May 22, 2020


Municipal Bonds, Race, and the American City

The rapid and expansive action taken by the Fed over the past two months in response to the coronavirus crisis has muddied the distinction between monetary and fiscal policy. In particular, its Municipal Liquidity Facility provides a path for financing emergency spending by local governments. In some optimistic accounts, MLF-backed investment has the capacity to dramatically reduce the geographical, income, and racial inequalities which have increased in recent decades. But in order to do this, the MLF must explicitly prioritize investment in these communities.

In a recent article for the Washington Post, UChicago Professor Destin Jenkins argued the historical case. In the aftermath of WWII, a municipal bond market that valued white, middle-class consumption diverted investment outside of cities and into the suburbs. Federal housing officials, mortgage bankers and real estate agents profited off of the construction of debt-financed highways, shopping malls, schools, and parks for this upwardly mobile demographic. Cities took on billions in debt, but their black, brown, and immigrant populations saw few of the benefits. Jenkins argues that the history of municipal debt is intimately tied to the history of racial disparity in American cities, and that interventions in the politics of bond markets could enable municipalities “to avoid the punitive credit ratings that devalue certain regions or populations over others.”

We spoke to Jenkins last fall about his research, which focusses on the history of racial capitalism and its consequences for democracy and inequality in the United States. His forthcoming book, The Bonds of Inequality, examines the role of municipal finance in growing American cities and widening the racial wealth gap. Jenkins is the Neubauer Family Assistant Professor of History at the University of Chicago. You can follow him here

An interview with Destin Jenkins

Daniel Kay Hertz: Your work connects municipal debt and bond markets to the story of American cities over the 20th century and into the 21st. Can you give us a bit of an overview of your research?

Destin Jenkins: I started as an urban historian interested in the process of gentrification in post World War Two San Francisco. I began the project just as Detroit declared bankruptcy in 2013, and quickly became interested in two questions: the idea of the public, how we define what belongs to the public, and who counts as “the public”; and how negotiations and debates between bondholders and Detroit shaped the experiences of the city’s black population. I started thinking less in terms of housing and displacement, and more about access to public infrastructure and social services.

My work follows the life of a municipal bond, considering how cities issue debt to finance public schools, parks, public housing projects, and sewage systems—and how this has, at times, held the potential to redress infrastructural inequalities, while always exacerbating the wealth gap because of the benefits that accrue to bondholders. I also make the case that municipal debt can be thought of as the mid-20th century version of offshore tax havens: it was a way of obviating the high federal marginal tax rates of the period.

dkh: You talk about how municipal debt has the potential to undo and remake racial inequality. What sorts of policies does municipal debt make possible, and to what extent have cities actually used that potential?

dj: The idea of “undoing” racial inequality is there to suggest that the unequal distribution of resources was hardly inevitable.

Let me set the stage, a bit. We can take a city like San Francisco to see how the question of social infrastructure was never simply about costs, but who and what was rendered worthy of debt. San Francisco was the site of a massive influx of black Americans during World War II—the black population increased from 4,800 in 1940 to 32,000 in 1945. Like most other Americans, these newcomers demanded new public schools, green spaces, convenient transportation systems.

Postwar cities were in luck. City officials could replace aging, deteriorating infrastructure and respond to infrasturctural demands by borrowing at very low interest rates. In the spring of 1946, for instance, many cities issued 20-year bonds and borrowed at 1 percent. Between new populations, low interest rates, and high marginal tax rates, there was a moment of immense opportunity for cities to borrow, in part to facilitate economic growth, in part to remedy the infrastructural deprivation that had become the norm for black folks and so many others.

dkh: What happened that actually remakes, rather than undoes, those existing racial inequalities?

dj: It turns out that a signal feature of the “golden age” of American capitalism is what I call the infrastructural investment in whiteness. Ideologically, white middle-class Americans were treated as the keystone to Keynesian domestic consumption and economic growth. Basically, during a moment of low interest rates, we see debt-financing for white neighborhoods.

One of the central arguments of my book is that racial inequality was remade less in terms of explicit, Jim Crow-style policies, but rather through seemingly race-neutral decisions about which new schools received funds, which parts of the city received parks, and so on. Out of this moment of opportunity, you see San Francisco neighborhoods like Hunters Point or Chinatown rendered unworthy of debt. In the Western Addition, you see debt used to facilitate what James Baldwin called “Negro Removal”; the city’s redevelopment agency issued debt to buy up blighted property and turn the area into the “New Western Addition,” code for white space.

dkh: Who was actually holding the municipal debt in the 1940s and 50s, and what was their relationship to those issuing the debt and the voting public?

dj: Prior to the 16th amendment in 1913–which instituted the federal income tax—the typical image of the bondholder was of the laymen, widows, and orphans; they were seen as small people who pooled together their savings to invest in their city. They did so, it was said, to secure some kind of long term security during a time when private charity and philanthropy was basically all they could count on. (There are of course exceptions to this, like when the city of Mobile, Alabama went through its debt woes in the 1870s, they sent negotiators to parlay with the New York City bourgeoisie.) But certainly after the 16th amendment, bondholders were, by and large, wealthy individuals and institutional investors. This goes back to my earlier point about municipal debt as tax haven.

The composition of these institutional investors changed over time. There are some cases in which cities purchased their own bonds. There’s great work done by Michael Glass and Sean Vanatta which argues that pension funds were used to underwrite municipal bond issues. Between 1945 and the late-1960s, fire and casualty insurance companies came into the picture. Commercial banks became major players, both as underwriters and bondholders.

Over the course of the 20th century, then, the institutional investor became increasingly synonymous with the commercial banks. This is a huge problem, because once cities grew dependent on a single major institutional lender, they had no viable recourse if in fact these institutions scaled back their purchases of municipal debt or fled the market entirely. And indeed, by the early-70s, you start to see these institutions seek greener pastures elsewhere. In Fear City, the historian Kim Phillips-Fein offers a useful overview of the new kinds of investments that became available in that period.

dkg: Is the argument that, as the identity of the bondholders narrowed and consolidated, there was also a concentration of power?

dj: Certainly there was concentration, though I think the more useful way to frame the problem is in terms of dependence. The dependence of cities on the bond market gave bankers and their allies ever more power over cities.

The other critical part of the story is federal cuts during the Reagan administration. In the early 1940s, there were calls for 100 year federal loans at minuscule interest rates, there were calls for grants that could circumvent financiers and provide cities with direct aid, and there were members of Congress who pilloried credit rating agencies publicly, saying, more or less, “We don’t need these people. We can use the federal government as a clearinghouse for information.” But, in addition to the exodus of commercial banks and the increasing power of creditors, the cutting of the federal lifeline meant that cities were firmly in the lion’s den. By the early 1980s, many municipal borrowers paid 14 percent interest for basic infrastructure and social services.

Another interesting relationship emerged between city technocrats and bankers. The relationship that developed between technocrats and the financiers wasn’t in and of itself predatory, but was wrapped within an intractable structure: cities wanted cheap rates, and lenders wanted higher yields.

That’s one layer of the story: the bankers and the technocrats. The other is between voters and bondholders. As voters, all we usually see on Election Day is a simple choice: Yes to more debt, No to more debt. It’s an extreme flattening of a very complex world.

One of the things I found most interesting was the blistering and prescient criticism of bondholders by many voters during the 1960s. In a sense, they launched a progressive tax rebellion. Black San Franciscans noted that they had been servicing debt for 20 years with very little in return. And until that changed, they would boycott local bond referenda.

dkh: The progressive tax revolt in the late-60s makes me think about recent resistance to TIF-backed bonds in Chicago. There’s an ongoing scandal about the use of property tax-backed bonds to fund infrastructure.

Can you tell us more about the ‘70s? What accounts for the shift in the role that the bond market played in the fiscal crisis of New York City, and what parallels can we draw to its role in the post-2008 recovery of places like Stockton, Detroit, and Birmingham? Have we seen another shift?

dj: With respect to New York City and its debt crisis, the Big Apple came to signify “urban liberalism,” as Phillips-Fein notes, and credit analysts penalized the city for excessive expenditures and flabby budgets. When George Moscone took office as Mayor of San Francisco in 1976, he vowed that his city would not become another New York. The fear of the disciplinary consequences imposed through the bond market, in other words, accelerated retrenchment. I say accelerate because for the black working class, this was only the most recent round of retrenchment, this time fueled by the debt crisis.

The narrative about the moral failings of municipal debtors persists. But one of the biggest differences between the 1970s and recent instances of municipal debt troubles is that back then an institution like Bank of America might even offer to pay higher taxes. In recent years, this willingness, even if mere posture, is not on the table.

dkh: Rating agencies still face these kinds of questions. These are services with clients who have very clear interests, yet they’re depicted as neutral arbiters of social value. Can you say more about that?

dj: I like the framing of the “neutral arbiter” because it highlights the changes in how these agencies have been represented over time. Moody’s began rating municipal bonds in 1919, but during the 1930s something like 78% of AA-rated bonds went into default. The bankers I studied were very skeptical of ratings. They basically thought that ratings were little more than useful conversation starters. Throughout much of the postwar period, no one suggested that these agencies were neutral arbiters. Even when called before Congress, leading analysts confirmed that ratings were, in fact, “judgements” made by a handful of analysts.

But since the 1970s, a reliance on new technologies and an older technocratic discourse of revenues and expenditures has been leveraged to convey the image that bond ratings are simply reflections of objective conditions.

dkh: Gail Radford’s Rise of the Public Authority gives an account of how methods of managing and financing local economies shaped local governments. I’m wondering whether you have thoughts on how the increasing importance of the municipal bond market has actually restructured government and democratic institutions?

dj: I think it’s productive to consider this question in relation to local social service. To fully get at this question I’d have to look at specific claims that bondholders have on revenues. But suffice to say that the creditor-debtor arrangement has led to the restructuring of the relationship between the state and the citizenry. At best, the ordinary citizen might show up to a local Board of Supervisors meeting to make the case for or against greater social services. But why is it that the course of action in particular, and infrastructural quality of life more generally, is structurally linked to the opinions of bankers, credit rating analysts, and bond buyers?

dkh: You’ve emphasized how historically contingent this dependence is. What is an alternative world in which the negative consequences of that relationship are mitigated?

dj: That’s a very good, very complicated question. I think that social services and infrastructure should be insulated from the market, and decommodified. The question is how to do that. During the 1930s, people like Upton Sinclair used the End Poverty in California campaign to imagine public authorities as a way to circumvent Wall Street altogether. It’s possible to fund a Green New Deal (and guarantee full employment) through federal grants and direct loans. You need federal financial power to minimize and neutralize the extreme penalties imposed on cities for the provision of basic needs. That’s what congressmen like Patman and Proxmire recognized in the late 1960s.1

dkh: The financier dependence on the state is an interesting point, because there is a common heuristic that situates left politics with the state and right politics with the market. You can’t really make that distinction here.

dj: That’s what studying bonds makes very clear: that there’s no real distinction. Regulation is a different area, as the bond market remained largely regulated until the mid 1970s. But that’s not the same as being anti-state, the state is essential to structuring the market. This history blows up the artificial binary between the state and the market.

  1. See, for instance, H.R. 15991 and S 3170, March 1968. 

We live in a dysfunctional system in which money flows out of the countries that need it most and into the coffers of the wealthiest. In 2023, the private sector…

Read the full article

The rise of the Chinese EV industry has been enabled not only by generous government subsidies but also by profound changes in strategy and organization, and in particular by a…

Read the full article

The 2008 financial crisis was an unprecedented demonstration of financialization in capitalism today. In the US, the collapse of real estate values revealed how formal credit channels—imagined as mechanisms of…

Read the full article