Fundamental trade-offs often are the same regardless of the scale of the organization in question.
That thought hit me as I read an article about a county board meeting in a weekly newspaper back home while getting new tires on the front of my pickup. Whether it is a rural Minnesota county with a population of 9,300 or Hennepin County with 1.2 million, the optimal relationships of taxing, borrowing and spending involve near-identical issues. And fundamentally, this also is true for Lotterman Wind LLC and Medtronic. Government is not business and neither of these is exactly the same as a household or an individual, but very often the economic similarities far outweigh the differences.
Everyone — businesses, governments, households, big and small — faces the question of whether to borrow versus save up for a purchase.
At the county board meeting in question, one commissioner clearly was weak on economics. A county should never borrow, he asserted, except in some real emergency. Yes, thrift is good and no individual, business or government should borrow carelessly. But if we applied a rule that all purchases had to be funded out of current income or from savings, the global economy would be sharply smaller and we would all be much poorer.
Indeed, it was the rise of modern capital markets during the Renaissance that was the primary reason per capita incomes began to rise after millennia in which the average human lived just above subsistence level.
Capital markets, which now include something called a “municipal bond,” facilitated the flow of saved value — from people, businesses or governments that did not need the money at a given time to others that did. Helping capital flow to where it created the most additional value increased total output and made it possible for living standards to grow faster.
Start with a simple example. A good friend is getting his life together after a bad patch. He is a skilled carpenter and can get a well-paying job as long as he can get to jobsites. But he does not have a car. Should he take a job in a coffee shop at $10 an hour and save up money to buy a car? Or should he borrow $1,500 to buy a basic used car right now that will get him to building sites in the suburbs where, including value of benefits, he will earn three times as much?
The answer is that he will be better off borrowing a manageable sum and getting the higher pay immediately. This reflects a more fundamental fact. My friend produces more value for society if he works building houses than busing used coffee cups off tables. If borrowing money to buy a car gets him to building houses right away, then not only is he better off in terms of personal income, but society as a whole is better off.
Similarly, if a rural county or the state of Minnesota have road and bridge projects now that make the economy more productive going forward, it may well be wise to issue bonds and get the projects done now rather than wait. Following a rule of never borrowing would waste resources and make us poorer. That nearly all businesses borrow at some time or another to invest in new machinery or facilities should teach us something.
The county newspaper reported that another county commissioner voiced a different opinion. He argued it was good to borrow if the cost of waiting to do a project was higher than the cost of borrowing. That is getting close to the way a public-finance prof might phrase it. A business or a unit of government is justified in borrowing if the rate of return from the new investment is greater than the cost in interest and fees, and is greater than the return from alternative purchases the money might be spent on.
The knotty question, from the point of view of both governments and businesses, is estimating the prospective return on an investment. Especially if that return is “to society,” rather than to an individual or single household or corporation. We cannot know exactly what 20 miles of newly blacktopped county road will do in terms of speeding grain into the elevator or saving wear and tear on the tires and springs of feed trucks and school buses. And a metal stamping company does not know exactly how much money a new press will save them if they replace another that is 30 years old. But in both cases, there are methods to make useful estimates.
To appreciate the benefits of public infrastructure, it helps to experience what its lack entails. In March 1936, when my mother drove her Model T 72 miles from where she taught school near Orange City, Iowa, to the home farm near Chandler, Minn., she and her little sister had to get farmers with horses to pull them out of the mud seven times and it took them 11 hours. In 1969 in Brazil, when I traveled from Iguacu Falls, on the Argentinian border, back to Rio de Janeiro, the bus spent at least six hours without ever getting over 20 mph because the soybean trucks in the state of Parana created such potholes in the unpaved clay road that any higher speed would have been disastrous.
We would have been richer in the United States if we had borrowed money to build farm-to-market roads 20 years before we actually did. Not spending the money kept us poorer for longer. And Brazil, with a tremendously dynamic farm sector, still throws away much of that productivity with terrible rural roads. In 2006, taking a bus up to Brasilia, as soon as we passed from the state of Sao Paulo into Goias, it was a return to my first experience 37 years earlier.
Yes, state and local government borrowing always needs a prudent tie to future tax revenues. Yes, the return to public investment always needs some comparison to what would be earned if the money was left in the private sector. But history and theory both show we are underinvesting in things as basic as transportation infrastructure right now.
That was borne out by another item in the same news article. A representative of the Minnesota Department of Transportation made a liaison visit to the county meeting. Among other things, she informed them that MnDOT is “in an asset management and preservation mode.” That means they are like a South Bronx rental property owner who is trying to keep his tenement from deteriorating too quickly. But that doesn’t hide the fact that we are living off of past generations’ investments.
The board did discuss historic low interest rates. Whether these are good for the country as a whole is debatable, But from the point of view of any single country or city, with current low rates it makes more sense to borrow for a road project in 2016 than it did in 2006.
No one in the article, however, mentioned another key consideration. By exempting interest earned on “municipal” bonds from taxation, the federal government effectively subsidizes state and local government. But if a county never borrows, it leaves that federal money sitting on the table. Its citizens are that much poorer as a result. Doing so in the name of fiscal prudence and good government is a senseless waste.
Past leaders, especially the progressive Republicans typified by Gov. Elmer Anderson in the 1950s, knew the benefits of public investment. We are all richer in our state as a result. But many of us, including some county commissioners, have forgotten that lesson.