Deficits for Localities?

By Robert Schiener

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

Debt is good. Debt allows for the construction of capital infrastructure. Debt allows for the feasibility and fabrication of capital innovations which require an immense sum of monetary support. Debt allows a majority of Americans to own a home or attend a university. Indeed, debt is good and it can be positive for localities, too.

According to Arthur O'Sullivan, author of Principles of Urban Economics, the private sector has reported a high incentive to remain in a geographical spatial area when such a region contains attractive public services like sewerage, education, and land development. O'Sullivan reports that such a realization accompanied by higher taxes offsets the potential benefits from public sector investment proportionately. This deviation from the potential benefits of such spending may be reduced by issuing long-term debt, say 25 years or more.

In this light, businesses and households benefit from an increase in infrastructure without an immediate 100% corresponding tax increase to cover the expenditure. The inference is clear: The initial investment in land renovation, public utilities, and human capital may generate an average annual return exceeding the total cost of investment, thereby producing a net return to investment if managed efficiently. A second conclusion is made conspicuous: The city will henceforth make itself more attractive for business to operate.

In the end, the possibility for long-term growth, observed in the intermediate future, will be observed. The end product is critical for understanding the rationale for debt issuance. The end product entails a lower ratio of local debt to local income, more commonly referred to as the "Debt-to-GDP ratio" (at the federal level). So long as this ratio remains reasonable (to be determined by experts), there is little reason to lose sleep.

Although the above theoretical background simplifies this actuality of deficits for localities, it illustrates the potentiality for further growth if statisticians and local planners can formulate a methodology which maximizes long-run utility. This formula must avoid short-term political passions that sacrifice sound fundamentals in favor of irrational exuberance.

Also relevant is the idea of attempting to eradicate the inevitable information asymmetry that households may inherit. In other words, general taxes for the local consumer may rise in order to cover interest payments. But by how much? This information must be conveyed to such persons before any action is taken so that their rational self interest is made known. It is their community and, as such, deserve an opportunity to approve or reject the notion of debt for localities.

Pondering the change in local economy as a consequence of issuing long-term bonds should not, once again, be necessarily encouraged nor necessarily rejected based on theory alone. It takes a consideration of the multitude of variables and its potential variance. Whether or not the local folk are ready to discuss the complex nature of local growth, infrastructure, and debt is based on arbitrary preferences which carry a high variance, in and of themselves.

Eric Seymour

Robert Schiener

Bryan Wilhelm

Bryant Lewis
Joel Corbin