Paul Krugman the Nobel Laureate in economics writes in Monday’s NY Times that debt is good, that attempts to pay it off are bad, and that nations and individuals should take on more because it will help “the economy.” Elsewhere, he claims that borrowing is OK as long as we can pay the interest. “We owe it to ourselves.”
Krugman has apparently never personally experienced the downside of loans (fixed income securities, or “paper” as it’s known in the trade.) Many of us in Kentwood know the stress of having to make a car or a mortgage payment when times get tough. The feeling of being trapped, of having to mooch off of friends or relatives, of scrambling to make a few more dollars to keep what you have; if you fall behind, the bank or owner of the paper will stuff back and ruin your credit. Paul Hense, a former CPA who had offices in Kentwood often pointed out that wealth is not an excuse to not work, but rather allows people to make better decisions. On the other side, the threat of loss from not paying one’s debts causes panic, the irrational and desperate thinking that gets nothing done.
What Krugman misses are the basic features of paper, that the principle will have to be repaid, that debt interferes with one’s ability to borrow more, that buying stuff on credit when times are good is easy and pleasurable and repayment unnoticed, but that economic times can get tough making servicing those debts becomes a hell.
What I hear around city hall is that the economic slowdown of 2008-11 caused real pain with layoffs and projects defered. Another theme is that we should be saving up for small purchases like fire trucks and computer equipment, but that borrowing for the big stuff should be standard and is even better with our current low interest rates. Of course, we are refinancing all of our previous bond issues to save a few hundred thousand here and there, to great self praise.
The city has a AA credit rating, good for a Michigan city but we had to pay Fitch and S & P to be rated before we could borrow. Our total long term debt as of 2014 is nearly 22.9 million, 19.4 million of which are in bonds issued since 2002 to pay for the 4 modern buildings from the city complex (I’ll bet that most folks in Kentwood have never seen them.) We paid off 1.9 million last year and borrowed a new 2.9 million from a “Drinking Water Revolving Fund.”
Besides debt, Kentwood finances are at risk from now abandoned defined benefit pension plan. We must provide a fixed amount of money for these retirees. This is funded in part by gains in the stock market from which we assume an annual return of 6.5%, conservative among Michigan cities, but higher than the 5% suggested by the Economist Magazine. If there is deflation or some other major disruption in the US economy, Kentwood could be at risk for spending millions to make up for the pension shortfall.
Right now, times are good. The national and Michigan economies are stable and no one frets about debts. I’m a gloomy sort and fret a lot about hard times; they will come and we have made many sacrifices already. We’ll have to find more. I don’t detect any enthusiasm to raise taxes.
Our interest payments were 588K last year plus the 1.9 amortization show that abpout 2.5 million must be paid, or else. Two and a half million in a 33 million per year operation seems manageable until the income stream is compromised because housing prices (and tax income) are in the toilet or the unemployment rate is over 10%; then the panic sets in, and crazy stuff can happen.
It might be prudent to study ways to cut costs now when everything is calm. Certainly it’s not wise to increase our expenditures; rather we should be putting a bit aside to buffer a huge downside move in revenues. In Kentwood, there is still room to expand, so new residents and businesses ought be welcomed to increase our tax base.
Krugman sees the benefits of borrowing from the banker’s and economist’s vantage; he ignores the other half of the balance sheet. We in Kentwood and in our household budgets have to deal with making repayments. These demands for cash continue even in hard times when our attention should be directed at solving cost cutting problems. Fear and having to resort to panicky “plugging in the dyke” solutions which solve little is the high and poorly understood cost of living in a pawnshop economy.