Detroit As A Warning

This week’s Courier Herald Column:

Last Thursday the city of Detroit Michigan filed for the largest municipal bankruptcy in US history.  The move places retired workers’ pensions at risk and makes it likely that those holding Detroit’s municipal bonds will receive pennies on the dollar for their investments.  For those individuals affected it will be a painfully dramatic change.  But it can hardly be called a surprise.

Detroit was a city of 1.8 Million in the middle of the last century, but today only about 700,000 call it home.  The city’s principal industry remains automotive, but General Motors which once sold half of the cars in this country sells less than 20% of them today, with Ford and Chrysler also seeing dramatic losses in market share.  Detroit industry – and its residents – have watched as others have “voted with their feet”.  The city was slow to change, and now dramatic steps must be taken.

The Washington Post’s Wonkblog offered “Six Crazy Ideas for Saving Detroit” that should be examined not so much in the context of what would fix Detroit, but as a bigger picture of what should also be done around the rest of the country.

The authors first suggest “eliminate all the taxes”.  This is quite strange coming from the Post, which routinely pushes a “soak the rich” argument.  But for Detroit, they acknowledge that a way to kick start Detroit back to health would be to eliminate all taxes, with the Federal Government paying the state and local taxes owed by Detroit residents “to spur outsiders to come in and do business.”

So plan one is to reward Detroit’s failure by having the rest of us pay our income taxes and let some of that go to the City of Detroit and the State of Michigan?  We should at least acknowledge the Post has admitted that cutting taxes will spur growth.  They even doubled down and suggested “Get rid of zoning, parking requirements, occupational licensing and other cumbersome regulations while you’re at it. See how many businesses come.”

Funny, but every time a Republican suggests those “cumbersome regulations” that government keeps coming up with at a record pace, publications like the Post suggest that means dirty air and water.  But now that a major Democratic city needs to be saved, they apparently can get a waiver from all those people who are from the government and are here to help.

The next suggestion is to make the city a tax shelter to attract businesses.  Funny thing about that, but Republicans have also been suggesting the same thing be done as part of broad tax reform.  After all, there are hundreds of billions of dollars stored in offshore tax havens by US companies because they don’t wish to pay confiscatory corporate tax rates to bring that money home and reinvest it here.  The Post should expand this suggestion nationwide, and then let Detroit earn its “fair share” of those investment dollars based on their ability to attract capital.

Another suggestion is to create a “Detroit Visa”, and allow those seeking to immigrate to the US to settle in Detroit.  This, also, is the basis for what should be the cornerstone of comprehensive immigration reform.  Lots of folks want to come to the US legally.  We should be seeking to identify those with the intellectual capital that would add to skills we need here in this country.  Giving priority to those who will agree to settle in areas of poverty – urban city centers as well as rural areas in need of health care providers – could be an idea that helps much more of the country than just one city.

There are other ideas that are less than compelling.  One suggests moving federal workers to Detroit.  Again, while the concentration of federal workers has turned Maryland and Northern Virginia into wealthy recession proof enclaves, there is no reason to reward Detroit specifically with federal largess.  Many federal workers should be taken from the areas surrounding the beltway.   Some of these should be eliminated altogether (as the authors have already conceding lower taxes would help the economy), while others should be disbursed more evenly around the country.

Suggestions that the city go vegan are just about feeding the non-stop PR machine that is the People for the Ethical Treatment of Animals.  And the suggestion that Detroit be given to Canada is more about admitting that Detroit has truly failed than a serious policy discussion point.

That said, there is a bigger lesson here.  Detroit is one example, but may not be the only one.  Any entity that perpetuates expensive yet unsustainable government programs, all the while relying on industry that acts contradictory to market forces is headed for failure.

Those looking at remedies for Detroit need to keep perspective of the much bigger picture.  Detroit’s economic failure was last weeks’ news.  Yet the parallels between Detroit’s policies and that of the current US Government have too many familiar parallels.

It is time to look at Detroit for the lesson that it is.  People can vote with their feet, and with their checkbooks and capital.  The U.S. needs to right its economic ship, and take an honest look at the size of government it has, and the amount of regulation we continue to burden industry with.   Failure in one major city is manageable.  Failure at the national level of a major superpower will not be smoothed over as easily.

37 comments

  1. Eh, the US can continue to run a manageable structural deficit as long as the population keeps growing. Mistaking the lessons of a region for that of the whole is foolish. Show me one country in the world where austerity is working or one country with lower total actual tax burden where you’d rather live and we’ll talk. Of course if you aren’t growing, you’re dying which is why continued immigration is important to keep fueling the future just like it did in the past. Finally there is no contradiction at all in acknowledging that lower or eliminated tax rates in an area or for a certain period can spur growth and also calling for higher and broader tax rates for the longer term. Still from a moral standpoint why is it worse for taxpayers to subsidize Detroit than the continued subsidization of say Mississippi? Not saying we should, but maybe Detroit’s problem in that respect is not so much that it needs help now, but that it once didn’t.

    • Ken says:

      Chris,

      By definition resources are limited. Those resources will be used in either the private (productive) sector or the public (nonproductive) sector. Every penny pushed into the public sector comes at the expense of the private sector.

      As for the silly “where you’d rather live” argument, you are arguing that this is the best we can do. Do you really want to make that argument?

      Wake up, Chris. We have continually shifted our burden of debt to the future and while we do so we are limiting our future options. There will be no deus ex machina to save a foolish republic from itself. Denying that we have some fiscal responsibility is irresponsible. If cutting spending now hurts, doing so in the near future it will be viewed as catastrophic, leading to a real catastrophe.

  2. Three Jack says:

    Good column Charlie!

    It was refreshing to hear Detroit’s Mayor Dave Bing on ABC’s This Week with (fill in the weekly host name). George Stephanapoulis was hosting this week and started off by asking the mayor what the federal govt could do to help. Mayor Bing surprisingly said ‘nothing’ at this time. GS couldn’t believe it so he pressed on asking the same question at least 3 times with Bing responding the same way each time. Stephi was incredulous, how could it be that a mayor would not immediately seek (demand in most cases) federal assistance…I mean come on, they bailed out Wall St and the auto industry, why not Detroit? — http://abcnews.go.com/blogs/politics/2013/07/detroit-mayor-we-will-come-back-from-bankruptcy/

    Some folks like Stephanopoulis will never understand that the federal govt cannot be all to all, there are limitations even under liberal rule. Detroit needs far more than a pile of taxpayer money shifted its way as Bing pointed out. I hope the mayor maintains his course and becomes the hero who saved a once great city.

  3. Harry says:

    Oh yeah, avoiding austerity is working great in Europe. Keep spreading that myth. Here are the debt-to-GDP ratios:
    Euroarea: 92.2%, up from 88.2% a year ago
    Greece: 160.5%, up from 136.5% a year ago
    Italy: 130.3%; up from 123.8% a year ago
    Portugal: 127.2%, up from 112.3% a year ago
    Ireland: 125.1%, up from 106.8% a year ago
    Spain: 88.2%, up from 73.0% a year ago
    Netherlands: 72.0%, up from 66.7% a year ago

    Who will pay the piper? You?

    • tomfromdecatur says:

      Nice cherry picking of statistics. How about showing all the members of the EU. Including “socialist” countries like Sweden, Denmark, and France, and a few former Soviet Eastern Bock countires that are loving being in the the EU such as Bulgaria, Estonai, Poland, Romania. You might even throw in the old UK and Germany, to be fair.

      • Harry says:

        What’s your point? I’m just point out that some of the worst offenders – aka Club Med – have handed over excessive benefits to their voters, and are now demanding bailouts from others instead of practicing good budget husbandry, and someone has to lose in this theater of musical chairs. The Germans are increasingly shaky themselves. This absurd performance will bring down the curtain on the failed experiment known as the Euro, and good riddance.

        I love it that Detroit is sniffing around for a bailout. This should be fun, I’m grabbing the popcorn.

        • tomfromdecatur says:

          You make my point for me through your response. You now say “here are some of the worst offenders” but your first post made a sweeping statement about “Europe” in general, not just selected worst offenders. Does any one of the countries you use in your example answer Chris’ comment about “Show me one country in the world where austerity is working or one country with lower total actual tax burden where you’d rather live and we’ll talk.” Do you have one in mind? That is not made clear in your post either. You just throw some statistics out without context. Aren’t most of the countries you have pointed out agreeing to austerity plans? Weren’t bondholders (banks) the biggest losers there?

          Come on, didn’t Detroit just file bankruptcy? Is that better? Who is crying there? Bondholders? Employee, Police and Firefighter pensioners? They are the top 20 creditors in the filing. I do not see taxpayers anywhere in the top 20. Finally, where do you see thta Detroit is “sniffing around for a bailout”? Save the popcorn.

          • Harry says:

            Of course Detroit is looking for a bailout, but they ain’t gonna get it because nobody not least the federal government can afford to give one to them. They were trying to use 1970s NY as a precedent. Ha.

            You question “show me one country in the world where austerity is working” is incorrect. Countries pretend and posture to undertake austerity but none of them have done so, and never will. It’s not governments work where voters want benefits, not austerity, and elect governments that will comply. So I don’t understand all this leftist BS about austerity not the solution. Austerity IS the solution to reduce deficit spending and avoid bankruptcy, but will never be actually done. Meanwhile the productive middle class is drained, incompetence and laziness are rewarded, government elites are fattened, but living standards are falling worldwide.

  4. sockpuppet says:

    @Harry:

    After the 2008 crash, several European countries – at the urging of Merkel and Germany – adopted austerity measures. Those austerity measures did not work in a single country. In every country where austerity was tried, the combination of lower revenue from both the public and private sector caused the recessions to worsen. Which is why no one in the EU is promoting austerity anymore. Our own conservatives went from cheerleading Merkel and the austerity measures taken by the EU countries and contrasting them with Obama’s stimulus to silently quietly backing away when their advice turned into fiascos for the countries that took them. Notice that you don’t even hear conservatives criticizing the stimulus anymore … because the economy has grown. The stimulus that was supposed to sink us deeper into a recession and cause the dreaded double dip – all of that talk is gone. Especially since even the projected deficits are now smaller. That is why all of the Obama criticism has basically shifted to ObamaCare.

    Really, the GOP has no grounds to push austerity anyway. The GOP uses “austerity” and “bad economy” as an excuse to push for budget cuts and entitlement reforms while the other party is in power that they themselves never enacted – or even really tried – when they were in power. The GOP controlled the White House and – along with the ideologically similar yellow dog Reagan Democrats – Congress for most of the 1980s and attempted no austerity measures. They just waited until Bill Clinton got into office to propose the Contract With America. The Bush years? The same deal. 8 years of mostly economic expansion and spending actually increased. It wasn’t until Obama’s election that austerity seemed to be a good idea. The Ryan plan: great idea with Obama in office and therefore it has no chance of happening. But when Bush was in office and you guys actually had the votes to enact it and a president that would have signed it? Not such a good idea.

    So wait until you guys control the White House and Congress again like you did in 1980-1986 and 2000-2006 and THEN start talking about austerity. My guess is that if you guys get control of D.C. back, guys like Ryan, Rand Paul etc. will get shoved to the back bench and we will see the return of the porkbarrel spending and crony capitalism that proliferated during the Reagan and W. Bush years.

    • Harry says:

      See my response to tomfromdecatur, above. I see that commonsense austerity is a sensitive subject with leftists/liberals.

      • tomfromdecatur says:

        “There you go again” (I suppose you will recognize that quote). Did I miss it? Did you list any “common sense” austerity programs? As a taxpayer, I am interested in such “common sense programs”. But, I am more interested in economic growth, not austerity for austerity’s sake. If it takes cuts, so be it. But, as we have seen, austerity is not the only solution (check Europe) but stimulus (see China, recent Japan, and yes, the US whether it be by the Administration or the Federal Reserve, in this case) and luck (see Australia and Canada with their resources) also play a part. The US has enormous capacity for all three. We just need leaders (key word) and a return of the lost “art of the compromise”. There is a (false?) glimmer of hope for compromise as recently seen in Congress (although it appears mostly window dressing for upcoming elections). Other than that, I see none on the horizon for compromise on big issues; certainly not compromise options that would hurt their particular constituency as is alluded to in sockpuppets comments. I think we need more closed door sessions like the Senate recently held for both Houses and the President. Something to shake things up but in private, not on a soapbox. That is my opinion. Your thoughts?

  5. saltycracker says:

    Should the Feds bail them out ? No, a precedent of costs and a rejection of any standards of consequences.

    Should the local citizens be subjected to restricted services and draconian taxes to bail out the disaster decisions of their elected? Maybe, if they can develop a plan to stop the waste and employee empires…doubtful.

    Should the current retirees and bondholders bail out the city by taking a haircut on promises ? No, they were granted stupid expensive/risky promises by the public.

    Should the city sell off assets, unincorparate and become part of the county? Maybe…..

  6. Ken says:

    Back in 1979 in An American Renaissance: A Strategy for the 1980s, Jack Kemp proposed “Enterprise Zones” for areas with extreme unemployment or high poverty. Part of that strategy was an elimination of taxes on businesses which operated within those areas.

    Kemp’s ideas would have been a big boon to urban and poor rural areas by lessening government’s stranglehold on entrepreneurship and capital. Thirty-four years later the WaPo opens its collective mind. Pardon me if I remember that this is likely temporary and subject to retraction.

    • Harry says:

      WaPo is pretending openness to new ideas. Just remember they’re in DC and not looking to reduce the size of government.

      • saltycracker says:

        Opportunity zones are used in Atlanta, selectively, like Beach did for GM high tech hires on “downtrodden” Mansell Rd., Roswell. As for Detroit, if the mismanaged past is a sign as they did little to adjust over decades of population loss, any tax cuts will not be used to benefit the beleaguered residents.

      • Ken says:

        grift,

        Not quite what Kemp had in mind, including waivers of burdensome regulations, too. Kemp envisioned complete elimination of state and federal taxes for those locations. If we’ve been doing that, then my apologies; I missed it and will kick myself severely.

          • Ken says:

            I’m simply pointing out that there was a difference. The idea was a good one, So good, in fact, that a watered-down version claimed the name.

            Republicans had an opportunity to make Kemp’s proposal happen. We failed to do so. The burden, frankly, is on us as a party.

  7. John Konop says:

    The biggest issue is demand is down……the reason demand is down is because real wages have been going down hill since the 70’s…….We used irrational debt personal, government to cover up the problem…..As working class jobs leave the western world for 2 dollar a day workers in third world…you have less consumption…..ie consumption drives wages ie tax revenue…… The spread between rich and poor growing on steroids is not a good long term business model, as Henry Ford pointed out years ago ie you want workers making enough money to consume the products they make….

    • Scott65 says:

      …and it doesn’t help that companies like Apple, Google, GE, etc can so easily make their money here…keep their money here, but through slight of hand via Ireland set up a sham company in Bermuda and never pay taxes (do some research as to the mechanics of it…will make you think twice). It would be so easy to stop…but corporate cash will buy all the congressmen they need so it wont ever happen. Just because something is “legal” doesn’t mean that it is right.

      • Three Jack says:

        Yea, it had nothing to do with union bosses using their status to enrich themselves while pricing labor too high for any company to sustain. Come on John, at least admit the unions were a big part of why Detroit failed and the south is now home to high paying automobile manufacturing jobs sans the union dues.

  8. Scott65 says:

    The problem with Detroit is that they put all their eggs in one basket. Pre 2008 employment was going up in the Detroit Metro area…just not in the City of Detroit. Thats the problem…not pensions, not greedy city employees, and not even inept governance (although that is a big part of the equation). When you have a city’s population crash by more that half over the last 50 years (most within last 10) everything having to do with running of the city becomes impossible due to the geographic holes. Detroit’s size (geographic) could hold the cities of San Francisco, Boston, and Atlanta and have room to spare…ok for 1.8 million…not possible for 700,000. Detroit ignored its urban core to its own detriment (take note of that Atlanta Metro). It didnt diversify its economy. The riots of the 60s didnt help much either. Tax free zones would be fine…but who pays for city services…its just a stupid idea that has proven wrong so many times…its great for those at the top…kinda sucks for everyone else.

    • pettifogger says:

      Throughout my roughly 30 years, Detroit has been synonymous with awful. That is a tough reputation to beat back. During my last visit in 2000 or so, the city had some vibrancy, but the decay greatly overshadowed the attributes. It appears to be far worse today, though with some bright spots. I think that modern Detroit had a lot of issues, a number of which were recoverable, but the combination of which were fatal.

      I agree with a lot of your assessment, although I don’t think the pensions, unions, corruption, etc., can be understated as factors. I do disagree that Detroit ignored its urban core, at least in the way you seem to be using it. Yes, the urban core died, but I am unsure of who you think ignored it. The urban core ran the urban core, emphasized it above all else, and it still declined. I think the same can be said for modern Atlanta. Who is to blame for that? The metro area at large?

    • Ken says:

      You have to ask why all of those people left. Why was there no industrial diversification?

      Remember, GM was losing money with every car it produced when the net present value of retirement and benefit costs were included. It was an unintentional Ponzi scheme pulled by the unions and the automakers.

      • saltycracker says:

        Actually it was an intentional ponzi scheme by the execs, UAW, accounting and legal firms. Keep everybody everybody fat and happy today and deal with it tomorrow. It pales in comparison to the public pension and health plans of today because neither party has a lot of skin in the game. To get it to biblical disasters, just allow public unions.

        The good news is there are many methods to kick the can down the road for decades. Detroit just found a perfect storm.

  9. Joshua Morris says:

    I understand that this post is more about solutions than analyzing the problems. However, my favorite author, Russell Kirk, was writing about Detroit over 20 years ago, and he gave some interesting historical perspective that I think should be lessons for the future as well: http://adasboro.tripod.com/prols.htm

  10. elfiii says:

    @ Chris Huttman – “Show me one country in the world where austerity is working or one country with lower total actual tax burden where you’d rather live and we’ll talk.”

    It’s pretty much ingenuous to say after decades of running up massive global unsustainable government debt and deficits that austerity “isn’t working” when it’s the only choice left on the table and nobody really wants to embrace the cure because it tastes so bad so they shave points and call it “austerity”.

    Let’s nix austerity altogether and just go ahead and drive the whole world into bankruptcy. It’s headed there anyway. Why delay the inevitable with half measures? Besides, it’s been almost 70 years since we last had a real good gene pool cleansing. We’re due.

    • John Konop says:

      Both sides are wrong…..,.you cannot cut your way out of declining wages, nor spend your way out of the problem…. Both are temporary medicine with no real solution……the only way out long term is to produce your way out…….and the production ie labor……must be paid enough to consume and pay taxes, that cover overhead…….

      We need to reexamine our trade policy……short term the boom in oil prices with us producing more is helping…..ie more money turning in our an economy….but unless working class real wages start climbing we will see more of the same…..

      We do needvreal infastructure investment, but once again short term medicine without real wages going up…..We do need cuts to entitlements, but once again the same as above…..

      This is why the CEO of Costco is even calling for liveable wages…..He understands anything less is just taxpayer subsidized labor on a macro…..And even if the price go up a bit it is cheaper than the tax payer subsidy……and it is all about real wages not inflation……

  11. Harry says:

    “In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.” – Friedrich Nietzsche

  12. elfiii says:

    @griftdrift “wow”

    The notion WWII was the last “be all end all war” is naive in the extreme. The next one is when, not if. The banksters are going to make sure of it.

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