The credit rating of the United States of America was downgraded on Friday to AA+ from AAA. For many this might inspire as much fear as the phrase “lions, tigers, and bears? Oh my!” But the truth is that the downgrade our national government’s credit rating should keep us awake at night, especially for those of us who see the future of sustainability in good land use and public transit. Sustainable solutions often rely heavily on publicly financed capital infrastructure (during the debt lid debacle I wrote about how a downgrade could increase the cost of the deep bore tunnel).

It’s true that such projects usually don’t state interest costs. There are good reasons for that, the most obvious one being that issuances of public debt in the form of bonds are often negotiated sales; the interest rate isn’t known during project planning because it doesn’t get established until a deal is struck between the borrower and the leader. We should be careful that in criticizing the lack of specifics on interest on the tunnel, that we don’t feed NIMBY know nothing rhetoric about good projects at a time when elected officials are irrationally paranoid about debt.

However, these are not ordinary times and the tunnel is not a straightforward project. And by saying “not straightforward” I don’t mean “complex.” I mean that so much of the stated financing of the project has been sketchy and vague on details like where the port will find the funding to pay for it’s promised $300 million, will the functioning project really deliver $400 million in tolls, and how much will the City of Seattle have to borrow to fix the decaying seawall? The fact that the country’s credit has been downgraded means that the cost of the project could go up beyond the usual expectations. A downgrade has never happened in the 70 years since the US got its AAA rating, in 1941, the year Pearl Harbor was bombed.

Asking questions about tunnel financing has become synonymous with tunnel opposition. And I’ll admit I am a tunnel opponent (and a fan of debt). But we’re talking here about a first-time-in-70-years downgrade in the credit rating of the government managing the world’s largest economy. The ding to the credit rating is likely to affect borrowing on projects like the tunnel (local governments here are already on a downgrade watch list).  But current evasion by the State of Washington of the question of “how are we going to pay for it?” hurts the tunnel, and it also fuels skepticism that government actually can manage the public’s money and the public’s trust.  That troubles me and should trouble all supporters of debt funded but sustainable projects.

I’ll be dancing on the tunnel’s grave if it dies, but not quite so much if the autopsy finds the cause of death was public skepticism of the use of borrowed money by government for all big, complicated projects. That would make the tunnel patient zero in a plague of unwarranted local debt skepticism.

24 Replies to “Deep bore trouble: Public financing and public trust”

    1. I hope we handle that more sanely than we did the debt celling. For one thing the Federal role in transportation should be fairly non-controversial except among the most extreme. For another sparsely populated areas stand to lose the most if federal highway and transit funding is eliminated.

  2. Wow, Roger, your posts generate even fewer comments than mine :-)

    I wonder if this will actually redound to the benefit of public agencies that have very strong credit histories, like Sound Transit. The amusing thing about this morning’s opening on the bond and stock markets was that stocks plunged and yields on t-notes went down as investors sought a safe haven, and perhaps that will trickle down to other highly-rated Muni/local government bonds if the stock market continues to struggle.

    There’s a number of takeaways from this. The first, extensively discussed elsewhere, is that this is probably a bad call by S&P. The second is that, to the extent S&P have a point, it is that what is missing on a federal level is a willingness to raise revenue, not an ability to raise revenue. Third, while cuts on the federal level hurt, if they are applied equally, the states and localities that suffer the least are those that are net donors to the federal treasury.

    If this bipartisan deficit-reduction committee can’t do its job (and I doubt it will), under the parameters set out by the law just passed, across-the-board reductions will be ordered, split evenly between defense and non-defense. This is about the least-painful type of reduction possible for Seattle, because most of our New Starts projects are either already funded or very competitive, and we’re not hugely exposed to any defense spending that’s likely to get the chop.

    1. If you think the DoD is going to be cut to any significant degree, I have a Sgt. York weapons system to sell you.

      The worst case scenario will be a President Perry in being sworn in 2013

    2. Related to your takeaways, one thing I read (with the caveat that with all that’s going on in the world it’s foolish to read a single narrative in stock and bond market patterns) is that investors are pretty confident the US government will service its debt, but not at all confident it won’t hurt the economy badly to do it.

      1. I don’t think that’s quite right. Investors are more or less confident the us will service it’s debt, but there’s now a non-zero chance of default.

      2. Not really. That’s the irony of this whole debt ceiling debate, and it’s why investors are rushing to treasuries. Everybody agrees the Treasury will pay bondholders before anybody else, and it has plenty of monthly income (taxes) to pay bondholders and 55% of the government’s other expenses. Even if there were a default, it would only mean that the bondholders get their interest a few days or a month late when a deal is made, not that they’d lose any of their investment. The US would have to be in far worse economic shape than it is now for bondholders to lose any money. At the worst there would be a devaluation, which to bondholders is the same as inflation.

      3. Remember that the 2008 collapse was triggered by a money-market run. Lehmann Brothers had gone bust, and then one single money-market fund broke the buck (=couldn’t pay investors in full). People started pulling money out of all money-market funds and were threatening to do the same to banks. That’s why the government suddenly raised the guarantee at banks and extended it to money-market funds and put together a huge bailout (which Republicans had recently rejected pre-Lehmann).

        But then as now, the panic did not mean that all money-market investors were about to lose their entire savings. One fund broke the buck, and I assume it would have paid back investors 95%-ish (?), and all other money-market funds were still 100% solvent. So a panic does not necessarily mean that all investors will lose all their money; it just means a few investors lost some money.

      4. Sorry to post repeatedly, but I think this is an important issue. The debate on “default” is not really about default, it’s about politics. I don’t recall any tea party person ever suggesting the government should not pay its bondholders. Even though they advocated not raising the debt ceiling, it was with the knowledge that the Treasury could still pay bondholders. We have not reached the situation where not paying bondholders is even a possibility. That’s even less likely than a war erupting in east Asia and the US bombing China.

      5. You guys make no sense. Why was the debt downgraded if it wasn’t because of fear of non-payment?

      6. @Andrew: S+P downgraded the debt because their analysts felt there was a higher, yet apparently still low, risk of default.

        However, the individual traders in the market bought up tons of bonds today, driving bond yields down. In looking for a safe place to put their money, despite S+P’s downgrade, investors put it in the Treasury rather than in stocks (which, in case you didn’t notice, got killed today). That perhaps indicates (again, with the caveat that one should not read simple narratives or a single strategy into market movements) more confidence in the US Government paying off its debt than in the value of US corporations.

        Gold and bonds up; oil and stocks down. Investors may be more concerned about US Government debt than they used to be, but are still pretty confident in it. They clearly are doubtful about US and global economic growth.

      7. Andrew, I think it has to do with the risk involved with not balancing the budget, year after year, and no plan to even come close. At some point, the US economy will be unable to even pay a spiraling debt payment, especially when inflation kicks in (which it will), then the US truly couldn’t pay the debt and keep some semblance of government funded.
        The downgrade says, “If you stay on this trajectory, you will go into default”.

      8. No, that’s nonsense. Our debt/GDP ratio is tiny compared to UK, China,etc.. What S&P SAID was this:

        America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed

        Our debt ratio is completely managable if we had a working body politic. We don’t.

      9. That’s the question. There are several possible answers, and I’m not sure exactly which is correct.

        (1) S&P fears that repeated gridlock could result in a more serious stalemate down the road. (2) S&P is counting as “default” the non-payment of other government bills. Does default mean not paying any expense, or does it mean specifically not paying the bondholders? Not paying another expense would trigger credit-default swaps, but a bond rating is specifically about the trustworthiness of the bond. Nevertheless, there’s disagreement on this. (3) People are confused about what the issue is: they hear the word “default” and think it means more than it does. I wouldn’t accuse S&P of this because it should know better, but many people in the media and in society are confusing the two. (4) The US deserves a downgrade because it should not even be giving the appearance that it might repudiate its debt. (5) S&P’s math was sloppy. (6) S&P has a political agenda: it wants the government to shrink for ideological reasons, so it’s overstating the impact of the deficit in order to force the government to focus on it rather than on stimulating the economy and making investments for the future.

      11. Andrew, that has two parts. “Exposing political dysfunction” is what my #1 is, and it seems to be how you interpret it. “Did not go far enough” implies that the deal should have been bigger. It doesn’t say what kind of deal it should be, but coming right after the tea party said there should have been further cuts, it plays right into the hands of those who say the deficit is so urgent we must forego raising employment, stimulus, infrastructure investments, and unemployment compensation/retraining because we can’t afford these. And given that the people who say the deficit is so urgent we must cut now are mostly the same people who say “no tax increases”, it strengthens that position too.

        If S&P’s real concern is gridlock but enough people interpret it as “cut, baby, cut”, that’s what we’ll get. And they’ll say S&P supported their position. And if they do cut-cut-cut, there may be no recovery for five years, and that would increase the debt rather than decreasing it. It would also mean you can kiss any transit improvements goodbye including Link to Lynnwood, and would further entrench the automobile/airplane bias in our region’s infrastructure and the nation’s.

      12. Mike,

        I believe what S&P said originally is they would downgrade our credit rating if the debt deal didn’t reduce deficits by 4 trillion or more over the next ten years. I don’t think there was any mention of how quickly those went into effect, just that they happen within that ten year time frame and were credible. The debt deal ended up being less than that, so here we are.

        As dumb as the downgrade was, I would bet money that even S&P is advising that we not cut much in the next several years as our recovery trudges along, just as nearly every economist on the planet agrees. The only people (with influence) really saying that are the same ones that say we need to cut spending at all times in all circumstances anyway. They put ideology ahead of actual economics, and it’s unfortunate that such a large contingent of the population is willing to follow their lead, but it’s a relatively small group of pundits and “elite thinkers” that actually think we should be cutting significantly right now.

  3. We have only two political parties in the US. A significant portion of one of them has said they woud rather the US default than raise taxes. The downgrade had more to do with the S&P (correctly) surmising that even though the US debt would be completely managable in a normally functioning democracy, that term no longer applies to the US.

  4. What the Congress seemes determined to do is repeat 1937. The economy was still struggling to get out of the Great Depression, and FDR and the Congress thought it was time to retrench, to stop spending so much out of the federal treasury. What happened of course is that the depression worsened and unemployment jumped back up.

    Santayana was right.

    1. Santayana was right.

      Definitely like when he sang, “you got to change your evil ways — bab-bee. Before I start lovin’ you. You got to change. Ba-bee…’cause every word that I say is true.”

  5. “credit rating of the United States of America was downgraded on Friday to AA+ from AAA”

    That must be why so many are buying our government bonds today, pushing the interest rate down on 10yr T-bills. With S&P’s track record, it’s just safer to do the opposite.

  6. I think the cost of a 2 mile tunnel built for cars highlights really well how great an investment light rail really is compared to roads. Light rail cost us a lot, but we’re an expensive city with difficult topography, so road-building faces exactly those challenges, and is inequitable, less green, and does little (if anything) to improve congestion.

  7. Get ready for a plague then.

    Mindlessly replacing infrastructure or creating “problems” out of thin air is a thing of the (overleveraged) past.

    We are living in the age of under-leverage. Before, you could use a little bit of cash to set off an avalanche of capital. Now it’s going to take a mountain of force to move a molehill.

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