Good Riddance to Build America Bonds
The true barriers of our liberty in this country are the state governments. -Thomas Jefferson (1811)
Begun in April 2009 (under the provisions of the "American Recovery and Reinvestment Act") and terminated on December 31, 2010, the Build America Bond program proved to be a popular fund raising vehicle for U.S. state and local governments, who took advantage of its generous 35% interest subsidy (refunded via the U.S. Treasury) to the tune of $187 billion worth of new borrowings. While a hit with issuers, investors and government employee unions it is important to ask - was it a good idea? While it had (and still has) many proponents, the mere popularity of something is no assurance that it's a good thing for the nation in question.
From April 2009, when $7.6 billion in BABs were issued, to its high point in December 2010 when $15.7 billion was raised, BABs comprised over 23% of all municipal issuance during its lifespan. As the end game approached, municipalities ramped up their issuance to get in under the deadline, so much so that in their last month BABs represented just shy of half of all issued municipal debt. While we cannot say that BABs increased municipal debt issuance by 23% during their tenure (as we can only guess how much, if any, debt would have been issued without the federal subsidies), we can be certain that the level of debt issued was certainly boosted above what it otherwise would have been, as is the case with all subsidies.
The most enthusiastic issuers were concentrated in three states (California, New York, and Texas), who alone issued over 43% of all BABs, with $37.6, $20.6, and $16.7 billion outstanding, respectively. Overall, it was a program that leaned towards the long end of the curve, with only 12% of total issuance having maturities less than 12 years. Just shy of half of all BABs had maturities of greater than 25 years. All BABs were investment grade rated, with fully 74% at AA or better credit quality. Sold under the banner of infrastructure improvements, all the proceeds were used for myriad projects, from playgrounds to sewers to bridges.
Was the program a sound idea, economically speaking? The statement of the Treasury Department sums up nicely the views of its supporters, that "the Obama Administration's Build America Bonds program help(ed) states and localities pursue needed capital projects which build infrastructure and create jobs." Since the projects to be funded had to be, by legal statute, "shovel-ready", and since the work was to be performed by union labor (making AFL-CIO chief Richard Trumka, unsurprisingly, an ardent supporter of BABs), most certainly people were put to work by the program - but that is only what we see in front of our eyes.
The mark of sound economic thinking is that one take into account also what is not seen, and by using deductive reasoning we can see that the BABs program did not "create" jobs, it merely moved them around. Since, as Frederick Engels told us in his The Role of Force In History "force, however, cannot make any money; at most it can only take away money that has already been made." The "public" funds used to power the BABs program must, by necessity, have first been taken out of private hands. For every union job "created" by the BABs program, there was at least one private sector job taken away elsewhere. At best it was a wash, and, judging by the historical inefficiency of government run programs, it likely cost more jobs than it created.
BAB type programs have been tried before, without success, to "stimulate" an economy. Not surprising (as President Obama greatly admires FDR) infrastructure programs flourished under the New Deal, all to no avail. By 1939, Treasury Secretary Henry Morgenthau confided to his diary, "We have tried spending money. We are spending more than we have ever spent before and it does not work...we have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot."
In a recent column in the Wall Street Journal David Reilly wrote, "Temporary government programs hatched during a crisis can easily become permanent. That is the danger with Build America Bonds." He is correct. The program was barely a year old when President Obama was already floating the idea of making it permanent.
The New Deal was a series of "emergency" programs made permanent, and many exist to this day still. Do we need yet another one? BABs were a subsidy, and like all subsidies they distorted the market, pushed scarce capital where it otherwise would not have gone, and (in its worst effect) created a dependent relationship where none should ever exist.
We should never lose sight over something more important than the mere dollars and cents of this issue - we need to take into account the effects of the BABs program on the political structure of our nation. For our safety we were specifically designed as a republic, each individual state, sovereign in its own right, is tasked to be a check on federal power.
How much of a check can they be, though, when they are constantly sending emissaries to D.C., hat in hand, begging for money? For that reason alone, I am relieved that the Build America Bonds program has been relegated to history's dustbin, and I hope that's where it will stay.
