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Worshiping the false god of fiscal rectitude in D.C.

A few weeks back, I tried to apply the premise of a Paul Krugman column to D.C. politics. It went so well, I'm gonna try it again.

Today Krugman tackles what he calls the "hypocrisy" of fiscal hawks calling for governments to take severe austerity measures even amid severe economic hardship. Not having a particularly distinguished background in macroeconomics, I will not judge the merits of his argument. But it reminded me deeply of a major local campaign issue these days -- the state of the city's "fund balance," the accumulated surpluses that have padded the city coffers in recent years.

Writes Krugman: "[T]he policy elite -- central bankers, finance ministers, politicians who pose as defenders of fiscal virtue -- are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods."

In the D.C. version of the analogy, Council Chairman Vincent Gray and Chief Financial Officer Natwar Gandhi are the policy elite, the invisible gods are Wall Street bond raters, and the sacrifices are most certainly human.

As colleague Nikita Stewart explained wonderfully a week ago, Gray has hammered Mayor Adrian M. Fenty for proposing budgets that have spent down the fund balance from about $1.5 billion to a projected $605 million in fiscal 2013. (Gray, Fenty correctly points out, has passed through all of those budgets.) And Gandhi issued a letter in July, warning Fenty and Gray that Wall Street had "expressed concern" about the "precipitous drop" in the fund balance and will be "watching carefully" to see how city leaders handle the issue. "To fail to address these challenges effectively would clearly threaten the District's hard-earned bond ratings, and could be viewed very unfavorably by rating agencies and investors alike," Gandhi wrote.

But the question is: Why do we keep these reserves if not to spend them in times of need? And is this not a time of need? Wall Street can bluster about bond ratings, sure. But in the universe of states, counties, cities and other governmental and quasi-governmental bodies with bonding authority, has the District of Columbia really been so irresponsible by spending the money it has in the bank during a generational recession in order to keep cops on the street and homeless residents off the street? (For the record, the D.C. Fiscal Policy Institute says it hasn't.)

Color me skeptical.

Fenty certainly hasn't done a very good job explaining the sacrifices we've been able to avoid by spending reserve dollars. But there would have to be sacrifices.

"Anyone who doubts the suffering caused by slashing spending in a weak economy should look at the catastrophic effects of austerity programs in Greece and Ireland," Krugman writes. And anyone who holds a hard line on maintaining a fund balance equal to a quarter of the city's yearly local spending should acknowledge the suffering that decision would cause here in the District.

By Mike DeBonis  |  August 20, 2010; 3:19 PM ET
Categories:  Adrian Fenty , DCision 2010 , The District , Vincent Gray  
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Next: The District electorate, in black and white


Thoughtful piece. Cringe at the word "suffering" in the last sentence though. This is The Post, not a DCFPI press release.

Posted by: rweber3 | August 20, 2010 3:44 PM | Report abuse

I would hope supporters of both candidates (and the media) understand the graveness of this situation.

I would hope that both candidates understand that we do need to continue to trim our budgets, to act more efficiently and to get more out of our dollars.

That is why I get upset when Team Fenty trumpets this issue while passing inflated contracts to cronies. We simply cannot afford such excesses (ever) right now.

Fenty has already shown where he is on the scale of being a budget hawk. Can Gray be better? I do not know, but worse is getting Barry-esque and I know we cannot afford that.

Posted by: LukasWP | August 20, 2010 4:09 PM | Report abuse

The question of whether we should be spending our rainy-day fund it times of need is not a black and white issue.

Yes, of course, that's what it's there for.

But at the same time, if you (for example) found your own income dramatically reduce, how would you respond? Would you continue to spend at the same rate you had as if your income had been unchanged, augmenting the decrease with your finite savings?

Or would you try to take reasonable austerity measures first and foremost, falling back on your own rainy day fund only when absolutely necessary?

The problem is not that we are spending our reserve in a time of need - the problem is that we have not taken austerity measures first.

Now is not the time for expensive capital improvement projects like park renovations. This would be akin to building a new deck on your home after you lost your job. These are things you do when times are good - and the consequences may be that we find ourselves out of cash much sooner than we might have otherwise, and will have to sacrifice things much more needed than new parks a couple years down the road as a result.

Posted by: jamietre | August 23, 2010 10:50 AM | Report abuse

Debonis- It's a good thing you don't claim to be a financial guru. There is a major difference about what Krugman is talking about and the city's financial health. Federal governments can print money. They can determine to what extent they are willing to go into debt to stimulate the economy or to pay for specific programs.

They don't have to balance budgets. We in the city do. We cannot print money though some are suggesting we spend it as if we could. We are dependent on the federal government policies as to whether we will receive more federal money in any specific year to pay for programs we can't fund. City leaders must determine whether that money will keep flowing before they spend it. In our case spending down the reserve fund may decrease our bond ratings and cause us to spend even more on debt service. We have no control over that.

When Fenty wants to raid the TANF money to pay for an extra week of the summer youth jobs program he has no idea where the money will come from to pay for the homeless who were supposed to be the recipients of the money he wants to use. He can't just print more money next year to make that program whole.

Some Councilmembers don't even realize that the summer youth jobs program is not means tested. There are many people in that program whose family would not be eligible for TANF funds so when some say it's all social services money they are wrong.

So I think using Krugman to justify the gimmicks used by Fenty to balance the budget, and the increases in nearly 700 fees and taxes over the past few years, is totally wrong.

Posted by: peterdc | August 23, 2010 11:32 AM | Report abuse

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