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Family Budgets Meet Macro Economics
Author: BobR    Date: 07/22/2013 13:03:02

Republicans have run their campaigns for years touting their financial savvy. They claim to be the antidote to "tax and spend liberals", and advocate for lower deficits and sound fiscal policy. Their track record, however, tells another story. The reverberations of an economy based on a house of cards rather than a solid foundation eventually become clear over time. Those reverberations are getting louder, and it is not a pleasant sound.

At the end of the Clinton presidency, we did not have budget deficits (yes, we still had debt - those are two different things). We were actually beginning to pay off some of the national debt. The economy was booming, and the middle class was still on good footing (not thriving, but doing okay).

Enter President George "Dubya" Bush and the Republican-controlled Congress. Bush thought it was a terrible thing that the federal government was taking in more money than was being spent by the government, and decided to "give it back" to the taxpayers. The infamous Bush tax cuts carved a huge hole in the budget and put the country back on track to accumulating and increasing the national debt. Add two wars and a housing collapse that put millions of taxpayers out of work (thus depressing the feeble tax stream even further) and the national debt ballooned.

This can happen on a family budge scale. Someone in the family gets sick and accumulates massive medical bills... The house gets flooded and the insurance company says "you don't have flood insurance - sorry"... The husband or wife loses their job and the income stream plummets. At that point, there is little left to do but declare bankruptcy.

The federal government can't declare bankruptcy, so they just increase the debt limit, lay off (or furlough) some workers, and raise taxes (or close tax loopholes). But what about those entities in between? What about cities, counties, and states?

In most cases, they don't have the same options as the federal government. That's why we keep hearing about them declaring bankruptcy. By far the biggest one to do so has been Detroit:
With more than $18 billion at stake in Detroit's restructuring, big law firms and other advisers are clamoring to represent the city's many creditors - including some advisers not exactly known for municipal work.

The city, which filed the largest-ever U.S. municipal bankruptcy on Thursday, tapped high-priced lawyers from Jones Day, financial advisers from Ernst & Young and restructuring consultants from Conway MacKenzie, court papers show.

For creditors and related parties, there is clearly a lot at stake. That means bondholders, insurers, retirees and others are sure to be accompanied in court by platoons of lawyers.

Previous to that, the largest municipal bankruptcy was Stockton, California. Both cities have something in common: the collapse of the main local industry, and the 2007 collapse of the housing bubble. In Detroit, it was the automobile and steel industries. In Stockton, it was the closure of a naval base. Stockton had just floated a bunch of bonds to revitalize their downtown, and once the base closed, their tax base for paying those bonds dried up. Detroit has seen a more gradual decline, but the economic collapse from 2007 to 2009 really did it in. You can buy house in Detroit with the cash in your checking account.

With city worker pensions (past promises to workers) straining budgets, and housing teetering on a delicate recovery/balloon line, and the economy's slow recovery, and with the sequestor effecting government workers across the country, this is a story that could get worse over time before it gets better. Currently, there are 36 cities and municipalities declaring bankruptcy. Bond insurance companies generally have to pay when the bond can't be repaid by the city. This will make it more difficult for cities to acquire bonds required for those big projects that attract business and new residents (or sometimes just keep them from leaving).

There are no easy answers here. The closing of a base or a large factory is hard to plan for. Cities would be wise to ensure they have multiple industries instead of relying on just one. There's also the delicate balance of raising enough taxes to keep the lights on (and maybe stash some under the mattress) with making taxes so high that people decide to move elsewhere. There is also some self-control required by all of us to reject the "flip this house" mentality that led to the housing price balloon in the first place. If you live in an area that is stable - look around, and get involved... and learn the lessons of the past. There are no guarantees, but we're not powerless to affect change either.

Balanced budgets require balanced taxation, common-sense spending, and civil planning. Budget numbers do not exist in a vacuum. That is where Republicans get it wrong.

70 comments (Latest Comment: 07/23/2013 03:29:05 by Raine)
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