Monday, September 05, 2005

When Can Cities Finance their Own Local Public Goods? A History Lesson

The horrible New Orleans case study raises a fascinating issue with respect to the financing of local public goods such as flood protection. Should the Feds or the Locals be in charge of financing such self protection investments? Do the locals have the ability to finance their own self protection investments? A very nice recent case study of Local Municipal Water System Financing speaks to these issues.

David Cutler and Grant Miller, "Water, Water Everywhere, Municipal Finance and Water Supply in American Cities,

"The construction of municipal water systems was a major event in the history of American cities -- bringing relief from disease, providing resources to combat fires, attracting business investment, and promoting development generally. Although the first large-scale municipal water system in the United States was completed in 1801, many American cities lacked waterworks until the turn of the twentieth century. This paper investigates the reason for the century-long delay and the subsequent frenzy of waterworks construction from 1890 through the 1920s. We propose an explanation that emphasizes the development of local public finance. Specifically, we highlight the importance of municipal bond market growth as a facilitator of debt finance. We argue that this explanation is superior to others put forward in the literature, including disease knowledge, the presence of externalities, municipal population density, natural monopoly, contracting difficulties, corruption costs, and growth in the supply of civil engineers."

Moving forward as coastal cities face climate change shocks, I will be quite
interested to see whether cities are more pro-active in making costly investments to protect themselves. Will there be a silver lining from the New Orleans Tragedy? Will the Federal Government stop this game of "chicken" with the local cities such that cities delay making costly investments in the hope that the Feds will pay for the upgrades?