Tag Archives: Great Depression

Municipalities in fiscal distress: state-based laws and remedies

The Great Recession of 2008 “stress tested” many policies and institutions including the effectiveness of laws meant to handle municipal fiscal crises. In new Mercatus research professor Eric Scorsone of Michigan State University assess the range and type of legal remedies offered by states to help local governments in financial trouble.

“Municipal Fiscal Emergency Laws: Background and Guide to State-Based Approaches,” begins with some brief context. Most municipal fiscal laws trace their lineage through the 1975 New York City fiscal crisis, the Great Depression and the 19th century railroad bankruptcies. Writing in 1935, attorney Edward Dimock articulated three pieces to addressing municipal insolvency:  1) oversight of the municipality’s financial management 2) stop individual creditors from undermining the distressed entity and 3) put together a plan of adjustment for meeting the creditor’s needs.

These general parameters are at work in state laws today. The details vary. Some states are passive and others much more “hands-on” in dealing with local financial troubles. Scorsone documents these approach with a focus on the “triggers” states use to identify a crisis, the remedies permitted (e.g. can a municipality amend a collective bargaining agreement?), and the exit strategies offered. Maine has the most “Spartan” of fiscal triggers. A Maine municipality that fails to redistribute state taxes, or misses a bond payment triggers the state government’s attention. Michigan also has very strong municipal distress laws which create, “almost a form of quasi-bankruptcy” allowing the state emergency manager to break existing contracts. Texas and Tennessee, by contrast, are relatively hands-off.

How well these laws work is a live issue in many places, including Pennsylvania. In 1987 the state passed Act 47 to identify distressed municipalities. While Act 47 appears to have diagnosed dozens of faltering local governments, the law has proven ineffective in helping municipalities right course. Many cities have remained on the distressed list for 20 years. Recent legislation proposes to allow a municipality that can’t “exit Act 47” the option of disincorporating. Is there a middle ground? As the PA State Association of Town Supervisors put it, “If we can’t address the labor issues, if we can’t address the mandates, if we can’t address the tax exempt properties, we go nowhere.”

Municipalities end up in distress for a complex set of reasons: self-inflicted policy and governance failures, uncontrollable social and economic shifts, and external shocks. Unwinding the effects of decades of interlocking problems isn’t a neat and easy undertaking. The purpose of the paper isn’t to evaluate the effectiveness various approaches to helping municipalities out of distress, it is instead a much-needed guide to help navigate and compare the states’ legal frameworks in which municipal leaders make decisions.




Twenty states face bill for Unemployment Benefits

The Center on Budget and Policy Priorities has a new analysis highlighting the $35 billion bill that 20 states owe to the federal government for covering benefit extensions. The report points to one of the design problems with the current program. The joint federal-state unemployment insurance program (UI) is financed via a payroll tax. States have kept the tax too low and thus did not build up enough reserves in the UI fund to weather the recession. This isn’t the first time UI has run into this problem, in fact it’s a perennial issue. Alan Krueger of Princeton provides a summary of some of the structural weakness in UI, a program unchanged since the New Deal.

While it is widely recognized that UI is structurally broken, solutions vary considerably. In a paper for The Brookings Institute, Rosen and Kletzer suggest “strengthening the federal role” in UI that would require states to harmonize eligibility criteria and benefit levels, increased eligibility and benefits financed by a higher FUTA tax. In addition Rosen and Kletzer propose a wageloss insurance program for those who become employed at a lower wage than their previous job; and lastly private accounts for the self-employed.

The Tax Foundation proposes another set of fixes. These include loosening up restrictions in the program to allow states to experiment with alternative programs, as well as the establishment of individual accounts.

In September the Obama Administration proposed a ‘sweeping reform’ of the current program. Included was the wageloss subsidy for the employed. In last week’s SOTU the president stressed transforming UI into an employment program via job training services. But these new appendages avoid the problem that UI was created to address: how to smooth private consumption during times of temporary and involuntary unemployment?

What about a private insurance model? Trooper Sanders makes the case at The Huffington Post.

Great Myths of the Great Depression

The New Deal deficit spending helped boost the economy and bring the unemployment rate down to single-digit levels, but fear of deficits limited the scale of New Deal programs and caused Roosevelt to reverse course and cut back on spending in 1937, just as the economy was gaining momentum.

So writes Dean Baker in the New Republic. This is marginally better than the myth I learned in high school: FDR saved capitalism from itself by embracing the wisdom of Keynesian economics. He “primed the pump” with massive deficit spending and lifted the economy out of the Great Depression.

My high school story was a tad inconvenient for those who are fans of both Keynes and FDR: In 1940—7 years after the New Deal had begun—the unemployment rate still hovered at an astounding 14.6 percent.

But the high school myth turned out to be wrong: Keynesian economics didn’t end the Great Depression because Keynesian economics was never tried. Keynes, remember, called for deficit-financed spending during downturns (and surpluses during times of plenty to pay off the debt). The data show that FDR (and Congress) implemented half of the Keynesian stratagem: real spending dramatically increased throughout the Great Depression. 

The problem—from a Keynesian perspective—is that they also massively increased (already-high) taxes so that, even as the economy collapsed, revenue soared.  



A seminal piece in the American Economic Review by Cary Brown exploded the myth that Roosevelt was a Keynesian:

The primary failure of fiscal policy to be expansive in this period is attributable to the sharp increases in tax structures enacted at all levels of government.  Total government purchases of goods and services expanded virtually every year, with federal expansion especially marked in 1933 and 1934.  [But] the federal Revenue Act of 1932 virtually doubled full employment tax yields.

But notice, Brown doesn’t say that FDR failed to be Keynesian because he stopped spending; he failed to be Keynesian because he also raised taxes. But that doesn’t stop many in the punditry from claiming that, in his later years, FDR was converted into some sort of proto-Paul Ryan.

See this excellent post by Alex Tabarrok on the subject. See, also, these posts by Tyler Cowen.

Spam Artists, Electronic Pickpockets and Online Jobs

Hard Times can lead to acts of desperation. During the Great Depression rural areas saw increased petty property crimes – illegal fishing and crop picking, as well as a violent crime wave by notorious and newly-minted public enemies.

The current recession has produced its own wave of burglaries, robberies, and scam artists. Neighborhood Watches have intensified in Las Vegas and Miami as residents contend with a sudden up-tick in break-ins, car-thefts and other “crime of opportunity.” Copper, (which has been steadily rising in value), is increasingly being pilfered, everywhere from foreclosed homes, to Bangor Hydro Electric Co. in Maine, to Pennsylvania’s mines.

Perhaps more fitting with these times is  the increase in financial and online fraud. According to NPR, the  poor economy is also leading to increases in “data breaching”: identity theft, credit card fraud, and insurance schemes. Reports of online crimes are up one-third from last year to 350,000 complaints.

But not all of the fraudsters are professional criminals, or big-time Ponzi scheme masterminds. In fact, many often come from the ranks of disgruntled employees. Risk managers are most worried about embezzlement plots and organized data theft by insiders: “administrative staff, back-office employees, traders and tellers.”

According to the Association of Certified Fraud Examiners the number of embezzlement crimes are likely to continue increasing. Times are rough and layoffs are leaving holes in companies’ internal fraud controls.

It’s not just Wall Street that should worry. Employee embezzlement happens in other sectors too. Last week, the ex-Chief Financial Officer of Michigan Public Health Institute, was charged with embezzling $120,000 from the non-profit.