Adapted from Editor and Publisher Jerry Sullivan’s Commentary in the Nov. 23 issue of the Los Angeles Garment & Citizen:
You can hardly turn around these days without bumping into a bond proposal. It’s enough to make you think that some finance house in New York is handing out a free lunch for every billion dollars’ worth.
Now Gov. Arnold Schwarzenegger has mentioned a $50 billion bond, which sounds as though it’s some sort of giant do-over on state finances. It looks as though the $15 billion bond he campaigned for, also just a year ago, didn’t quite get the job done.
Author George Orwell once said that a restatement of the obvious is sometimes the first duty of a responsible person. So here we go, in an effort to be responsible: Bonds are not free money.
Bonds are promissory notes sold to investors. Any public entity or private company that issues bonds promises to pay the investors back, with interest, over a long period of time.
Bonds are a way for states and cities to live beyond their budgets. Sometimes that means paying for necessary repairs. Sometimes they finance an investment. And sometimes they are issued simply to help finance government when accounts have gone awry,Schwarzenegger’s proposal appears to fall in that category.
This borrowing is not the inherent evil that some would suggest.
The old saw about having government live within its budget “just like American families do” is simply off the mark. Think of how many people would be able to buy a house if they had to pay cash. Think of a mortgage,which allows buyers to purchase the property over a long period, paying substantial interest on the loan,as the homeowner’s version of a bond.
So the Garment & Citizen does not jerk a knee in reaction to bond proposals, per se. But we wonder about the plethora of such proposals currently in the air.
We remind readers that the bills for the bonds generally stay on the books for a long time. That means today’s borrowing could mean tax increases or cuts in service during any economic dips in the future.
That’s not necessarily a disaster, either. Sometimes a vicious cycle of debt can force actions that lead to a virtuous cycle of economic growth.
Look back to the early 1990s, when the Clinton administration raised taxes in an effort to address a budget deficit. The tax hike convinced financial markets that the federal government had taken a sincere step toward addressing its deficit. That pushed down bond rates, which led to a drop in interest rates.
The lower interest rates made it cheaper for companies to borrow money, and many invested the funds into new technologies. Companies began to realize greater efficiencies, and productivity went up. Wages increased, sparking a consumer boom that continued to feed the business expansion.
Tax receipts rose and the federal deficit disappeared in short order.
The problem we currently see is that the state of California is not in a position to prompt a virtuous cycle. It is simply too small in terms of the overall market. Indeed, the state will continue to be dependent in part on a federal government that shows no signs of fiscal discipline these days.
So we urge elected officials and voters alike to exercise caution when taking on debt.
Let’s face it, politicians aren’t the only ones addicted to spending.
But voters are the only ones who get the bill.
