Bonds, inflation, and sloppy writing
Kevin disagrees with my assertion that city managers should have been better able to forecast the loss of buying power of the 2005 capital improvement bonds.
And i'm probably guilty, yet again, of a bit of sloppy writing and inappropriate synecdoche.
But first, let me point out that the inflation rate in the construction industry, while high by historical standards, is not without precedent. General inflation rates of 20% or so were a large contributing factor to Jimmy Carter's defeat by Ronald Reagan in the 1980 general election. And as this chart shows, the energy costs of steel making rose as much as 50% during the 2004 calendar year, before settling somewhat. Iron ore remained steady throughout 2004, then appears to have spiked in early 2005 and continued to rise*. It's probably debatable as to whether this should have caused a rethinking in the effects of inflation on the bond's purchasing power, or merely should have sent a warning sign that things might get ugly in the future. Early 2005 was within the time frame which could have been considered by decision makers preparing the November 2005 bond package. As now, the contributing factor was the construction boom in China and throughout Asia increasing demand beyond production capacity.
The factors resulting in the difference between what was promised by the city for the Duke Park renovations and what was actually constructed were many, and hyper-inflation was not one of them, although regular inflation certainly was. I was wrong to imply that they were the same as the troubles now facing the city with the 2005 bond package. However, the results are going to be esentially the same. City departments have promised projects to the voters that they can't deliver on.
That's not a good way to do business.
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* - What the chart shows is a stable price for iron ore throughout each calendar year. All increases are recorded between December and January. I'm not in the steel business, so i can't say whether this reflects, say, that iron ore is purchased on annual contracts, or whether this is simply a convenience adopted by the chart's authors, averaging out the cost of iron ore over a calendar year. Given that they show month over month fluctuations in the price of energy supplies, i lean to the former.
And i'm probably guilty, yet again, of a bit of sloppy writing and inappropriate synecdoche.
But first, let me point out that the inflation rate in the construction industry, while high by historical standards, is not without precedent. General inflation rates of 20% or so were a large contributing factor to Jimmy Carter's defeat by Ronald Reagan in the 1980 general election. And as this chart shows, the energy costs of steel making rose as much as 50% during the 2004 calendar year, before settling somewhat. Iron ore remained steady throughout 2004, then appears to have spiked in early 2005 and continued to rise*. It's probably debatable as to whether this should have caused a rethinking in the effects of inflation on the bond's purchasing power, or merely should have sent a warning sign that things might get ugly in the future. Early 2005 was within the time frame which could have been considered by decision makers preparing the November 2005 bond package. As now, the contributing factor was the construction boom in China and throughout Asia increasing demand beyond production capacity.
The factors resulting in the difference between what was promised by the city for the Duke Park renovations and what was actually constructed were many, and hyper-inflation was not one of them, although regular inflation certainly was. I was wrong to imply that they were the same as the troubles now facing the city with the 2005 bond package. However, the results are going to be esentially the same. City departments have promised projects to the voters that they can't deliver on.
That's not a good way to do business.
====================================
* - What the chart shows is a stable price for iron ore throughout each calendar year. All increases are recorded between December and January. I'm not in the steel business, so i can't say whether this reflects, say, that iron ore is purchased on annual contracts, or whether this is simply a convenience adopted by the chart's authors, averaging out the cost of iron ore over a calendar year. Given that they show month over month fluctuations in the price of energy supplies, i lean to the former.
Labels: Durham, local politics
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2 Comments:
Heya Barry,
Just wanted to point out that while I do think that the magnitude of this rise in costs wasn't reasonable to predict, the incompetence the City showed out of the 1996 bonds -- and Duke Park was just one example of this -- make it all the more frustrating that we're up against this wall.
This is doubly true when we're talking about looking at user fees for friggin' garbage pickup, and when many capital project priorities (including my own favorite, more trails and greenways) are barely funded as it is.
I was glad to see more use of efforts like CMAR to mitigate inflation risks -- and I wonder, if the City had been able to move faster on executing the '05 bond funds, whether we could have avoided a great deal of this mess.
By
Unknown, at 12:29 PM
i think it's a worthwhile conversation to have. pinpointing where the failures occur should, under normal circumstances, give us a leg up on avoiding them in the future.
this being Durham, however, well, we'll see.
i recall having a discussion on a website that i hang out on about global warming, and Lovelock's hypothesis that if we don't stop burning fossil fuels immediately, we're doomed. He feels the only currently available technology that can provide sufficient energy resources to avoid the collapse of civilization while we develop longer term solutions is nuclear power, and as a result, he advocates a crash program to build as many nuclear powered generating plants as possible. I'm pretty sure this discussion took place in the spring of 2005, but it may have been a few months earlier or later.
One of the counter arguments i tried to make at that time was economic. Namely, that supply for steel and concrete was already inadequate to meet demand,and that adding, say, 50 new nuclear fired plants to the mix within a decade would exert incalculable upward pressure on those commodity prices. In other words, leaving aside political factors such as site location, evacuation plans, waste disposal, etc., the basic economic factors rendered any cost estimates useless.
Now, i don't think Durham's proposed capital improvements have tipped the supply/demand balance for steel and other construction materials all by themselves. But certainly the signs were there as early as 2003 or 2004 that there was a risk of inflation in the sector that exceeded overall inflation.
My background in economics may be slightly more extensive than the average person's, but i don't hold any advanced degrees. So if could see this risk, i would hope that people whose jobs it is to spend taxpayer's money could see it ias well.
By
Barry, at 1:18 PM
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