Funding Schemes for Local Authorities and Regional Governments

by Serban V.C. Enache

Observation: many of the following proposals, if not all, require medium to long term economic planning and are incompatible with the laissez-faire approach. In order to appease capitalist libertarians, I will begin the article by quoting Carl Menger, the founder of the Austrian School of Economics in his lectures to Crown Prince Rudolf of Austria.

Government thus has to intervene in economic life for the benefit of all not only to redress grievances, but also to establish enterprises that promote economic efforts but, because of their size, are beyond the means of individuals and even private corporations. These are not paternalistic measures to restrain the citizens’ activities; on the contrary, they furnish the means for promoting such activities; furthermore, they are of some importance for those great ends of the whole state that make it appear civilized and cultured.

Important roads, railways and canals that improve the general well-being by improving traffic and communication are special examples of this kind of enterprise and lasting evidence of the concern of the state for the well-being of its parts and thereby its own power; at the same time, they constitute major prerequisites for the prosperity of a modern state. 

The building of schools, too, is a suitable field for government to prove its concern with the success of its citizens’ economic efforts.”

The simplest solution allowing the government maximum space for fiscal and monetary policy is for that government to spend and tax in its own free floating fiat currency. Since Local Authorities and Regional Governments are not sovereign, they are forbidden to tax citizens in any other currency except the national currency. They can, however, issue a different currency, but demand for it can only be secured through persuasion, which is a lot less efficient than coercion (taxation and penalties for unmet tax obligations). Personally, I am not an advocate for parallel currencies. There is an argument to be made in their favor, if the Local Authorities were allowed to give several different currencies the status of legal tender in their jurisdictions. The advantage is that the system is more resilient to negative demand shocks. But the downside is that the system is less efficient. The opposite is true for a single currency jurisdiction. The system is not resilient to negative demand shocks, but it is more efficient. Below are my preferred ways for Local Governments to secure funding.

Public banking

What are the advantages of banking with your own bank? You control the bank’s areas of activity. You control the conditions in which the bank extends loans and what it does with those assets. You control the fee structure. You decide what to do with the profits it makes.

Bank Behavior and Purpose

The regional public bank wouldn’t have subsidiaries of any kind, since keeping assets off balance sheet doesn’t serve the public purpose. It wouldn’t be allowed to accept financial assets as collateral for loans, as financial leverage serves no public purpose. It wouldn’t be allowed to lend off-shore (for foreign purposes). It wouldn’t be allowed to engage in proprietary trading or any profit making venture beyond basic lending. It would issue loans based on credit analysis, not market valuation. It wouldn’t be allowed to buy or sell credit default insurance. It wouldn’t be allowed to contract in an interest rate set in a foreign country. It would only be allowed to lend directly to customers, service and keep those loans on its own balance sheet. No public purpose is served by selling assets to third parties.

The Complete Scheme

Every citizen within the regional government’s jurisdiction would receive a free checking account at the regional public bank. The bank’s fee structure would be formulated with low mark-ups in mind, in contrast to the competition. This will incentivize firms and households to bank with the regional bank, thus increasing its market share. Also, the regional government can give its public bank the competitive edge by issuing loan guarantees. In essence, the bank uses the regional government’s IOUs as capital. Banks are constrained in their lending by their capital and the actual demand for loans, not by reserves. Banks don’t lend out people’s savings as it’s commonly and foolishly believed. The regional government loan guarantees would only be cashed in by the public bank in case its assets shrink in value enough to warrant usage of those guarantees – which is unlikely if the bank sticks to prudent lending behavior. This, in conjunction with regional fiscal policy based off Georgist principles would work wonders. Taxing the value of natural monopolies (the land-value tax), and not taxing labor, consumption, and man-made things (goods and improvements to the land).

It’s not a panacea. It would still be an imperfect world, but a far better one than we have today. The regional government taxing the value of land (capturing economic rent) would leave the economy free of the rentier excess charge. The cost of production would go down. Housing costs would be dramatically lower and stable. More spending/investment, higher sales, new jobs, more income.

Employment and Income Guarantees

The regional government could pursue more investment in public infrastructure and services, even uncommon ones like a local Jobs Guarantee and Basic Income. As another competitive edge, the regional government could offer its citizens a basic income via its public bank only. There would be no need to deliver cash payments or cashable checks, just numbers in the person’s account at the bank. An important observation has to be made. The regional government, before engaging in these ways to gain the competitive edge in the banking sector, should hire competent lawyers and make a tight case in defence of its actions, should private agents sue the public bank and the local government for “unlawful competition.” They need to employ all the arguments they can, from constitutional law and business law, to pragmatism and morality. In the end, what matters is for households, for the government, and for firms (non-financial firms especially) to get the best services for the best price.

Mosler Bonds, Unorthodox Financing for Local Authorities

Mosler Bonds are designed to be sufficiently attractive to private investors and ensure the funding of government at very low rates of interest. They’re identical to existing municipal bonds, with one exception. The “default clause” in the bond indenture is replaced by the following statement: “In the event of non payment, principal and interest, which continues to accrue, [the bond] can be used for the payment of taxes to the government.”

In the event of non-payment, investors are not dependent on payments from the government for debt repayment – instead, they’re compensated by reductions of tax payments. Mosler Bonds function as interest-bearing government tax credits. The elimination of the default risk dramatically lowers interest rates. They can be used to immediately fund payments of interest and principal on existing debt. Banks and other investors will compete for Mosler Bonds, thereby driving down the interest rate for the respective Local Authority. The government can issue Mosler Bonds at low rates of interest and fund its public corporations at the same yield. Mosler Bonds are not a substitute for monetary sovereignty, but they’re one of the smartest funding schemes for currency user governments.

Bilateral Trade Agreements and Circular Investments

This method requires close collaboration with other Local Authorities and businesses. The mechanics are simple enough. Local Authority Y gives a money loan to Local Authority Z in exchange for Z’s promise to purchase output from Y’s jurisdiction. The loan would show up on Y’s balance sheet as an asset, and it would show up on Z’s balance sheet as a liability. A financial surplus obtained by Y’s jurisdiction against Z’s jurisdiction would obligate Y to recycle (reinvest) that surplus into Z’s jurisdiction. Such an agreement between the two Local Authorities would ensure a constant flow of funds between them, a permanent level of demand for each other’s services and labor.

Serban V.C. Enache is a Romanian journalist and indie author. Though interested in history, politics, and economics, his true passion is for medieval fantasy fiction.