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Public Finance – Budgetary Distress

Lately, the most casual of readers cannot avoid subjects entangled in public finance, including Greece (cf. Argentina), Puerto Rico (cf. Detroit), Illinois, etc., to name a few, that contain the following narrative:

  • Outflows of funds have outpaced inflows of funds (excluding borrowings) over many years, resulting in a current economic condition in which significantly increased borrowing, debt restructuring, tax collection, user charges for public assets and/or significantly reduced commitments of funds for public services, including support for current benefits (e.g., education) and support for deferred benefits (e.g., pensions and other post-employment benefits such as health care) seem necessary to meet present obligations.

The existence of this type of financial condition (i.e., budgetary distress) seems remarkable. After all, numerous legislatures, public sector executives, and independent private sector experts (e.g., credit rating agencies) have regularly prepared, reviewed, approved, analyzed, etc. the numerous annual budgets preceding these budgetary distresses. To paraphrase the Talking Heads Рhow did we get here? How do we work this? (This is not my beautiful house!)

Some reflexively describe these distressing conditions as arising from kicking the can down the road. Perhaps. More specifically, I cannot avoid the idea that they arose in part because debtors are generally seduced by debt, especially in the case of public finance where it will be paid (or not) by others, and creditors’ controlling persons and agents are generally seduced by loan origination fees (and related income streams from debtors). Everyone was satisfied, yesterday. There were no bad guys, then. Deals were made. Champagne was drunk. Reelections occurred. Bonuses awarded.

Today, public finance and the related accounting issues are front-and-center; i.e., the conflict of the day. Where did the funds go? Were they used to create public assets (e.g., tunnels, bridges, schools, hospitals, etc.) Were they used to pay for current services (e.g., to operate the public assets consistent with the labor agreements in place) in lieu of raising and/or collecting taxes? Who should bear the costs of this distress (e.g., debtors through austerity, creditors through haircuts)?

The moral of the narrative may be threefold: 1.) This is not your beautiful tunnel, bridge, school, hospital, etc. Like many other benefits arising from the public sector, they arose from the cooperative efforts of investors, financiers, taxpayers, elected officials, public sector employees and contractors, etc. 2.) It is way too easy to be irresponsible in budgeting notwithstanding the participation of so many elected, appointed, and hired individuals. The checks and balances of theory dissipate like fog in the heat of these individuals working together. 3.) Any fool can take something apart (cf. financial analysis). It takes real skill and demonstrations of cooperation to make something valuable and long lasting (e.g., hospitals, schools).