Markets in everything, until they are cancelled

Is this good or bad for the macroeconomy?:

In Los Angeles County, cities are buying federal stimulus funds from
each other at deep discounts, turning what was supposed to be a
targeted infusion of cash into a huge auction.

In two cases $500,000 in stimulus funding was selling in the range of $310K to $325K.  (What does that tell us?)  But wait, the Los Angeles County MTA has now cancelled these swaps.

I thank Jerry Brito and Todd Myers for the pointer.


Isn't this classical rent-seeking behaviour?

It's rent seeking only in the sense that embezzlement is.

Quite plainly, it's illegal, and the MTA staffer who gave the cities the go-ahead should have known so. The whole idea of a transportation fund is to keep it separate from the general fund.

There are reams of laws and regulations preventing government agencies from transferring dedicated fund $$ to the general fund. Governments try to find loopholes all the time. Auditors keep shutting them down.

As a concrete example from my own experience, state governments will often try to inflate charges for centralized computer services to agencies receieving federal funding. This has the effect of subsidizing computer services for agencies dependent on the state's general fund. The feds know all about this of course, and make the state's central computer service agency jump through all kinds of hoops to prove they aren't doing it.

This is a terrific example in state and local public finance. It may well be more efficient for governments to trade away their restricted (conditional) grants for unrestricted (unconditional) grants. The transport funds would then go to the localities who have more valuable transport projects while the cities who sell their grants would spend the money on projects which have higher value than their local transport projects. This is assuming local officials in the buying and selling communities act in the best interests of their communities, admittedly a stretch. (See below.)

Restrictions (conditions) are usually put on block grants because the higher levels of governments want to influence lower levels to do particular things (e.g., spend money on schools or roads or welfare). In this case, the federal government should want the local governments, which are in deep financial trouble, to spend money on just about anything that they wish to spend on that would benefit their constituents. Congress I think foolishly put too many conditions on the spending.

Now obviously there are problems with this argument: governments that use the stimulus money to pay higher salaries to corrupt officials aren't helping much. Furthermore, spending on things like extending unemployment insurance (at the state level) is better than many other types of spending (which might be done at the local level). However, it is quite likely that once you decide to give the money to local governments, those local governments know better how to spend the stimulus money effectively than higher levels of governments.

If we believe that local government officials are just plain corrupt, then the embezzlement charge from Bob Knaus in a comment above makes more sense. However, local officials know better how to spend the money effectively and may well do so. And in the current crisis, it may be harder for local officials to get away with corrupt dealing.

For more on the case for stimulus via unrestricted block grants see this post by James Hamilton:

"$500k for only $310k. At long last, empirical evidence for the multiplier."

While not really evidence of the multiplier per se, I too thought this was pretty interesting evidence of how much value the taxpayers were getting for the stimulus dollars being spent!

This is essentially a premium on the "use it or lose it" requirement attached to these funds. A lot of places do not have qualifying projects that can be awarded this fast.

"Irwindale, population 1,500, had also agreed to sell its $500,000 to Westlake Village for $325,000 cash."

What happens to the $175,000 differential? Does Irwindale get to keep it? For anything they choose? Or only for transportation?

Thanks for posting up this comment.It was really very useful & informative.


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