Monday, June 8, 2009

Bonds vs. Taxes - on Reps and Dems

A regular question that comes up whenever the public has to pay for something is this: "HOW are we going to pay for it?" Democrats are often criticized as people who raise taxes, when clearly members of both parties do that. Republicans are known for wanting to cut taxes, but state governments on many occasions have had to shut down because of insufficient funds - an embarrassment and a crisis in some cases. One approach that some like is to issue bonds. There are several reasons it's a good idea to do that.

If I've got things right, a bond is basically a loan that the government takes out in order to pay for something. The bond buyer invests in bonds as a very secure, though low-return, virtually sure thing. If things go perfectly, the government can essentially take out a loan, invest in something helpful for society, and as property values increase, the tax base increases, and without raising anyone's taxes, revenues rise. As such, in time, the government has more money to spend and can therefore pay off those bonds slowly and with a little interest. Sounds fantastic.

Governor Haley Barbour of Mississippi issued $3.5 billion in bonds in 2007 for, among other things, education (Sigo, S. "Mississippi: Gov. OKs $3.5B for Schools," The Bond Buyer, SourceMedia, April 26, 2007, p. 360). There is little doubt that a great deal must be done in Mississippi to improve the system of education and to help pull people out of poverty.

Here is the trouble with issuance of bonds. Like any investment, it has its own risks. In the scenario I described, property values go up, as do incomes, or whatever way it can happen, the income that the government takes in must increase. For, how else can we pay off not only the cost of the principal of the loan without raising taxes, let alone the greater cost of also covering the interest on the bonds? The big problem arises when we take a bad bet. What if property values one day stop going up - as has happened? What if incomes decrease and people lose their jobs - which has happened? What happens then is that the government must pay off the principal of the bonds plus interest at the contracted rate, but with decreasing state revenues. This is the problem with government debt, but not just for bonds. It is also the problem for debt generally.

I am not criticizing Barbour here. We've got to get the money from somewhere. At the same time, some people, such as Barbour, are criticizing the federal government these days for taking out loans and leaving our grandchildren with debt. This may be something to criticize, but clearly in the case of education in Mississippi, this was not criticized in the same way. In the end, either the economy will have to get dramatically better quickly, or we will have to raise taxes.

There is an alternative, of course. We can cut government spending. The trouble is where to do it. If there are obvious places to cut, we can save ourselves lots of money. So many of our expenditures were hard to establish, but were put in place because of a clear need. That may not be true in a few cases, but in so many, it can be incredibly difficult to cut spending. Consider, for instance, the desire to cut pork-barrel spending, a mantra in the election. In my home state of Mississippi, Senator Thad Cochran was right to point out building after building bearing his name that would not exist were it not for the federal government's help. "Pet" projects, as they are called, are negotiating tools to get one person to vote your way because you will fund a much needed expense in his or her district. Now, surely some can be criticized, maybe even many cut or avoided. The point here is only to say that these things are not so simple.

Government should be as efficient as it can be, but the flash of criticisms against government loans or raising taxes are often too simply stated. The claim that lower taxes spark greater business success should imply that New York and California are poor states, given their high taxes, and that Mississippi is thriving and wealthy, given its very low taxes. This simply is not the case. We must invest in ourselves. Even though Barbour's bet on the bonds went sour, it was not his fault, and Mississippi is worth an investment. In the end, Democrats and Republicans are not so different as they make themselves out to be on taxes.

These are initial thoughts on taxes, bonds, and government spending. If you've got comments or suggestions for thinking about these matters, post them. Of particular interest to me are places that have tried out and succeeded with great public/private partnerships to grow their communities. One great example is Auburn, AL, which turned around its economy after a manufacturing plant closed, cutting thousands of jobs at once in a small town. You can find a little info about them and their plan here.

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