Superficially, the idea of the City of St. Paul using federally subsidized bonds to build apartments and a grocery store downtown seems like a bad one. It’s the sort of ‘government-stepping-in-even-where-private-markets-work-pretty-well’ action that gives ammunition to those who believe that all government economic initiatives make things worse.
Here, government wants to build private infrastructure that no private developer is willing to touch at a time of an apparent surplus of both retail commercial property and rental housing.
Unfortunately, as one examines the details for the latest revamp of the Penfield project, it doesn’t look much better.
One has to make heroic assumptions about how some $50 million in spending might stimulate employment or overall economic output to argue that the project would make U.S. society as a whole better off. Even starting from the assumption that the special “Build America” bonds authorized in the 2009 Obama administration stimulus bill should be used for something, there probably are other uses that would have a higher return to society than an upscale supermarket and 216 apartments.
Parenthetically, I should note that this sort of municipal government subsidy to develop essentially private property is something that economists of all political persuasions love to hate. Despite claims by city or state economic development officials that some apartment, factory or shopping complex would not exist without government action, most economists see these all as zero-sum games that shift construction from one location to another but do little, if anything, to advance society as a whole.
Some development for the block bounded by Minnesota and Robert and 10th and 11th streets has been in the works for years. Initial plans were for a 40-story building of luxury condos. When this didn’t fly, developers proposed adding a hotel. Now, the plan is for an 11-story apartment building with a Lunds supermarket as the first floor.
Most of the funding would come from Build America bonds. These are taxable municipal bonds guaranteed and subsidized by the federal government. The subsidy comes through the feds picking up 35 percent of the interest payments over the life of the bonds. The rest of the principal and interest must come from the project’s rental income.
When the stimulus bill was proposed, these bonds were presented as a way for municipalities to fund general public infrastructure construction such as roads, bridges, water and sewer facilities and public buildings rather than for publicly funding residential and retail buildings. But this use apparently is legal.
Advocates argue that a $50 million-plus building would create construction jobs and spending on materials that would not exist otherwise. And they note that unless legislation is extended, the subsidized bonds will end Dec. 31. So from the point of view of St. Paul, there may be a net benefit to doing this compared with doing nothing at all.
However, that begs the question of whether we would get a greater benefit from traditional public works projects. Minnesota cities, including St. Paul, have done better than many municipalities, particularly ones on the East Coast, in terms of maintaining infrastructure.
But in general, U.S. local governments have been depreciating out capital invested over the past century and a half by not replacing public works as fast as they wear out. Such spending on facilities that are pure “public goods” — ones a free market never would produce spontaneously — almost certainly would have a higher return to society in the long run. They do take longer to plan, however, and the rush is on to get subsidized money while it is available.
The Penfield development may be good for St. Paul. For the nation as a whole, it almost certainly is not.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.