'Which Side Are You On?' - Solidarity and Municipal Bonds

In 1931, the wife of a Kentucky coal miner wrote the song "Which Side Are You On?" The song was a call for solidarity among miners as the United Mine Workers led the struggle to improve conditions in the mines.   

This idea of solidarity has deep roots in our country. Writing 100 years before the miners' struggle, the French observer Alexis de Tocqueville was impressed by Americans practicing what he called "self-interest rightly understood." He saw Americans believing that their individual welfare was in part based on the good of their communities.  

This link between individual and community wellbeing is no abstraction. It was important for the American Legion and Veterans of Foreign Wars that fought to help educate veterans through the GI Bill, for the Fraternal Order of Eagles that championed Social Security, and for wealthy benefactors such, as Andrew Carnegie, who helped fund more than 1,000 public libraries across the United States (on the condition that the townspeople were willing to raise taxes to fund the libraries as well).

But a recent MorganStanley report on the municipal bond market suggests that this tradition of solidarity has weakened considerably. The question implicit in the report is: To what extent do the interests of municipal bondholders overlap with those of people who work for financially strapped city governments and rely on city services? The answer: Not much. 

If you work for a state or local government that is currently furloughing workers, downsizing its workforce, seeking to change employee benefits or otherwise enacting measures to better align revenues with expenditures, this is indeed a crisis. Similarly, if you are a politician trying to galvanize public support for such initiatives or one of the countless citizens who may be adversely affected by such adjustments, this is also a crisis. If, however, you are a bondholder who has been receiving timely payment of interests and principal payments (as is still the case for the vast majority of rated municipal bonds), this is not a crisis. https://www.morganstanleysmithbarney.com/contentmanagement/pdf/gic_special_report_munibonds1104.pdf

So the conclusion seems to be: Laying off city workers, cutting their benefits, and cutting citizen services won't impact people who have lent money to municipalities and expect to get paid back; in fact, it would stabilize municipal budgets and increase the odds of paying them back. 

I don't doubt that cities can be run much more efficiently, and that in some cases this involves cuts in benefits, employment, and services. But the report's message that the interests of bondholders are not aligned with those of city workers is troubling.

The report is silent on shared responsibility. In discussing the need "to better align revenues with expenditures," the emphasis is only on expenditures. Even minor tax increases to raise revenues, such as those required by Carnegie, are off the agenda. The burden falls only on workers and those who rely on public goods, such as public schools, buses, and public hospitals. 

The report's message also reflects and reinforces the growing power of Wall Street and its separation from Main Street. Rather than investing in a company producing solar energy equipment or a construction firm helping to rebuild our bridges, financial firms often focus on shareholder claims. Productive firms have become asset bundles to be restructured to maximize financial returns. In the process, inequality has grown in our country: The income share of the top 1 percent of U.S. households has risen from 10.2 percent in 1980 to 21 percent in 2008.

All of this is consistent with the report's message of a "crisis for you, not for me." This message undermines our local communities as well as the very idea of citizenship.