Public investment – and local government


In the warm-up before the State of the Union address, the sides are digging in.  A strong focus on debt appears to be the main point of contention, with Obama proposing investments that will pull the US out of its funk and the opposition apparently finding a religious fervor in the size of our debt.

About to get lost, once again, in the big story out of Washington are hundreds of smaller stories across the US of debt running out of control at the State and Local level.  Smaller investments made one highway at a time, one transit line, one park, one new factory or housing development paid with tax increment financing are starting to dominate our crisis.  And they get very little attention.

Once again, I’ll rely on graphs generated by the St Louis Federal Reserve, which has the most impressive data on topics like this anywhere online.  The graph below shows in red State and Local expenditures and in blue total State and Local debt:
Note that the point where they cross each other and debt exceed income already happened – back in 2003.  For State and Local government, the crisis has been a reality for seven years now.  The Depression that appears to have started as early as 2001 has been forcing their hands already.

By itself, debt exceeding one year’s expenditure is not a terrible thing.  However, it is an indication that borrowing has already hit a point where it is not likely to be sustainable over the long haul.  The slopes of the lines show that the trend has no chance of reversing without serious action.  The overall debt stands at 14 months of expenditures and continues to climb.

State and Local governments provide most of the essential services that we rely on every day.  Minnesota’s State general fund is more than half education, with K-12 the dominant part of it.  Local governments typically spend most of their money on Police, Fire, and street maintenance.  Our way of life is specifically defined far more at this level of budgeting than the machinations out of Washington.

Standing at about 14 cents of every dollar in the spent, State and Local governments are a big part of the economy as well.  Essential services are typically very labor intensive, with most of the money going to salaries, benefits, and pensions.  A debt crisis at this level will be catastrophic.

The debt outstanding by State and Local government generally comes from investment in the community or essential infrastructure – not that different from the kind of investment that President Obama will likely propose in his speech.  But these investments are being made in a manner which does not appear sustainable over the long haul.  The entire system of public investment, starting with where we focus our attention as a people, has been in trouble for a long time already.

Note that right now interest rates are quite low and the debt outstanding is being financed cheaply.  That could change rapidly if interest rates rise substantially, meaning that what may not be an obvious crisis today may show up very suddenly in the future.

Investment by government is not something we choose to either do or not do.  It is an essential part of our lifestyle and has been for a long time.  Where we do the bulk of it, however, is a part of our government that has been in a silent crisis for years.  While Washington gets all of our attention, the real investment in the US already strained to the breaking point – a problem neither side is addressing.