Deficits for Localities?

(One of a two-part series examining local deficits)

Currently, I am enrolled in Business G330, Principles of Urban Economics. Within the course setting, we have developed theoretical models which outline the "what if?" inquiry that economists attempt to answer when connecting a general change in economy to the eventual output. One of the changes of economy that we have often debated is the idea of allowing the Evansvilles, Fort Waynes, and Bloomingtons of America to run deficits.

The untested, reflexive response from most deficit hawks in Congress is a flat, "No." They perceive the notion of deficits for localities as a burden small cities aren't ready to undertake. They believe the status quo is an optimal policy. To a certain extent, I disagree.

Take Bloomington as a case in point. If you ask the average resident the relevance of our university on the local economy, they will respond with, "Very relevant." Yet, according to Professor Marcus, Bloomington is an industrial, blue-collar working arena dependent on the external demand for the products produced by Bloomington's export industries.

Now imagine these factories and plants move elsewhere (as has happened in the industrial mid-west), leaving thousands of workers idle and leaving Bloomington's local economy in short-run ruin. What is the solution? Should our federal or state government realize a "big-brother" answer to a local problem? Should we trust that the economy will recover on its own? I believe that both the former and the latter do not resemble the ideal methodology of improvement in this unique situation.

The answer may possibly lay with more intense efforts by the local government. But let us not confuse this hypothesis with expanding the scope of local governments. I am not suggesting more administrative and environmental offices. Here's what I am suggesting: Local governments should have the option of paralleling the federal government in which the monetary base is expanded upon to increase the money supply, thereby increasing aggregate demand. Localities would operate in a somewhat similar fashion. Because our mid-size cities do not have the power to manipulate the money supply in such a direct manner, I propose that they be allowed to issue long-term bonds on a much larger scale to finance an improvement in infrastructure and relative attractiveness to current businesses long before such businesses pack their bags.

In the next issue, I will address the most relevant questions that contemplate the specifics and limits of such a policy. I will cover the multitude of benefits which could arise from issuing debt and, yes, the costs of unregulated issuance. The time horizon for long-term bonds will be discussed along with policies of taxing the interest received by bond holders.

Much of these questions were debated with passion in the 1986 Tax Bill and continue to baffle economists and consumers alike. Yet, from all these possibilities which arise from local deficits, we must keep in mind the following caveat: Any proposal to create debt must be carefully examined by local experts and MUST take into fact the costs and benefits. If such experts reason that the costs (risks) far outweigh the possible benefits, then the action should not be executed until the balance favors the benefits by clear and convincing evidence.