This piece originally ran here in July 2011.
In case you hadn’t heard, the Federal Government is hovering dangerously close to its debt ceiling and the rising tide of debt is near to drowning our government like so many clichéd booby traps. America’s intensely leveraged national coffer —a not unusual concept, internationally— would face the prospect of skirting their loan obligations if we aren’t able to, well, incur more debt to pay off the current debt. The effects of a national default are clear cut: our credit rating would be docked by the Moirae of Moody’s, Fitch, and S&P, active duty military personnel would stop getting checks, the Department of Justice would stop seeing pay stubs, and programs of the Federal Transit Administration and Office of Housing and Urban Development would freeze in place (the prioritization of funding categories was analyzed by the Bipartisan Policy Center).
The paralysis of Federal government programs is finite, but the effect of a default is less understood on the municipal-level where debt is based on state and local statutes. Many states require legislative action if they choose to mobilize short-term borrowing to fill budget gaps usually filled by Federal government outlays. However, with debt hawks stalking the Capitol as well as state houses throughout the country there may not be enough political will to grant such relief.
Media outlets tend to paint the effect of an outlay stoppage for cities and states as a nuisance rather than a potential catastrophe. State and Local Government Series Securities or SLGS (pronounced, in what can only be a Republican-strategist’s dream, “slugs”) are one of the ways states can generate interest on their bond holdings between receiving funding and paying their contractors —they’re legally prevented from arbitrage— and since SLGS are managed by the Federal government, states would no longer be able to have their cash flow generate additional income. This is, at best, an “annoyance”, but at $47.4 billion the market for SLGS isn’t negligible. Esotericism abounds with municipal funding minutiae but the issues that a Federal default will cause extend beyond government-approved arbitrage.
With all the furor over the encroaching specter of the Federal government on the God-given (see: Constitutionally granted) rights of the state to govern themselves one would think that states like California, Virginia, and Texas would fare just fine on their own. But the Federal government outlays to states total nearly $3 trillion. Texas by itself received $210 billion in Federal-assistance in 2008, the most recent year that statistics are available. Of course, these funds are not donated to state coffers but are in place to assist with Federal programs that serve the defense, transportation, and general welfare programs, three broad based platforms that are generally well-regarded in the center of the political spectrum.
The latter two initiatives also disproportionately serve urban denizens, the less fortunate of whom depend on welfare distributions and transportation assistance that the Federal-government plays a role in. Washington distributes billions in assistance for social safety net programs and planning assistance; states couldn’t afford welfare distributions, transportation programs, or affordable housing assistance without the central government playing the role of allocator. The Federal default has the potential to freeze HUD programs that assist with housing for the poor and disabled and with the Federal Transit Administration funding halted there would be significant impacts on public transportation services. The detriments aren’t just centered on dense cores; Section 8 housing vouchers go to families in townships nationwide and county transit programs are seeded with FTA Section 5303 grants, both of which operate on the Federal budget. The Federal government doesn’t have the dexterity to manage these programs with a broad stroke, which is why these grant and assistance programs for cities and people exist in the first place. Cities would feel the pinch of a government debt crisis acutely and while it wouldn’t give pause to residents on the Upper East Side or Chicago’s Gold Coast, Brownsville and Englewood would struggle through the debt negotiations.
Fiscal discipline is an admirable pursuit when paired with responsibility and purpose. Lawmakers, though, have replaced sympathetic perspective with disaffected cynicism —one resource that is in abundance within the girdle of I-495. For all the rhetoric associated with controlling Federal spending, it seems as though those in favor of controlling debt have lost sight of what Federal outlays actually are: support for the states and support for the people. For cities, it means the loss of billions in assistance for welfare, transit, and unemployment assistance for millions of Americans and, in the words of Federal Reserve Chairman Ben Bernanke, “would create… a huge financial calamity… and would set job creation back very signifincantly.” Stopping the Federal government won’t hurt the families that can operate independent of direct assistance, but it does handicap those who can afford to lose the least: the unemployed, the urban, and the poor.