etc) the federal government could give funds to the local area, potentially issuing debt if necessary. Of course that doesn't provide any protection against federal debt binging... so I'm not sure how you'd square that. You don't really want to prohibit the federal government from taking on debt - for example, the largest debt the US ever accumulated was to fight and win WW2. But maybe there are strings you can attach. One such string that makes a lot of sense to me is the idea that you should never allow debt for operating expenses or maintenance. You would think that would be obvious and you wouldn't actually need a policy to enforce that outcome, but unfortunately it's common practice today to just issue bonds if you can't afford to maintain your municipal services.

nicbou 6y ago
I'm not American, so I might get American political culture wrong. Wouldn't this transfer a lot of power from the states to the federal government? Isn't that considered a bad thing?
- eldavido 6y ago
  Great question. It's not that cut and dried. You could probably ask ten Americans what either the balance of power between the federal government is, OR what it should be, and get ten different answers. The reality is that, today, the federal government gets the lion's share of attention but the bulk of day-to-day stuff (roads, schools, police, utilities eg water) are run by state and local governments. BUT--and this is an important caveat--SOME (not a lot, but some) money for this is provided by the federal government through about 20 different mechanisms including federal block grants for education, federal highway funding, and other mechanisms. It's actually quite complicated, but to a first approximation, most local things are operated locally, financed mostly locally, but the federal government does kick in (fund) a little on certain things, in a way that's fairly haphazard and subject to the whims of politics, than any sort of tradition-driven or constitutional way. Incidentally, this is part of why the US's COVID response has been literally "all over the map". It's mostly in the hands of the states and you're seeing how 50 different political cultures deal with this crisis.
eldavido 6y ago
I think the psychology of spending actual cash, in a bank account, that could theoretically be spent on anything, is completely different from using debt to fund projects. A lot of my views come from operating perhaps the lowest level of "government" possible: a large HOA. Our CC&Rs prohibit entering into any contract (including debt) lasting more than a year. It works for us because the entire place is run by volunteers, many of them nonspecialists, who could do a lot of damage getting us into, say, a 10-year contract with Comcast that was too expensive, not negotiated well, etc. I think we expect our politicians to be superheroes. This might be borderline reasonable for large, well-funded federal agencies like the Federal Reserve, BLS, BEA, etc who can attract large numbers of truly great people, and pay them well. It's not reasonable to expect someone like Tim Geithner or Ben Bernake (a Princeton economics PhD) to run the finances of a small city or HOA. You're going to get part-time volunteers who know how to balance their checkbooks. Expecting these people to be perfectly rational decision-makers without formal accounting training, let alone knowing how to think carefully about how to analyze NPV, cashflows, and long-term liabilities, in the face of all kinds of local small-ball politics (e.g. trying to help their friend win a contract, or a personal vendetta against someone's project) is laughably far from realistic.

tonyedgecombe 6y ago

What I've realized is that most municipal governments are run by people of fairly average intelligence and drive. In the UK local government is heavily restricted in what they can do. My parish council gets to mow the grass and paint the village hall. As far as I can see that's about the limit of their abilities. The downside is some larger municipalities like Manchester or Birmingham have traditionally been ignored by London based politicians and civil servants.

bshanks 6y ago

Debt should be allowed but only when the legislature authorizes it with a 2/3s supermajority vote. Having a higher voting threshold for issuing debt than for other decisions will reduce the amount of debt that gets issued, while still providing a mechanism to issue debt in exceptional situations.

eldavido 6y ago
I like this. It's flexible enough that it could be used in times of true crisis, but it's also super-simple, a major under-appreciated aspect of policymaking. One thing you definitely DON'T want is a California-style "we can spend with majority but raising taxes requires a 2/3 supermajority". That has produced some truly horrific outcomes in government and needs to be repealed. https://www.westerncity.com/article/californias-two-thirds-legislative-vote-requirement-and-its-role-state-budget-process https://www.westerncity.com/article/californias-two-thirds-l...

tsss 6y ago

The government needs to be in debt to a certain degree. Debt is a zero sum game: If someone is saving, then someone else needs to make debt. Private house holds are always saving, they can not make debt. That leaves private companies, the government and foreign countries. Often private companies are also reluctant to make debt if times are not good, so the government has to invest to keep the economy from grinding to a halt. Some countries like Germany manage to save in all sectors, but this only works because they export their debt to other countries like Greece, which is unsustainable and ultimately caused the euro crisis.