Saturday, November 6, 2010

The problem with not borrowing

We've heard a lot about the evils of borrowing in the recent election cycle, but I don't think enough attention has been paid to the evils of not borrowing. In other words, to the problems of not having money when you need it.

Obviously, if your income goes down and you don't borrow, you can't spend as much as you used to. This is not necessarily a bad thing if you don't need to spend as much money. For us, though, it is. Accomplishing our goals will require a massive shift from personal cars to transit, and we will need to spend lots of money to develop the necessary capacity.

If your income is down and you don't borrow, you miss out on investments that could increase your income down the line. Worse, deferring maintenance can mean bigger expenses down the line, as with the Manhattan Bridge. The worst is when you spend money for infrastructure that doesn't get used for 73 years.

It may be better to borrow if it will increase your income later, if it will avoid much bigger expenses, or if it will allow you to put previous investments to use. You just need to be fairly certain that the costs won't exceed the benefits. Of course, you can never be completely sure: nothing about the future is a hundred percent certain. It's important to be careful and not take big risks. But it's also important to take small risks to avoid major expenses.


George K said...

You should show this article to the planners in NYC. There are/were many plans for subway expansions into neighborhoods now served only by overcrowded local buses in parts of the central Bronx, eastern Queens, southeastern Brooklyn, and Staten Island. If they had built those subway lines (even if it required borrowing money), eventually the savings from running fewer buses in those neighborhoods and running trains instead would exceed the cost of the subway line.

jazumah said...

George K, at the right fare, yes. I wouldn't mind a $3 fare to have the IND Second System operate tomorrow.

Alon Levy said...

At a billion dollars per kilometer, a $3 fare wouldn't even come close to covering the costs.

George K said...

I meant that, eventually, the fact that the trains have a much higher capacity and higher speed will provide savings, as parallel bus lines can have their service reduced. I figure that the per-person operating cost per passenger on a subway line is about 1/3 to 1/5 the cost per passenger on a local bus line, which can result in huge savings when dealing with high-density neighborhoods.