Thursday, October 16, 2008

The local pump-priming 

Should local governments spend more in an economic downturn? Yes, says economist William Melton and Twin Cities area mayors.
Now is the time for cities to invest. If they have buffer funds, they should get ready to draw from them and spend as a way to protect assets and stimulate the local economy. If they have no reserves, well, the federal government should supply a brief spurt of aid, he said, adding: "There will be enormous budget pressures."

Mayors already know that part. Minnetonka's Jan Callison wanted clarification: "So this is a good time to spend, and that means raising taxes or spending reserves, if you have reserves?"

Upping taxes on citizens whose savings have been decimated in recent weeks may be an impossible sell, Melton and the mayors agreed, but investing is still important. Bloomington's Gene Winstead made the point that his city � and other inner suburbs � enjoyed a big growth spurt in the 1950s and '60s. The problem now is that lots of infrastructure is aging at the same time.

"You're going to see us dipping back into reserve funds," he said. "We think a steady course is needed. It's important not to fall behind on maintenance. We'd rather not defer; we'd like to continue to pay as we go."

Edina's Jim Hovland agreed, even suggesting the option of borrowing through use of a bond issue. For cities with good credit, as Edina has, borrowing can be an incredible bargain just now, he said.
How wrong is this? Let me count the ways:
  1. A buffer fund is for smoothing spending through a cyclical downturn in tax receipts or intergovernmental transfers ('round these parts we call that LGA). This is very likely to happen in the next budget cycle. At some point assessed values will have to be marked to market, and raising mill rates to compensate will be difficult for city councils. That's what you have a buffer fund for, not to accelerate spending.
  2. Note the words "impossible sell". Does this mean that if they could find a way to sell it, they would? We already have a presidential candidate contemplating tax increases in a recession. Can't see why we'd want the mayors to join in the frivolity.
  3. Cities must balance their budgets since they can't print money. Borrowing means increased debt service costs immediately and the overhang of repayment later. This removes an incentive for private citizens to borrow and invest, since their future after-tax returns on investment will be lowered by local government borrowing.
  4. Increased local government spending is only helpful to the extent the money is spent locally. Money given to new city employees will often be spent outside the city -- there is a leakage. Some employees in suburban cities will not live in those cities but in nearby ones. How exactly do we imagine this will help, then?
All around, a bad idea.

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