It is a time of fear in the face of freedom, a time for the widening of previous roads and the opening of new paths, a time of an emptying country and swelling cities, yet a time when these paths are mined by knowing algorithms of the all-seeing eye. It is the time of the warrior's peace and the miser's charity, when the planting of a seed is an act of conscientious objection.
 | Bonds: What are they Good For? (Absolutely Nothing?) |
I’ve got a question for you.
Cities and counties around the U.S. love to issue bonds to pay for things like schools, convention centers, museum improvements, roads and other public works. As I understand it, there’s an election with the bond issue on the ballot, and if the ballot issue passes, that’s taken as permission for the city or county to issue bonds to raise money to pay for something.
Here’s my question. It’s my understanding that a bond is basically a loan taken out, with interest and everything. I hear “experts” say all the time on the radio and newspaper that bonds are a “good” way of raising money when cities and counties spend them on projects that increase the value of the community. But given that loans require interest to be paid on them, isn’t it always (except in a situation of hyperinflation) going to be better economically speaking for a city or county to raise taxes to pay for some project?
Educate me! I’m all ears.
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Not necessarily; in theory, the projects funded by bonds could improve the local economy enough to cover the interest.
Of course, anybody who asserts that they know for sure that this will (or won’t) happen is, shall we say, overconfident.
Comment by John Stracke — 5/24/2005 @ 9:09 am
Wouldn’t that take quite a lot of economic improvement? Has this ever, historically speaking, happened?
Comment by J. Matthew — 5/24/2005 @ 10:21 am
I don’t know. It doesn’t strike me as inherently implausible that it’s happened sometimes; public works do sometimes help the economy. But, yeah, generally a bond is like a credit card: a way of convincing people to buy things they can’t really afford.
Another way of looking at it is that a bond is a way of starting a long-term project, one which would otherwise get its funding cut in favor of new projects. The bond mechanism makes it impractical to cancel the project, so it gets completed even if it wouldn’t be possible to maintain a political consensus for it. This is arguably antidemocratic; but, on the other hand, it counters the antidemocratic problem of legislators cancelling projects so they can fund their projects and get reelected.
Comment by John Stracke — 5/24/2005 @ 12:07 pm
This depends on your long-term outlook. Bonds have paid for interstate-level highways, schools, bridges and World War II.
Not investing in all of these would probably certainly have a negative economic impact compared to what we do have. Is it measurable or predictable? Probably not with any accuracy.
Remember that most of the muni bonds’ interest is not the highest, but that’s because they are usually good risks for the investor. Risk =approx= Rewards.
Also, raising taxes affects everyone. You don’t need to buy bonds to support the building of a new stadium if you don’t want to. If they fail to get enough money raised, (usually somewhat unlikely) they theoretically would not start construction. So the bond is a good barometer of public support. And if you hate football and find it both mindless and barbaric, it would be nice to “opt-out” of paying increased taxes to support it.
If we had raised bonds to pay for the Iraq situation, it might be a very different story today.
Comment by mondopercipient — 5/24/2005 @ 1:10 pm
No, but, if you buy bonds issued by my town, I have to pay the interest.
Comment by John Stracke — 5/25/2005 @ 9:55 am
True point, but the interest on the total bond amount is a pittence compared to raising the equivalent (total) amount of money equal to the bond by raising tax revenue.
Plus, you can drive on the new bridge or sit in thenew stadium even if you don’t buy a bond!
Comment by mondopercipient — 5/25/2005 @ 10:16 am
…what are you talking about? The town still has to pay back the total amount of the bond. It’s a loan.
And it’s usually a long-term loan (30 years?), which means the interest is not going to be a pittance. I’m not sure what interest rates municipal bonds pay; but I know that, when I had a 30-year mortgage (I’ve since refinanced at 15 years), the interest was going to come to something like 250% of the principal.
Regardless of how small the interest is, it’s always going to be greater than zero, so the total cost of the project is going to be more than it would be without bonds. Tax rates may not go up as much, because the cost is spread over, say, 30 years; but the total amount of tax money spent on the project is higher.
As I’ve said, that can be worthwhile, if the economic benefit of the project is great enough. However, it would be cheaper for the government to save up until it can afford the project out of savings. That way, they would be collecting interest instead of paying it, so the project would cost less than its nominal price. That doesn’t happen, though, because Americans get angry over government surpluses. They aren’t going to say, “Oh, good, the city is saving money for future projects, so we won’t need a tax hike”; they say, “The city is taxing me and then doing nothing with the money; I want a tax cut”.
Comment by John Stracke — 5/25/2005 @ 2:33 pm
You have also forgotten about the money the government may pay in interest when they borrow to meet other financial commitments.
The increased taxes we pay are rarely enough to pay for all the projects, so other projects or services get cancelled (that’s another cost, more intangible, but still a cost to us) or they will borrow more money to make all payments.
If you look at the federal government’s interest payments today, it’s a huge part of our yearly expenses.
As to your last point, that does happen in some local governments. They usually call it a “capital improvement fund” or a “contingency fund”. It isn’t used enough, I agree. But that is human nature today. Stores used to have “layaway” plans that were used frequently. Try to find many today.
People would rather buy on credit cards today, pay more for it in the long run, than wait and do without.
This isn’t always bad with government borrowing and interest payments. There are economic “windows of opportunities” that open and then quickly close. It’s sometimes far wiser to spend money you don’t have (in either of the above ways) than to wait, because the value of what you are doing may go to zero.
Then it doesn’t matter how low the interest rate is. Separating those projects and doing the most necessary ones is the true issue. This doesn’t seem to be able to get done without partisan influences.
Comment by mondopercipient — 5/26/2005 @ 12:07 pm