Social Mobility and Public Banking

Last week, Richard V. Reeves and Allegra Pocinki of the Social Mobility Memos Blog at Brookings published "Space, place, race: Six policies to improve social mobility," a distillation of research by Harvard economics professor Raj Chetty. But the recommendations contained no analysis of financing--and that's always the fly in the ointment.

The list is:

1. Target housing vouchers more effectively;
2. Build public housing in low-poverty areas instead of high-poverty areas;
3. Reform exclusionary zoning laws for housing;
4. Better enforcement of fair housing rules by HUD;
5. Invest in infrastructure; and
6. Promote school choice.

School Vouchers are controversial, and this isn't really the place to comment on them, but many of the other recommendations should be of interest to proponents of public banking. This is another instance where we can help economists and policymakers connect the dots.

Public banks' housing assistance potential is one of the main reasons the City of Seattle is carefully studying opening its own bank. Councilmember Nick Lacata has been leading that charge, believing, according to Daniel Beekman of the Seattle Times, that "a state-licensed public bank, in addition to holding money the city now deposits in conventional banks, might be able to lend money to small businesses, homeowners and others who lack good private banking options. In addition, a public bank might serve as an alternative to conventional banks for financing local infrastructure and housing projects."

Hawaii's public banking bill has a similar motivation--not low-income housing per se, but helping people stay in their homes. When it was first introduced in 2012, it came with an explicit purpose: "The purpose of this measure is to establish the bank of the State of Hawaii in order to develop a program to acquire residential property in situations where the mortgagor is an owner-occupant who has defaulted on a mortgage or been denied a mortgage loan modification and the mortgagee is a securitized trust that cannot adequately demonstrate that it is a holder in due course."

Of course, a public bank can help a city or county invest in affordable housing in the same way it can invest in small businesses, public transportation, schools, and city services.

Infrastructure funding is one of public banking's bread-and-butter issues. This partly because what stifles infrastructure funding is interest payments--they are monstrous. Funding infrastructure through bonds doubles the price or worse. Last year, Ellen Brown described the "sticker shock" on both infrastructure and school funding when we finance through private banks:

The San Francisco Bay Bridge earthquake retrofit was originally slated to cost $6.3 billion, but that was just for salaries and physical materials. With interest and fees, the cost to taxpayers and toll-payers will be over $12 billion.

The bullet train from San Francisco to Los Angeles, another pet project of Jerry Brown and his administration, involves a bond issue approved in 2008 for $10 billion. But when interest and fees are added, $19.5 billion will have to be paid back on this bond, doubling the cost.

And those heavy charges pale in comparison to the financing of “capital appreciation bonds.” As with the “no interest” loans that became notorious in the subprime mortgage crisis, the borrower pays only the principal for the first few years. But interest continues to compound; and after several decades, it can amount to ten times principal or more.

San Diego County taxpayers will pay $1 billion after 40 years for $105 million raised for the Poway Unified School District.

Folsom Cordova used capital appreciation bonds to finance $514,000. The sticker price after interest and fees will be $9.1 million.

As the experience with the Bank of North Dakota demonstrates, public banks can finance (or help local banks finance) infrastructure projects at a tiny fraction of those rates.

Solutions lists like the Chetty/Reeves-Pocinki list are useful, but if they don't account for how we can afford them, they'll remain stuck on blogs rather than making their way into ordinances and legislation. And given the political unpopularity of higher taxes, and the outrageous costs incurred by private financing, paying for them may well require the creation of state-, county-, and city-owned banks.

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