Robert Lawrence Commentary: Community Insurance

The Dallas Morning News

While some economic shocks reverberate across the nation and trigger macroeconomic policy responses, many are confined to particular cities, counties and states. These local shocks take many forms: plant and base closures, crop failures, industrial restructuring, natural disasters and property market slumps. And they can be extremely painful, not only for individuals, but also for communities.

Given the manner in which most local governments are financed – they are often legally constrained to balance their budgets – there are likely to be cutbacks in basic community services at precisely the time they are most needed. As local services decline, the quality of life deteriorates, and those who are mobile and best able to adapt to change often decide to leave. This further contributes to tax losses and declining property values. The result can be a community death spiral, one in which collective action could help – but with the exception of some natural disasters (which trigger federal emergency responses), none is offered.

It doesn't have to be this way. Just as the federal government provides workers with unemployment insurance, it should provide counties, cities and states with community insurance, a self-financing program that would allow communities to pool the risk of tax-base erosion through tax-base insurance policies. In normal times, communities would pay an annual premium for the insurance; in bad times, the policy would help make up shortfalls in tax revenue beyond certain threshold levels.

The aim of this policy is not to prevent long-term change or adjustment. In a dynamic economy, some communities and regions may inevitably have to shrink and decline. Nor is it to finance major new regional economic developments for depressed areas; policies such as tax breaks for enterprise zones may be more suitable for this purpose. The idea is to provide for easier transitions and to prevent sudden unforeseen shocks from generating downward spirals.

Robert Lawrence is professor of international trade and investment at Harvard Kennedy School. The views expressed in this article are his own.