The most toxic word in politics today is "bailout," and Sen. Chuck Grassley had no qualms about deploying it to describe the Build America Bonds program. According to the senator, it's just one more way to funnel taxpayer money to the banks and to profligate local government. A Washington Post article followed, focusing on fees major banks earned through the program.
That's the only article the Post has run on Build America Bonds since its inception over a year ago. This is telling, given that, despite recent criticisms, it is one of the most successful programs of the American Recovery and Reinvestment Act, spurring productive investment, job creation, and creating a more progressive and democratic method of local finance. The idea that this is any kind of bailout is misguided at best.
"Nobody can bring their lips to the idea that something actually works if government touches it, and that's just a fact," says Sen. Ron Wyden, the Senate's champion of the program. "We've found a way that is economically viable and politically viable to advance infrastructure."
Wyden is not known as a friend to the financial sector -- he voted to break up the largest banks. Neither is top Treasury economist Alan Krueger, another booster of the bonds, who, prior to his public service, was known for his research arguing that minimum-wage laws don't cause unemployment, a claim frequently made by business interests.
Building America Bonds are a new way for cities and states to borrow money to invest in new infrastructure or fill budget gaps. Proponents found it difficult to gather support for the idea until 2009, when local governments were facing grave difficulties borrowing. Markets were frozen, and Wyden, Krueger, and others crafting the fiscal stimulus bill saw an opportunity to introduce a more efficient subsidy for state and local borrowing.
Before BAB, the federal government supported infrastructure by making city and state bonds tax-free -- if you loan money to a city, you don't pay taxes on the interest it pays you in return. While this encouraged lending, it's also regressive and something of a tax-shelter boondoggle: The higher an investor's tax bracket -- the wealthier she is -- the more she is subsidized.
A Congressional Budget Office analysis notes that with this kind of bond, high-income investors gained several billion dollars in government money each year, with no discernible savings to borrowers. Now, that's a bailout. Economists, including those at the CBO, don't believe tax-free bonds are particularly efficient, and entities like nonprofit foundations and pension funds that are already tax-exempt have no incentive to buy these bonds.
Build America Bonds, on the other hand, aren't tax-exempt. They help out cities by making the tax-exemption a credit: Thirty-five percent of the interest a town or state pays to creditors is reimbursed by the federal government. Credit costs go down because lower-income and tax-exempt investors have more incentive to participate since they can now reap the benefits; BAB supporters call this the "democratization" of finance. Cities also see more money in their budgets during a recession that has left them increasingly cash-strapped.
"Even taking into account the underwriting fees, a report that we released in April found that state and local governments will save $12 billion in present value on their borrowing costs from the BABs that they issued so far, compared with issuing tax-exempt bonds," Krueger told me.
It's those fees onto which BAB critics have latched. Whenever someone wants to issue a bond, they have to pay a fee to a bank to underwrite and sell it. When Build America Bonds were launched, fees these banks, including Goldman Sachs, were able to assess were much higher than those for standard, tax-exempt bonds. This is the "bailout" of which Grassley speaks and a reason the financial sector has been lobbying enthusiastically on the program's behalf.
But it's not surprising that fees, initially, were high. No one had ever sold a bond like this before, the structures to do so were not in place -- customers had to be found and educated about the project at a time when lending was already tight. As the program has expanded and competition increased, underwriting costs have dropped steadily, to the point where today the fees are the same as those for standard municipal bonds.
The program proved successful: While the architects of the program initially hoped for $3 billion or $4 billion in loans, more than $90 billion in bonds has been issued by local governments, a third of those to fund infrastructure investments. This kind of spending is necessary to encourage economic activity, create jobs, and build national infrastructure for the future, a key progressive priority.
Criticizing the banks for the initially large fees is inimical to the progressive project of making finance sane and sensible again: We want banks to focus their efforts on underwriting projects like these, which actually move capital toward useful investments, rather than the speculative trading that defined the sector in recent years.
Grassley has also complained that the largest states -- California and New York -- have reaped the most benefit from the program, since their leery fiscal situations make it harder for them to borrow, and the government accordingly subsidizes them more. But this is not functionally different from standard bonds, where the government subsidizes wealthy investors rather than cash-strapped towns and states.
Those who benefit from the tax-free income of the old bonds, though, have fought congressional attempts to extend the BAB program. The administration has proposed lowering the subsidy in the future to a revenue-neutral 28 percent (the CBO believes a the subsidy would need to be still lower to be revenue-neutral), and the House passed a version of the bill out of committee. In the Senate, Wyden is preparing to push for the law's extension and says that Finance Committee Chair Max Baucus supports the provision.
So do a lot of state and local governments. Mayors of both parties have praised the program, and in Oregon -- Wyden's home state -- the program facilitated $580 million in transportation projects that state officials say will cost $58 million less thanks to the legislation.
"Put this money into a community and people get paychecks for doing the job, people get paychecks for selling equipment, the restaurant folks make ham sandwiches for people out there getting sweaty, and businesses build up around the finished system," Wyden says. "You couldn't have a sharper contrast between this and where Wall Street is going with our money today."
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