Comment by burlesona | Hacker News Reader

Comment by burlesona | Hacker News Reader

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I've heard this idea before and I think there's something to it, but it's interesting because for it to function well you generally need to first build up a big savings account which you can then use to fund expensive things, otherwise you're extremely limited in what you can do.

One variation I've heard would be for cities and states to not be allowed to issue debt, that only the federal government could do that. It would mean the local units of government (which actually run and fund most things) would have to operate on a balanced budget, and would provide a lot of robustness in the system relative to what we have now. If they needed a one-time bailout for some reason (natural disaster etc) the federal government could give funds to the local area, potentially issuing debt if necessary.

Of course that doesn't provide any protection against federal debt binging... so I'm not sure how you'd square that. You don't really want to prohibit the federal government from taking on debt - for example, the largest debt the US ever accumulated was to fight and win WW2. But maybe there are strings you can attach.

One such string that makes a lot of sense to me is the idea that you should never allow debt for operating expenses or maintenance. You would think that would be obvious and you wouldn't actually need a policy to enforce that outcome, but unfortunately it's common practice today to just issue bonds if you can't afford to maintain your municipal services.

I think the psychology of spending actual cash, in a bank account, that could theoretically be spent on anything, is completely different from using debt to fund projects.

A lot of my views come from operating perhaps the lowest level of "government" possible: a large HOA. Our CC&Rs prohibit entering into any contract (including debt) lasting more than a year. It works for us because the entire place is run by volunteers, many of them nonspecialists, who could do a lot of damage getting us into, say, a 10-year contract with Comcast that was too expensive, not negotiated well, etc.

I think we expect our politicians to be superheroes. This might be borderline reasonable for large, well-funded federal agencies like the Federal Reserve, BLS, BEA, etc who can attract large numbers of truly great people, and pay them well. It's not reasonable to expect someone like Tim Geithner or Ben Bernake (a Princeton economics PhD) to run the finances of a small city or HOA. You're going to get part-time volunteers who know how to balance their checkbooks. Expecting these people to be perfectly rational decision-makers without formal accounting training, let alone knowing how to think carefully about how to analyze NPV, cashflows, and long-term liabilities, in the face of all kinds of local small-ball politics (e.g. trying to help their friend win a contract, or a personal vendetta against someone's project) is laughably far from realistic.

> But maybe there are strings you can attach.

You could tie the debt to revenue. I think this happens often, but not often enough. You'll see "bond measures" on the ballet. "Raise sales tax by X, to pay for the bond X for purpose Z." I think this works, though you don't want to run every spending measure by the public. Maybe some of them can be more automatically applied, or within the discretion of the local council. But the key is the tie between future revenues and future expenditure.

> you should never allow debt for operating expenses or maintenance

Except these are perhaps the most important expenses. Maybe this requires something like automatic state-receivership or some other loss of local autonomy. Or the shortfall is picked up the state under some set of rules (something like state-wide municipal operational insurance, where in times of surplus everyone is kicking-in)

I'm not American, so I might get American political culture wrong. Wouldn't this transfer a lot of power from the states to the federal government? Isn't that considered a bad thing?

Great question. It's not that cut and dried. You could probably ask ten Americans what either the balance of power between the federal government is, OR what it should be, and get ten different answers.

The reality is that, today, the federal government gets the lion's share of attention but the bulk of day-to-day stuff (roads, schools, police, utilities eg water) are run by state and local governments. BUT--and this is an important caveat--SOME (not a lot, but some) money for this is provided by the federal government through about 20 different mechanisms including federal block grants for education, federal highway funding, and other mechanisms.

It's actually quite complicated, but to a first approximation, most local things are operated locally, financed mostly locally, but the federal government does kick in (fund) a little on certain things, in a way that's fairly haphazard and subject to the whims of politics, than any sort of tradition-driven or constitutional way.

Incidentally, this is part of why the US's COVID response has been literally "all over the map". It's mostly in the hands of the states and you're seeing how 50 different political cultures deal with this crisis.

A less stringent and more immediately applicable rule would be to limit debt repayment to the expected lifetime of the project.

Plenty of ways to cheat, but is still a decent yardstick.

The Federal government handing out money to peferred towns sounds horrific.

Especially on Juneteeth.

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