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How To Stop the Proliferation of Municipal Bond Issues
It seems rather strange that in a putative democracy a handful of people can legally, if figuratively, reach into the pockets of their neighbors but it happens all the time all across America via municipal bond ballot measures.
The main problem is that the measures “pass” if the majority of those who actually vote are in favor, even if hardly anyone votes. That leads to abuses. We should change the rules and mandate that bond/tax measures must obtain the affirmative approval of over 50 percent of eligible voters, not just those with sufficient incentive, education, and information to vote.
In most areas of our lives, no means no in the sense that no decision defaults to no action. You do not have to actively dislike the advertisement of a stationary bike company to avoid buying one of its products, you can vote “no” by not taking steps to purchase one. Heck, you may even approve of its ad but that does not give the manufacturer the right to drop ship one of its high-tech torture machines to your house and dock your checking account in exchange.
The same goes for physical intimacy. A stranger does not get to lawfully have sex with you because you did not actively swipe left on his or her Tinder profile. And Tinder does not get to establish a Tinder profile for you because you did not explicitly tell it not to. Wells Fargo found that out the hard way (though arguably not hard enough).
The need to obtain explicit consent before taking somebody else’s money (or bodily fluids) is one of the key remaining features of liberty. Without it, life begins to look a lot like slavery or authoritarianism.
But the rules change when the compulsory monopoly we call government makes the rules. The original impetus behind municipal bond measures was the notion that voters need to explicitly accept the tax increases needed to service the bonds. No taxation without representation and all that. When most people voted, and where taxpayers and voters were roughly the same people, bond ballot measures approximated consent. (Why fifty percent is often considered the best threshold is another matter, but I will stipulate it here.)
Statewide bond measures pass about four out of five times. Local ones appear to pass at the same rate, even at the 55 percent threshold established in California. And issuers who fail to gain approval can try again year after year, unlike in corporate proxy resolutions where shareholders are banned from reintroducing resolutions that fail to garner sufficient votes. (The SEC, incidentally, wants to raise those thresholds.)
It is a minor miracle when voters in a town like Monument, Colorado repeatedly put the kibosh on bond measures because the issuer, often a school district, is a concentrated interest with the budget authority to hire consultants who appear to make scientific, objective cases for the “necessity” of the bond. Some of those consultants even conduct market research studies designed to help the issuer use words and arguments most likely to sway voters to click “yes” come election day. Opponents are typically individuals with jobs, families, and lives.
Unlike in the commercial sector, municipal bond issuers do not need to persuade people to their cause, they just need to create enough uncertainty, confusion, or complexity to induce most voters to abstain. While often rational in other contexts, inaction on bond measures often means tax increases because the denominator for passage, regardless of the threshold, is always the number of people who actually voted on the measure rather than the number of registered voters.
Issuers know that and use it to their advantage. A suburb of Sioux Falls, South Dakota recently passed a bond measure 1,085 to 129. That seems like a mandate except 14,700 people were eligible to vote on the measure, which went up for vote on 10 September, a time when most East River South Dakotans are busy settling their kids in school, hanging tree stands, and “gettin’ the beans in” (soybeans of course). In other words, only about 1 in 15 people explicitly approved of the bond measure but the outcome is somehow counted “democratic.” (I don’t live in that town, incidentally, and the measure did not raise taxes but merely did not lower them as a previous bond recently matured.)
Other issuers put their measures up in November but only in odd-numbered years, when voter turnout is even lower than during even-numbered years. Often, public discussion of bond measures is muted because debate might draw out voters, which issuers want to avoid because when turnouts are low measures can be won simply by mobilizing teachers and naive statists.
In response to those obvious problems, some have called for minor reforms, like mandating that all municipal bond measures come up for vote on regular election days in even-numbered years. While that would be an improvement, it misses the main point, that no (action) should always mean no (money or booty). In other words, passage of anything authorizing use of the coercive power of the state to take citizens’ money should require the assent of fifty percent plus of eligible voters, not those who turned out at the polls.
When I proposed this recently at a meeting of the South Dakota chapter of Americans For Prosperity, someone immediately objected “but then no bond measure would ever pass!” “Exactly,” was my response. But of course truly important bond measures would pass, after mature consideration and extensive public debate clarified the issues at stake.
Consider again Monument, which sits on the Front Range betwixt Denver and Colorado Springs. Traditionally, taxes and public spending there were low so it attracted childless singles and older couples. Recently, younger couples with children began moving in because it was relatively cheap and improvements on I-25 promise to reduce commute times to both metropoles. Once ensconced, though, those couples began demanding more and better schools, even though that would mean higher taxes and, ceteris paribus, lower real estate values via what economists call tax capitalization.
I do not live in Monument either and would not presume to tell its residents what type of community they should try to create. But I do believe that a nation that purports to be a democracy should encourage citizens to debate the merits of proposals openly and to have to gain explicit approval for taxes, not a bare majority of a few percent of eligible voters in an inconvenient, secretive ballot. Robust debates could raise awareness of charter schools or maybe signal to parents with young children that they should live elsewhere. Or maybe they would lead to even more financial support for public schools. At the very least, full public discussion might expose the exorbitant fees that many municipalities now pay to consultants and issuers. The point is that to win approval, issuers would have to make a case and not just slide in under the radar.
Yes, voters could turn out to defeat bond measures, as they sometimes do, but the burden of proof should fall on the issuer, especially when public school districts seek funding because they have, with few exceptions, failed to create the type of citizens who vote. NGOs like iCivics are trying to improve civics education but the real problem, especially when it comes to bond and tax issues, is the failure of public schools to teach the basic principles of economics and public finance.
Without that background, most people do not feel comfortable voting on complex bond issues. So, as behavioral finance theory predicts, many abstain and the issuers win.
Robert E. Wright
Related Articles – Economic Trends
Why Is the System Rigged?
It’s crazy season, that special time on the American calendar when aspiring candidates for the nation’s highest office try to outdo each other in an effort to attract more voters to their platforms. This time around, background support is provided by a virtual anvil chorus of anti-capitalism clatter. Senator Elizabeth Warren, for example, frequently unleashes criticism of American capitalism by asserting that the “system is rigged,” a complaint that seems to resonate with meaningful populist appeal. It’s an old refrain that has echoed across the years from Karl Marx onward.
Nobel Laureate Robert J. Shiller explains why this may be the case in his new book, “Narrative Economics.” As Shiller points out, when a story is repeated enough, the viral message may be accepted as conventional wisdom, more like an article of belief than a matter of reason.
I’ll also emphasize that for a message to prevail, it helps if its content rests on a preexisting and inherently moral foundation that reflects our tribal instincts as an evolved human species. And what works for a small tribe doesn’t necessarily work so well for a huge industrialized nation.
Consider this: Some may inquire, “Do you believe in capitalism?” almost as if the position one takes is a matter of religion. When answering, we reflect on our tribal preferences, and cooperating and sharing with our family and neighbors is often a key to success. Thus, many people will almost instinctively answer “no,” or at least “yes, but …” followed by some serious caveats and exceptions.
Yes, the beneficial-but-invisible hand of commerce driven by self-interest has never been an instinctually lovable idea. Gains from trade, while well-documented since the days of Adam Smith, can be more elusive than we may first realize. Given the widespread negative views on the subject, politicians’ calls for greater accountability and government intervention may not be welcomed by all, but they’re understandable.
Shiller adds another dimension to his narrative economics story by using data from Google’s Ngram Viewer. The viewer produces charts based on the frequency of particular words and phrases in Google Books, which include some 8 million downloaded volumes in various languages.
Consider an Ngram we might apply to Senator Warren’s comments. The nearby figure contains one for “system is rigged” that shows the frequency of the phrase’s occurrence from 1940 through 2008, the final year in the database. I have smoothed the data by using a three-year running average:
The data show four viral periods: 1940-1950, 1960-1985, 1990-1998, and 2000-2008. The first period encompasses World War II, a time of draft, rationing, price controls, defense contracting, and related cronyism that may in some cases have been highly profitable for hand-picked firms.
The second viral period is much longer and encompasses a period including the Vietnam War and related draft, Watergate and significant social unrest.
The third period includes the first Iraq war, and the fourth contains anti-capitalism protests and budding expressions of concern about income inequality as a version of the economy closer to what we know today took shape.
The Ngram suggests that in seeking to communicate to her base, Senator Warren artfully chose a phrase that had gone viral before—which is to suggest that there may be an embedded tribal norm that reacts during periods when a relatively small number of people are able to build large fortunes or avoid burdens, such as the draft, as a result of government actions and favors.
Oddly enough, Senator Warren and other capitalism critics seldom ask how the system got rigged and what might be done to undo the rigging. But of course, the rigging is done in Washington, sometimes when special interest groups—including corporations—lobby congress for favorable treatment.
And how might that be undone? By trimming away uneven regulation and adopting policies that expose all business firms to the refreshing winds of competition. Put another way, by forcing capitalists to act like capitalists and not lobbyists.
Bruce Yandle
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science.
