Local government takes lessons in deficit financing from the Great Depression


There really ought to be a word for an unhappy coincidence. I am currently reading Taxpayers In Revolt: Tax Resistance During the Great Depression by David T. Beito. In it, he describes a pernicious practice that local governments used during the 1920s and 1930s to circumvent plebiscites capping government debt and limiting state and municipal taxes.

According to Beito:

By the end of the 1920s, local governments hit on the "tax-anticipation warrant" ... to evade the debt limit. For many vote-conscious politicians in the 1920s, the tax-anticipation warrant proved an irresistible temptation...

[P]oliticians had every reason to gamble that continued prosperity would ensure the safe retirement of the warrants or at least put off the final day of reckoning. In short, the tax-anticipation warrant seemed a foolproof method of financing the expansion of local government and at the same time circumventing tax resistance.

I read those words, written 20 years ago about an era 80 years ago, last night. This morning, in the Financial Times, I read these words, written presumably last night about right now:

Four of Britain's biggest city councils have called on the government to introduce a revolutionary scheme that would let them raise billions of pounds for regeneration schemes on the back of future tax revenue. This type of scheme was pioneered in the US where it is known as "tax increment financing"... The move by Newcastle, Liverpool, Manchester and Birmingham [would allow] local authorities ... to issue bonds that could be paid back using the increased tax base that - it is assumed - would be the direct result of improved infrastructure....

Tempting though it would be to remind these spendthrift municicrats that they have no way of knowing whether their cherished scheme has justified, let alone will justify, the investment, there remains the basic problem affecting all deficit financing: the ability of today’s service recipients to pass the cost of schemes they support onto tomorrow’s taxpayers.

This creates enormous moral hazard, especially as more mobile taxpayers can support municipal bonds that will be paid for by those who buy their houses, while they can sell up and move to lower-leveraged areas.

Being a firm believer in localism myself, I don’t believe that government should be allowed to prevent local authorities borrowing if they wish. Local voters should punish fiscally-lax councillors. But there needs to be protection for the homebuyer, caveat emptor notwithstanding. At the very least, vendors should be obliged to inform buyers of any outstanding liabilities that might impinge upon them through local taxation as a result of past profligacy. Thus property prices would be discounted to reflect wasteful “public" borrowing, and home-owning voters would be a bit more reticent about voting for deficit spending.