by James A. Bacon

It’s Business As Usual in Virginia as the political class grapples over budget issues seemingly oblivious to what’s happening in other parts of the world. Politicians of varied political stripes seem to think it’s a perfectly good idea to borrow another $300 million, over and above $150 million already set aside, to subsidize the Rail-to-Dulles project, an action that would push Virginia to the edge of its borrowing capacity consistent with a AAA bond rating.

What could possibly go wrong?

We’ll, let’s see. Despite the most massive peace-time monetary and fiscal stimulus in the modern history of the United States — near-zero interest rates and four years of $1 trillion+ deficits — the economic recovery remains the weakest since the Great Depression. Meanwhile, Hampton Roads and Richmond are under-performing in the current economic recovery, while slowdowns in the federal spending trajectory promises to slow future growth of the state’s only economic engine, Northern Virginia.

There is nothing left in the economic arsenal to goose the national economy along. The United States is caught in the same kind of debt trap as Europe, in which cutting spending or raising taxes will damage short-term economic growth prospects and not cutting spending or raising taxes only postpones the final reckoning. That reckoning will come, whether it takes a year or a decade. The longer the delay, the greater the debt build-up and the more painful the ultimate confrontation with reality.

Once again, we are reminded of how vulnerable some of the major European economies are, and by comparison we ourselves. Spain, a democratic welfare state with the world’s 12th largest economy, is back in the headlines.

Madrid has committed to reducing a budget deficit of 8.5% of GDP last  year to a mere 5.3% this year, which is necessary to maintain credibility among the buyers of Spain’s debt. Trouble is, such austerity is shrinking the economy — not a good thing when unemployment is already running higher than 24%. And the cuts still may not be enough to restore investor confidence. The yields on 10-year Spanish Treasuries topped 6% Monday. As interest rates rise, so do debt payments. Higher debt payments mean bigger deficits, bigger deficits push up interest rates, and so on.

The United States faces a similar challenge. The deficit this year is roughly 8% of GDP, comparable to Spain’s. But our debt as a percentage of GDP is way higher: 94% in 2010 compared to 60% for Spain. If Treasury bond yields reached 6% as in Spain, it would translate eventually (after long-term bonds matured) into additional debt payments of roughly $450 billion a year! There would be no way to cut spending or raise taxes enough to offset that burden. Of course, the U.S. is not Spain. We have our own currency, which means the Federal Reserve can buy as much Treasury debt as it wants. But that would lead to runaway inflation, which would substitute one form of economic chaos for another.

I have seen absolutely nothing since writing “Boomergeddon” two years ago to suggest that the U.S. can avoid a fiscal meltdown. Locked in internecine political warfare, Democrats and Republicans have blown their chance to reduce the deficit and establish credibility with financial markets. We are fast approaching the point at which the fiscal slide becomes irreversible.

Now, ask yourself. When federal finances melt down, with incalculable consequences, where would you rather be living? A state with strong enough finances to maintain core services through the ensuing chaos? Or a state that gets sucked into the maelstrom along with the federal government? Personally, I’d prefer to live in a solvent state and a solvent county. And that means making responsible financial decisions now.

On the positive side, Moody’s Investment Services just noted that this year’s changes to the Virginia Retirement System will reduce state pension contributions by $3.6 billion over the next 21 years and “put it on a more sustainable path to fully [fund] its pension commitments, which is credit positive.”

It will be interesting to see whether Moody’s will have anything to say if Virginia takes on an additional $300 million in transportation-related debt.

Update: I have made a small edit to this post in response to an exchange with DJ Rippert in the comments.

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  1. the answer to your dilemma is …..quantitative easing……

    Jim Bacon doubts that there are monetary and fiscal policies that can mitigate the problem or he believes the cure will be as bad or worse than the disease.

    Most advocates of Central Govt control of the economy KNOW that they CAN have an impact AND that they can pull the plug if quantitative easing leads to inflation.

    Right now – the economy is so screwed up that any thought of leaving it alone is considered heresy – even by those who don’t like the Fed.

    How exactly did we get here? In 2008, the die was cast, right?

    Obama clearly has not made it better but the real question is if he had done the recommended “nothing” would we have any kind of a recovery at all?

    Most believe that 8% unemployment would have easily reached 20+% AKA the Great Depression.

    Of course the folks who bleat the loudest about cutting spending by cutting entitlements live in their own LA LA world. Cutting SS won’t fix this. Neither will cutting Medicare of which the entire program constitutes about 210 billion out of a 3.6 trillion budget of which 1.5 trillion is deficit.

    The folks in LA LA land rein from the Bush era where it was famously uttered by the the Vice Idiot in Chief that “deficits don’t matter” and the man still has the audacity to pronounce the current Prez as a “disaster”.

    I disagree with the idea that raising taxes or reverting to the pre-Bush taxes will “hurt” the economy. That assumes that those increased tax revenues go “poof” rather than pay for goods and services… bought by the govt instead of the private sector.

    What’s irresponsible is to cut taxes and not cut spending. The Bush fools cut taxes but never got around to cutting spending least of all their much-loved DOD which doubled in budget from 2000 – 2008. So they left it up to Obama to cut spending … just as the economy collapsed in a heap and then proceeded to blame him for trying to do “something” as opposed to “nothing”.

    all of this is looking back rather than forward as Jim is doing but how about this? How about Jim regale us with what the US would look like in default?

    I’m not quite sure what it really means when we tell the Chinese that they pennies on the dollar for their treasury notes.

    Would that mean that the Chinese would then refuse to import stuff to Walmart as punishment?


  2. DJRippert Avatar

    Jim Bacon continues to espouse the voodoo economics of the Tea Party. He has apparently either forgotten the lessons taught by Ken Elzinga in the introductory economics classes he took or he slept through too many of those classes.

    Myth #1: If the tax base collapses we’ll be OK because we have AAA debt. Jim plays the Dr Doom card by insisting that any number of crises will conspire to kill off Virginia’s economy. He then smugly claims that he’d rather live in a state with “rock solid” finances once the state’s economy craters. Sorry, Jimbo – if the state’s economy craters then we won’t have “rock solid” finances. We also won’t have a tripe A rating even if we immediately stop borrowing. Our debt rating is as much a function of how much the state can collect in taxes as it is a function of how much has been borrowed. If the bottom falls out of our economy then we’ll lose our debt rating. I understand that there is no government debt in Somalia. No doubt that country’s economy and society is flourishing.

    Myth #2: Inflation doesn’t exist. The gas tax in Virginia has been lowered every year since 1986. At least, that’s the way any competent economist would view the matter. However, nobody ever confused the Tea Party’s ideas with competence. So, the fact that today’s gas tax buys less than half of what it did in 1986 never enters into consideration by the Tea Party. Instead, the idea of indexing the gas tax to inflation is shrugged off as “a political loser”.

    Myth #3: All taxpayers are created equal. In the world of Baconomics a taxpayer earning $300,000 per year and paying all taxes is no different than a person who has self-selected early retirement and is living off his savings while paying very little in taxes. Therefore, targeting infrastructure investments in economic growth areas makes no sense. No, in the “plantation mentality” of Richmond’s political elite high earners won’t just pack up and leave for elsewhere when the infrastructure is allowed to crumble, they will stay right where they are.

    Jim – do you put in ear plugs before you bury your head in the sand?

  3. Don says: “Myth #1: If the tax base collapses we’ll be OK because we have AAA debt.”

    That’s not my message at all. My message is, in a Boomergeddon scenario, I’d rather live in a state with a AAA bond rating *now* than a state with an A rating. When the economy goes all to hell, maybe Virginia’s rating drops to a BBB. At least that supports a functioning government. What happens to the other guys? They don’t even warrant a rating — they’re kiting checks! They will be in no position to preserve core services.

    As for building infrastructure, I’m all in favor of it when it makes economic sense. I don’t think it makes economic sense for the Charlottesville Bypass or Rail-to-Dulles. I do think it makes sense for the Midtown-Downtown Tunnel. I’m still researching the 460 Connector.

    As opposed to you… You seem willing to support every boondoggle transportation project that comes down the pike — unless it’s built in Richmond. Don, what happened to your critical faculties? You wouldn’t allocate your company’s capital that way. Why do you back every road or rail project ever ginned up in Virginia?

    Don’t you realize that money invested in a boondoggle is NOT invested in projects that may have a far higher ROI?

    The choice isn’t build or don’t build — it’s which projects we select to build. A handful of ill-conceived megaprojects crowds out dozens of worthy smaller projects.

    1. DJRippert Avatar

      “I do think it makes sense for the Midtown-Downtown Tunnel. “.

      Please provide your detailed ROI analysis for this project. I mean … you must have one, right?

  4. Don’t push me. I might change my mind.

  5. Actually, Sean Connaughton has given figures that attribute an economic value to the congestion mitigation. Tens of thousands of commuters saving a half hour of congestion every day more than offsets the price of the improvements. The political problem does not stem from the value of the project — it stems from opposition to tolls.

    I have not done a detailed ROI because the project is a done deal — any after-the-fact analysis would be a waste of time, just as it would be for Phase 1 of Rail-to-Dulles. I have chosen to focus instead on projects whose outcomes can still be influenced, like the Charlottesville Bypass, Phase 2 of Rail-to-Dulles and the 460 Connector.

    1. DJRippert Avatar

      What has the value of Metro been to the Rosslyn – Ballston corridor in Arlington?

      What was the value ascribed to metro for that corridor when Metro was originally being planned and built?

      I worked at the Groveton Car Wash in high school while Metro was being built. The guy who owned the place put up a huge sign that read, “Pay gas taxes now, ride Metro when?”. Now that I think of it, he reminded me of you.

      Since Metro Phase 2 is on your “analysis list” perhaps you could help me understand the methodology you intend to use in determining the value of Metro to the Tyson’s – Dulles corridor thirty five years from now.

      Maybe this will help – Arlington was falling apart in the 1970s. It’s population shrank 12.4% that decade. Wilson Blvd, running from Rosslyn to Seven Corners was particularly decrepit.

      What changed?

      Why is Wilson Blvd now lined with high priced (and high tax paying) condos? Why are there gleaming new office towers on Wilson Blvd today when there were only run down and dilapidated store fronts there thirty years ago (in 1982)?

      1. Metro was critical to reviving Arlington. (It wasn’t the only thing, but it was very, very important.) Arlington, like D.C., planned wisely. Unlike Fairfax County, which surrounded its Metro stops with vast parking lots, Arlington encouraged dense, walkable, mixed-use development around its Metro stops. Arlington also invested in Transportation Demand Management. That’s why Arlington has one of the highest rates of mass transit ridership in the entire country. Learning nothing from its neighbor, Fairfax failed to take advantage of the opportunities provided by Metro.

        Fairfax is trying to mend its ways these days by allow high density around the Silver Line stops. Here’s the problem. The cost of constructing a heavy rail line is a whole lot more expensive than it was in the 1960s/70s. The economic calculus has changed. Moreover, a handful of Tysons property owners captured an outsized share of the economic benefits. If the project financing had been structured properly, through a Tax Increment Financing arrangement perhaps, the project could have tapped more of those benefits to cover more of the cost.

        On top of that, you’ve got the problem that Washington Metro is run more for the benefit of its unions than the public. It’s a failed economic model.

        I’m a big fan of heavy rail mass transit — when done properly. When all the economic value is skimmed by landowners, contractors and labor unions, I’m not a big fan. We have to restructure the way we go about these projects, or we’ll “invest” our way into poverty.

  6. DJRippert Avatar

    As for your “good state” / “bad state” theory – it don’t hunt.

    First, you have to answer a difficult question: Can a state go bankrupt? Let’s examine both sides:

    Yes. If you believe that a state can declare bankruptcy (like a municipality under Chapter 9) then what would happen? Debt would be re-negotiated. Pensions and other benefits would be pared and the state would come out of bankruptcy far better than it went in. In any regard, any state going bankrupt would draw every other state’s debt into question.

    No. If you believe that states are sovereign members of a federation than the feds can’t let the state go bankrupt. The feds have to raise the money to bail out the state. And where does the fed get the money? Not from the state – it’s bankrupt. It gets the money from the residents of all states – including Virginia. Lucky for us we have a BBB bond rating. Maybe we can borrow the money to pay the feds to bail out the bankrupt states.

    Now, maybe you guys in Richmond are starting to think that you’re the capital of a sovereign nation again. How did that work out for you the last time?

    If you really believe what you wrote in this blog post you should run, not walk, to support Home Rule for NoVa (and maybe Charlottesville and Tidewater as well). It’s well established that municipalities can go bankrupt. The cradle of Tea Party civilization, Orange County, CA, proved that.

    You and your pals should be racing to protect your beloved Richmond from the certain devastation of NoVa / Tidewater / Charlottesville fiscal mis-management. You should isolate those “trouble spots” into autonomous, self governing areas with only the loosest ties to the Commonwealth of Virginia. Yeah, you’ll lose a huge amount of the tax revenues and subsidies that keep the rest of the state afloat but so what? Those three bastions of spendthriftery are certain to fail and then there won’t be any taxes to collect.

    Remember, the bankruptcy court is going to look long and hard at the actual practices in the “three bastards of the Old Dominion”. If there’s even a hint that they are still tied to the political elite in Richmond then Richmond goes down with them. I’d suggest a state constitutional amendment establishing the three areas as Virginia’s version of Waristan – lawless badlands where uncouth people refuse to talk about “the War of Northern Aggression” and show no respect to the “Descendants of Pocohontas”.

    Hurry up, Jim. The end is near. Inoculate Henrico County from the curse of economic progress. Cast off NoVa, Tidewater and Charlottesville NOW!

  7. Sarcasm and hyperbole do not constitute an argument.

    1. DJRippert Avatar

      Neither does pretending to want quantitative analysis while basing your opinion on guesswork and intuition.

  8. It took a lot more than Metro to revive the R-B corridor. Based on conversations with people who worked on the Arlington County Task Force, the county set up a balanced task force that included all stakeholders and in such proportion that nothing could have been decided absent cooperation and compromise. On the other hand, Clark Tyler would not allow members of the public to speak or ask any questions at Tysons Land Use Task Force meetings, until newly elected supervisor Foust told him to do so.
    The early Arlington meetings were confrontational, but people soon learned that they needed to work together to accomplish anything. Nearby residents had considerable input into the process. The County granted substantial density at the five Arlington stations, but also extracted significant proffers from developers. Arlington also limited density to the immediate station areas. A good plan was adopted and, over the last 30 years, a major transformation has occurred in the R-B corridor. It’s clearly a success.
    Physically, the R-B corridor already had a functioning grid of streets that saved hundreds of millions. Also, the area was generally ripe for redevelopment. Tysons, on the other hand, has many profitable buildings, with only the West Tysons and East Tysons areas clearly ready for redevelopment. On the positive side, the Fairfax County Planning Commission and BoS rejected the TLUTF’s plan and worked with all of the stakeholders to develop what is a pretty good plan. But there still is the question of how to fund $5.46 billion in road and non-rail transit.

    1. DJRippert Avatar


      You are making my point for me. I grew up here while Metro was being built. There were lots of nay-sayers in every jurisdiction. Just like today. People claimed it would never be built. Just like today. People claimed nobody would ride it. Just like today. The 50 year olds who were debating the original Metro in 1975 are either gone to the big subway stop in the sky or are cooling their heels in well worn slippers at the local nursing home by now. In their place are people like us – today’s 50 somethings debating the next phase of Metro. Just like our fore-bearers from 1975, we have all the answers. And, just as the 1975 brain trust would be stunned to see Ballston today, we’ll be stunned to see Reston in 2049 (assuming any of us live that long – I’ll be 90!).

      You describe the confrontational early meetings in Arlington. I am not sure if you were living here then or not. I was just a kid but I remember the screaming and yelling as people my father’s age debated the pros and cons of the original Metro. One BIG concern was that the Metro would dramatically raise the crime rate in the areas where the Metro stations were built. The “fact” of increased crime was stated like a tautology by about half the “combatents”. I can only assume that people thought thieves would get on the Metro in DC, take the train out to some swanky spot like Huntington Ave, grab a few TVs and stereos and then train back to DC to fence the goods. Who knows? In fact, the seedy strip clubs and “no tell motels” which used to be located near today’s Metro stops have given way to condos, restaurants and office towers.

      So much for the conventional wisdom of fifty somethings.

      As far as I can tell, Metro saved Arlington’s ass. Yes, it took more than the train but the train was the catalyst. I see no way that the R-B corridor looks anything like what it does today without Metro.

      The Metro at King Street helped create a “western old town” which eventually grew to touch the original old town and helped revitalize Alexandria. I worked one summer while in college gutting and rebuilding a series of town houses on King Street. When I asked the guy who owned the renovation company why this was happening now, he said, “Metro.”.

      You talk about large proffers being demanded by Arlington County. I see special tax districts being established to fund the Metro expansion. Philosophically, they seem similar.

      Even the street where I grew up – nasty Huntington Ave – is finally starting to redevelop around the Huntington Ave Metro. There are new condos, some new offices, etc. If that redevelopment can just work its way all the way down to Rt 1 it will be a miracle.

      Every generation owes the next generation a few big projects put into play for their benefit. Our grandparents paid for the Eisenhower Highway system. Our parents paid for things like the original Metro and now it’s our turn to give our kids a fighting chance to make something better for themselves.

  9. re: the cost of congestion.

    how come those affected refuse to buy it down if it is so “costly”.

    re: bankruptcy – is a condition where your expenses exceed your income.

    It does not mean you have NO income.

    It means you pay the creditors you must and “negotiate” with those who already supplied you with something that you owe them for.

    We’ve had a few nation-states go “bankrupt” but I have yet to see any of them taken over by creditors.

    In theory, the pensions are firewalled unless the state renegs on that then bad stuff will happen but the state will still be standing at the end of it.

  10. the “must have” infrastructure than no one wants to really pay for – including the riders.

    geeze… we build a hugely expensive piece of infrastructure and from day one – we plan on subsidizing ridership.

    this is sustainable development?

    Hell.. commuters down this way would like to have METRO from Fredericksburg to NoVa but they tell us this is a dumb idea because it’s way to expensive – but rail to Dulles is not?


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