Credit Freeze is Affecting Local Governments (Updated)
The New York Times reports on how the ripple effects of the credit freeze are beginning to trickle down to local economies.
Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening.
The sudden loss of credit, one of the ripple effects of the current financial turmoil, is affecting local governments in all parts of the country, rich and poor alike. In New York, a real estate boom has suddenly gone bust. Washington has shelved a planned bond offering to pay for terminal expansion and parking garages already under construction at Dulles and Reagan National Airports.
As Hilzoy points out, this is a bad time for this to be happening.
Heading into a recession is the worst time to cut back on projects like these, which provide people with good jobs, and can work to keep the economy going. The Federal Government can run a deficit, but most states cannot. So just at the time when people need these jobs the most, they end up having to cut back.
The Senate is voting on a
bailout rescue proposal today, so we’ll see how that ends up affecting the interbank rates. I know I was skeptical about the initial Paulson proposal (which was terrible, let’s be honest), but the bills shaping up now are better, and directly address the problem facing us right now. (Megan McArdle, Dave Schuler and Kevin Drum get most of the credit in convincing me of the need for the Treasury to buy up the toxic mortgage assets, in case anyone’s keeping score at home.) Right now I expect that the Senate is going to pass its proposal. Whether the House will is something I’m still unsure of. Public opinion may be changing, but from what I hear the calls into Congress are still overwhelmingly opposed to any government purchase of these assets, so we’ll see.
(cross-posted to Heretical Ideas)
UPDATE (Dave Schuler)
I’ve been predicting that local governments would be likely to fall into financial difficulties when the housing bubble burst for a couple of years now and predicted that we’d start seeing local governments in distress due to credit problems right after Henry Paulson and Ben Bernanke’s announcement last week.
The collapse in the housing bubble strikes at two revenue streams that local governments are highly dependent on: sales tax revenue and automatic property tax revenue increases as a result of reassessment at higher value. I suspect that the first inclination will be to raise marginal rates. That’s what happened during the Depression of the 1930’s and it resulted in more foreclosures than would otherwise have occurred. It will exacerbate the problem.
I don’t know what things are like elsewhere but here in Chicago and Cook County where I live local officials have been extremely reluctant to cut city and county payrolls but that’s what needs to be done. That’s going to be particularly difficult as demand for government services will tend to rise during a recession.