Failing Up the Ladder

America has lately seen an increasing trend among smaller cities and municipalities in finding themselves suddenly insolvent, unable to cover service on their long term debts, let alone current expenditures. The tendency has been for larger governments, respective states or even the federal government, to step in to support these small-scale failures – to bail them out.

But beyond the immediate implications of large governments providing support they can’t afford to smaller municipalities who don’t deserve it – a process that increasingly lacks viability given the current state of the US federal government – there are much further-reaching consequences which many fail to consider.

The conclusion, whichever perspective you prefer to consider, is the same: it is far better to let these governments fail.

Consider the typical career path of a national politician. President Barack Obama began his time in politics as a local community organizer before being elected as an Illinois state senator. Jimmy Carter began by sitting on local boards (e.g. school board) before running for Georgia State Senate. Both of these men – and they are certainly not alone – eventually moved into the national political arena, where they each led America nearly to ruin due to poor decision making and poor understanding of economics and finance.

The broader point to contemplate is that national politicians are typically groomed in small scale, local offices. Some people who today govern cities, townships, and counties will eventually move into national legislative or executive offices.

They are able to move up through the ranks due to their credentials – they’re perceived abilities to lead and govern. These perceptions are largely shaped by their track records in various positions they’ve held. In other words, when that city goes broke and the city fails (because it is unable to secure a bailout), that city’s mayor would be largely blamed for defaulted bond issues, unfunded public employee pension liabilities, a failure of the city to provide basic municipal services or reliable infrastructure for its business community and private citizens, and large-scale upheaval in general.

But, if that same mayor is able to secure financial support from a larger government, they’re able to frame themselves as the savior of their region. They may end up winning their next election by a wider margin, or even moving up to higher office.

After all, the people who put cities, towns, counties, etc., in dire financial straits don’t just retire; they stay in politics as long as people are willing to vote them into office. Before you know it, they end up in Congress or – God forbid – the White House, and it’s then that we start facing problems like those we have right now: Terrible ideas coming from idiots who should’ve been forced out of politics decades ago.

The real problem in this country is politicians failing up the ladder. While admittedly little can be done about bureaucrats – who have their share of the blame – doing the same thing, most bureaucrats are political cronies given positions as thanks for their support in a successful campaign. If the politicians they’re attached to fail, so do the bureaucrats.

This is something a President Romney could’ve helped to correct, but instead it remains a widespread problem that has yet to see much recognition, let alone improvement. It’s about time to start the shift back the other way; holding politicians accountable – at any level of government.

In other words, don’t bailout small towns and counties; let them fail. Kill the careers of poor politicians who do poor jobs of guiding their local governments. After all, bad decision-makers make bad leaders.

What’s more, allowing smaller governments to fail does more than simply punish elected officials guiding their regions to ruin. The past decade has seen investors flee equities markets and pile into bonds – many of which are issued by smaller governments for local municipal projects, infrastructure, etc. Bailing out troubled cities allows these investors to recoup their investment.

When investors purchase securities – including municipal bonds – part of the risk they assume in exchange for the interest they’re being paid is that the bond issuer may encounter financial difficulty and default, in which case bondholders would lose their investments. When towns or counties are bailed out and these investors are made whole, they continue pouring money into those towns and others, allowing them to continue behaving financially irresponsible.

If towns or cities failed and bond buyers lost their investment, they wouldn’t be so quick to buy into the next bond issued, and small governments that are today so rife with financial irresponsibility would be forced to rein in their spending and make better decision. Meanwhile, those local officials who continued to make pour decisions would stop failing up the ladder in American politics.

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
« Back to the blog.