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The Culture of Fiscal Irresponsibility

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While attention in Washington D.C. is focused on the federal debt and the failure of the Congressional "super committee," 2011 has already seen a number of local governments head toward bankruptcy. Some are filing for chapter 9, others are seeking state approval to go bankrupt, and a number are just starting to explore their options. Broke localities have included Alabama's Jefferson County, the city of Harrisburg, Pennsylvania, the town of Central Falls, Rhode Island, and the town of Hamtramck, Michigan.

In a recent article on the Alabama bankruptcy, Reuters' Melinda Dickinson observed that:

"The bankruptcy filing by the southern U.S. county will add to concerns about the risks in the $3.7 trillion U.S. municipal bond market, which was hit recently by the high-profile debt crisis in Pennsylvania's capital of Harrisburg. In addition to Harrisburg, which filed for bankruptcy last month, just two other cities -- Vallejo, California and tiny Central Falls, Rhode Island -- have declared bankruptcy in recent years since the onset of the U.S. financial crisis."

There are a number of reasons that localities have found themselves in this situation. In some cases, they have been hit by pension bills that cannot be covered by declining investment and tax income. In other cases, the costs of a critical piece of infrastructure have exceeded estimates and cannot be met. In all cases, local governments, like the national government, does not seem to be willing to increase taxes to pay the bills. In some cases, the tax load would simply be too high for any local community to bear. In other cases, local elected officials fear that the wrath of anti-tax zealots would cost them reelection. There is little question that local government made commitments that could easily lead to problems later on. While benefits such as employer-paid and guaranteed pay-out pensions have been eliminated all over the private sector, government employees continue to enjoy these types of benefits.

The American federal system is sometimes difficult to understand, but brings with it significant advantages in permitting decentralized governance and policy in a large and still heterogeneous nation. American states are considered sovereign, and have powers distinct from the federal government. Among the most critical powers controlled by American states is the power to tax.

While states have sovereign powers, cities and counties do not. Legally, they are "creatures of the state," and to some degree we need to see their fiscal problems as ultimately being state fiscal problems. That was certainly the case in the 1970's when New York City nearly went bankrupt. At that time, New York State Governor Hugh Carey was the central figure in working out an alternative to bankruptcy. Through his strong leadership and important contributions from other leaders of New York's institutions, we saw the development of a responsible fiscal policy that combined federal, state, private and union resources, Due to courageous and far-sighted actions, New York City averted bankruptcy and laid the foundation for the revival that continues to this day.

In today's political environment, we seem to be a little short of the political courage displayed here in New York by the late Hugh Carey. Governor Carey did not worry about the next election or what the focus groups thought of his actions. He decided that his responsibility as governor required him to act. Union leaders, realtors and bankers followed Carey's lead and made short-term sacrifices to ensure long-term civic health. Bankruptcy was seen not simply as a fiscal condition, but if permitted would represent a failure of community. When one family's house burns down, neighbors are supposed to help rebuild it. New Yorkers railed together and saved their city.

The picture in our Nation's capital looks a little different. Ideology trumps reason. Our national economy is showing signs of strain derived from decades of greed, stupidity and the absence of community values. During the most recent Bush Administration we started two wars and expanded prescription drugs for the elderly, without raising taxes to pay for it. The financial industry's greed led to the Great Recession and President Obama had to use borrowed money to bail out the banks and stimulate an economy shaken by the collapse of confidence that surrounds us still. Given the horrible example set by our leadership, is it any wonder that the average consumer borrowed against the equity in their home to buy big screen TVs and gas-guzzling SUVs? If the government and Wall Street live on credit, why shouldn't the rest of us?

Is it any wonder that local elected officials paid their employees unsustainable pensions, built capital facilities that might be too expensive for the community to pay for, and then considered bankruptcy when the bills came due? The seal of the United States of America reads: "E pluribus Unum" or "Out of many, one." It seems to have been replaced by a new national motto perhaps with a photo of Bernie Madoff: "take the money and run."

In Congress, Republicans continue to sign pledges to "starve the beast" and lower taxes, while simultaneously insisting on large defense and domestic spending programs. In our State Houses, Governors are doing their best to keep their distance from county and municipal fiscal problems. We have developed a culture of fiscal irresponsibility that is shocking, stupid and short-sighted.

The average American gets it. Savings rates are growing rapidly and people are reluctant to take on debt even when it makes sense to do so. Wal-Mart has even bought back layaway. Wal-Mart's customers can pay off a purchase before they take it home, instead of taking it home first and paying later. It is important to remember that debt in and of itself is not a bad thing. If debt is seen as an investment in the future it makes sense. When a company borrows to buy a piece of needed equipment, a family borrows to buy a house they will live in for 30 years, or a student borrows for tuition to go to college- they are making investments and taking risks that they hope will pay off in the future. That is not the same thing as borrowing money to pay for groceries or going into debt to enjoy a vacation at a luxury resort. But people are starting to look at all debt with suspicion.

We need to turn back from this culture of fiscal irresponsibility. This means that both revenues and expenditures must be considered in tandem. Some spending must be reconsidered. Some new revenues must be generated. We need to face up to our responsibilities and pay our bills. Health care, education, defense, police, fire, environmental protection, and infrastructure (energy, sanitation, transport and water) are not free. Sometimes we need to defer current consumption to build a sustainable future for our children and their children. But sacrifices should be shared, and not placed entirely on poor people and those in the middle class.

Letting local governments go bankrupt is the height of fiscal irresponsibility. The federal and state governments must act to prevent these bankruptcies. The failure to act will ultimately undermine all efforts by government to borrow and invest in the future. The inability to invest in the future dooms this nation to second-class status and dooms our children to downward mobility. These local bankruptcies have received much less attention than they deserve. They should be seen as a national crisis, not as a local curiosity.