The Municipal Bond Racket

This is Richard Wolff from Democracy at Work responding to another ask Prof Wolff question. This one comes from  Brandon Gilbreth, and he asks me about the hamster wheel of municipal bonds, and by that I think he means from what he tells me in his question, that he’s wondering about this endless cycle in which cities and towns, and since the term municipal bonds actually includes county and state borrowing as well, that when these different entities borrow money it seems to lead to more and more borrowing, to more and more of the taxes paid by the people who live in these cities and towns being used to pay off the debts that were incurred earlier, and that this is a never-ending cycle of indebtedness of our cities and towns. And he wonders couldn’t we handle all of this differently?

So, let me begin by answering the question pretty much as he puts it and so the answer is, oh, yes, we could do this completely differently. I mean the simplest way to explain it is: we could and you can just see the conservatives pretending to agree here with what I’m about to say, but we could say that cities and towns and counties and states need to raise money via taxes to pay for the services they provide and then there’d be no need to borrow there’d be no municipal borrowing. It would be a pay-as-you-go system. You know, we already have those in other parts of our economy: the social security system, for example does not borrow money to pay out the benefits to all of those eligible to be receiving social security benefits. It raises the money by taxing us to pay for the provision of funds to the elderly, to survivors, to injured folks and so on and you could run cities and towns in that way. Well, then, why don’t we?

There are several reasons we can look at by far the most important one driven as these things are in capitalist economies is the money made by the people who handle all of this and in this case it’s the bankers and the brokerages and the huge financial institutions. These are the ones that typically lend money to cities and towns, they lend their own money, they lend the money of people whose money they invest, trust companies, you know that local bank that calls itself “the bank and trust company”. Well, that word trust means wealthy people and others like that have given the bank money in trust for the bank, then to invest for them and they love to lend money to cities and towns and there’s a simple reason.

First, they get fat fees for doing that, and they love that, that’s a nice income, very small risk. The second reason has to do with that risk because what cities and towns have to do when they borrow money is to pledge the tax revenues of the city to pay off these debts. In other words, the city commits to tax you and me who live there or work there or both to cough up the taxes. In the future to pay back these debts and to pay interest on them and lenders like to lend to cities and governments because that mass of people that they can tax is a pretty secure source of money to pay off the creditors over time. No guarantees here, there, never are. But it’s a good bet, and it’s a big business handling municipal debt makes a lot of millionaires and billionaires in this country.

Well, you might ask: is it really possible to pay as you go for cities and towns and so on? Well, the answer is of course it is. There are many examples of cities and counties that have done that in the past. In the present we don’t even allow cities in this country to borrow for their ongoing expenses because we’re so nervous that they might really be drawn by the banks and the insurance companies and the other eager creditors into doing more of this than they ought to, so we limit cities and towns to borrowing for what are called capital projects. Big things: a sewer system, a new school, a water treatment plant, things like that. Then we allow them to borrow. Do we require them to determine first whether they might have the taxing resources to do that instead?

No, we do not. You see, the wealthy in every community and the big corporations they don’t want to be taxed so they put enormous pressure on local politicians not to tax them and at the same time they put enormous pressure on those same politicians to spend money to keep the roads going because the businesses need it: to provide street cleaning because the wealthy neighborhoods demand it… You get the picture. So, the only way to solve the problem of all this pressure including from the working class to get social services from the city like public schools like a public health program to make sure the water is safe and so on the pressure to do that coupled with the pressure of corporations and the rich not to pay taxes the way they could and the way they have to basically in the federal system with this crazy arrangement the cities end up borrowing. And then you get a big wink-wink from the corporations and the rich because, of course, they are the ones who now having blocked the local politicians from raising taxes on them turn around and take the money not taxed from them, by the local authorities, and lend it to the local authorities which is of course a no-brainer.

Any rich person, if he or she were asked, would you rather be taxed or would you rather give that money as a loan with the government having to pay it all back to you and pay you interest in the meanwhile? Unless you have serious mental difficulties, and maybe even then, you know, which one you’ll choose and that’s what indeed corporations and the rich have done. Which is why municipal finance this vast system of municipal borrowing has exploded in the United States and is an enormous drag, because you would be amazed to discover what an enormous portion of the taxes we all pay to the cities and towns we live in to the states we live in that goals not to provide a service we need but to pay off the loans which were taken out because the politicians were in the pockets of the corporations and the rich who didn’t want to pay their fair share of taxes. It’s an awful system. We live in it, and we will continue until we understand and take the steps to change the system. It’s long overdue.