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Willisms

« Trivia Tidbit of the Day: Part 564 -- Fat Taxes. | WILLisms.com | Trivia Tidbit of the Day: Part 566 -- Fiscal Nightmare. »

Trivia Tidbit of the Day: Part 565 -- Government Debt Not Just Federal Problem.

Some States Are Borrowing Way Too Much-

The national debt held by the public is staggeringly large these days. Its growth has been robust and persistent. It is also projected to nearly double over the next decade, according to many forecasts.

State and local government debt is also on the rise in some places and on average (.pdf):

stateandlocaldebtoutstanding.gif
From the perspective of average taxpayers, debt financing should be minimized. It is more costly that payas- you-go financing because of the interest payments incurred. It also comes with an overhead cost in the form of the large municipal bond industry, which employs tens of thousands of lawyers and finance experts in underwriting, trading, advising, bond insurance, and related Wall Street activities.

Another problem with debt is that mixing big
government with big finance usually causes corruption.
The municipal bond industry has had many scandals. In
“pay-to-play” schemes, bond underwriters use bribes or
campaign contributions to win bond business from state
and local officials. There are federal laws to prevent such
abuses, but violations are common. A recent pay-to-play
scandal in Philadelphia resulted in criminal sanctions
against the city’s treasurer and allegations that the mayor’s
office often chose the bond firms for big debt issues.

The existence of some debt is not a bad thing at all. Zero debt would signal a dysfunctional and unhealthy economy, but we've passed the point of healthy debt in most states and locales, as well as the federal government:

Who do you think is more reliable—the full faith and credit of the United States backing up Treasury bonds, or the McDonald’s Corporation, backed only by “billions and billions served”? By some market measures it is the latter, and for good reason. The price of credit defaults swaps guaranteeing payment on 10-year Treasury bonds has risen by 1000 percent since December 2007, with an implied 12 percent probability of default on government debt over the next decade. In the view of the markets, this makes U.S. government bonds a more risky proposition than debt issued by McDonald’s.

Why? Trillion dollar annual short-term budget deficits due to the recession and financial crisis will soon merge with even larger deficits generated by government entitlement programs like Social Security, Medicare, and Medicaid. While a large short-term deficit to stimulate the economy can be absorbed, large deficits running for decades simply cannot be. Over the next decade, the combined costs of the big three entitlement programs will rise by 2.1 percent of gross domestic product; over the following decade, entitlement costs will increase by an additional 3.1 percent of GDP, with costs continuing to grow thereafter.

Issuing bonds, much like earmarking money for pork projects, may seem somewhat innocuous, but in the same way that earmarking goes hand-in-hand with corruption, lots of municipal bonds can do the same thing. Often the two-- earmarks and bonds-- go hand-in-hand.

Imagine if a United States Senator slipped earmarks into a bill, and that Senator's husband issued the bonds associated with the earmarked projects. Imagine if this happened time and time again, over the period of many years.
earmarks and the bonds might start to waft out of the Trinity River into television and radio ads in the 2010 Republican gubernatorial primary.

In Texas, notwithstanding the hypothetical example above, our state and local debt per capita is 49th in the country. Only Tennessee has a lower rate of outstanding debt per capita. Number one: Massachusetts.


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Previous Trivia Tidbit: Punitive Coke Taxes.

Posted by Will Franklin · 31 March 2009 08:55 AM

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