Outside the Beltway

State and Local Debt Soaring

Steve Verdon · Monday, July 10, 2006 · 1 comment

The Cato Institute reports that the debt for state and local governments is soaring. State and local government debt has increased by 39% going from $1.19 trillion to $1.85 trillion since 2000.

What is the problem here? Well, one way to look at debt is moving future income to today. That is, I’m reducing my future income to increase my consumption in the future. Now in general this doesn’t have to be bad, unless the things I’m consuming more of provide for little or no increase in my current or future income. For example, borrowing money to increase my current stock of human capital might make me more valuable on the labor market and not only increase my current income, but also future income as well.

For a government the same logic applies. A government might find that borrowing its future income to fund a capital expenditure such as expanding public roads makes sense. The additional revenues generated by improving, maintaining and expanding public roads might more than offset the loss of future income. On the other hand, if the expenditure is for a sports stadium that is unlikely to have any impact on government revenues the borrowing is foolhardy. Similarly if the government is borrowing to meet expenditures like payroll or other spending that will have little or no long term payoff.

Hence, if state and local revenues are currently growing a prudent course would be to reduce debt burdens and try to use more of the pay-as-you-go method. However, since such an idea is actually reasonable count state and local governments to do exactly the opposite.