…and when it doesn’t. You borrow to time-shift consumption, i.e. so that you can consume today rather than consuming in the future. There are times when that makes sense. For example, when what you’re purchasing, e.g. a house, is likely to appreciate in value. Or when you expect your earnings to rise so that it’s easier for you to pay off the loan in the future. It helps when there are no good ways to save, e.g. when there are no good investment opportunities or when the cost of saving is too high.
It makes no sense to borrow to pay ordinary operating expenses. That’s the context of this remark from the editors of the Wall Street Journal:
This is the same sorrowful spectacle Chicago’s school system put on last year. When it failed to get a state bailout for a looming pension payment in 2015, it borrowed some $600 million. Now, unable to pay back what it already owes, the system last week did a $725 million bond sale at an 8.5% interest rate, a large premium over what other borrowers can pay. Mr. Emanuel blames Mr. Rauner’s bankruptcy talk for the premium.
8.5% is a lot of interest and we’re presently experiencing a period of historically low interest rates. The CPS is paying such high rates because its credit rating is very low, which is another way of saying that investors wonder if they’ll be paid back. My back-of-the-envelope calculation says that’s $50 million a year. That might make sense if Chicago’s revenues were expected to increase over time but that’s not the case.
Chicago’s population has declined in every decade since 1950 except for the decade from 1990 to 2000. The smart money is on Chicago’s population declining in the present decade. Fewer people means less revenue for the city and fewer people to share the debt burden. If the real incomes of the people who remain are shrinking (as I suspect to be the case—that’s hard to ferret out), more debt is being borne by fewer Chicagoans who are decreasingly able to bear it.
Chicago’s public schools serve fewer students than they did in 2000 but not only do the real per student costs continue to rise the total real costs do as well. There’s something wrong with this picture.