Detroit, Bankrupt, and For What?

This past week a new chapter in history was written in America, and it's not a happy chapter. The once-proud Motor City of the 50s has become the poster child for the biggest Chapter 9 bankruptcy of a municipality. The city fathers managed to run up $18 billion in debt that could not be repaid.

Many will clamor for the federal government to bail out Detroit. By the way, the "federal government" here should be translated - YOU! Taxpayers will soon come to realize it's really THEIR money at stake here whenever the topic turns to "bailout." I'm wondering if finally someone in Washington will draw the line in the sand and say, "No. We will not bail out ANY reckless spending by cities, counties or state governments." Then, having set THAT precedent, we might be able to establish a precedent for the federal government too.

Detroit’s bankruptcy filing is only the latest chapter in a long slow-reading book that has been written over a period of decades, but it should serve as a model for what NOT to do if you're running a city government. We used to study GM in business school as a model for American ingenuity and good old fashioned know-how when it came to making automobiles in the post-World War II era.

But Detroit's greatest strengths (its workers) became Detroit's greatest weaknesses (the unions those workers belonged to). The manufacturing decline in America had its roots in the factories of Detroit. The basic economic math became immutable as the city once bristling with economic wellness lost more than 60 percent of its population (2 million down to 800,000) because it gave exactly the wrong response to the manufacturing decline. On a grand scale we've seen Barack Obama doing the same thing at the federal level.

Detroit’s city fathers, as Mitt Romney documented so well in his campaign for the presidency, attempted to do the impossible by shifting resources from the private sector to the public sector. It's straight out of the socialists' play book. It's never worked ANYWHERE, and least of all in America. The leaders in Detroit failed to realize people who worked there would react predictably when they raised taxes and increased regulations, simultaneously growing their city government like the consequences would never come home to roost.

The tragedy here was the city was following the lead of a doomed GM, Chrysler and Ford. Rather than implement sound financial and economic policies and promote a vibrant private sector to help rejuvenate the city, Detroit's leaders did exactly what the Big Three automakers were doing - growing their city government through generous promises to their workers with unaffordable future pension and health care benefits. Just as the auto unions drove the Big Three to their knees, by far the biggest portion of Detroit’s debt comes from these unaffordable promises: $6 billion in health and other post-employment benefits for retirees and $3 billion in pensions. Mind you, these are public employees unions who won their concessions through collective bargaining, again mirroring their brothers in the private unions. They ignored the warnings of the past that public employees should never be granted collective bargaining powers.

Governor Scott Walker, Wisconsin

Wisconsin's Governor Scott Walker taught the nation a powerful lesson when he stood up to the public unions in his state. Detroit's failure is only an endorsement of Walker's approach to responsible government having to take principled and difficult stands. By doing what he did, Walker helped Wisconsin avoid a similar fate.

Today I read an interesting article about which states are running down a fast track to financial oblivion. You might want to check to see if your state is on this list. Do you want to guess which states headline this list?

For many decades, Detroit had sustained itself by bad fiscal management: unaffordable borrowing, state grant schemes, raising taxes, and deferring public pension contributions rather than cutting city spending. And now the end has finally come. The piper always demands payment. With all tax rates close to their statutory max and dismal public services that discourage individuals and businesses from remaining in or coming to Detroit, the city simply cannot continue to fund its operations and service its debt. The population voted with its feet, and the population is who pays the taxes. As Margaret Thatcher once accurately warned, "The problem with socialism is eventually you run out of people to tax." And once the population vacated Detroit, there was no way to keep its promises to the public employee unions. It used to be Economics 101 where I went to school.

It is likely Detroit’s creditors and pensioners may receive pennies on the dollar to what they are owed. That is the sad but irreversible reality. Certainly there will be cries of “unfairness.” But a federal bailout in which we the taxpayers who live in fiscally responsible cities and states have to pay for the services and promises made by city and state governments that waived such discipline for decades, would be the height of "unfair." The "pooling of risk" is a principle applied to insurance policies, where through no fault of their own premium payers can expect to be covered from the larger pool of policy owners when tragedy strikes. Such is NOT the case, and must NEVER be the case here.

Let's be honest, Detroit is not the only city facing serious financial trouble. By setting the precedent of offering NO help for fiscally mismanaged municipalities, it is hoped the representatives of the taxpayers in Washington could learn a lesson from Detroit and begin to put their own fiscal house in order. I am aware this may be wishful thinking and nothing more, but let's start here in Detroit. Further, remember all that bailout money that was spread around in 2009? If it had been helpful, wouldn't every state now be on a more firm financial footing? Bailouts for smaller governments by BIG government simply don't work. PERIOD.

In Utah, a state where leaders are routinely lauded for good management because they are good stewards, any idea of bailouts for cities as poorly managed as Detroit would be punitive and would fail to achieve the intended goal to force local governments to confront and deal with their own mismanagement. If that kind of discipline is required and demanded of the average citizen, is it too much to expect that our public officials should be required to do less? Facing the natural consequences of our poor choices is a childhood lesson, one it seems government officials at all levels seem loathe to learn.

Washington must learn by embracing and valuing what has happened in Detroit. Total national debt is over $17 trillion. For your convenience, I am tracking it day by day here at The Goates Notes (see the window on the right). That debt load is larger now than the whole U.S. economy. It is unsustainable. It is reckless. The profligate spending will ruin this once-great country if allowed to continue in the name of "stimulating the economy."

Look at the factors that drove Detroit into bankruptcy, as I outlined above. Beyond escalating growth in nearly all federal programs, future spending will be driven to the breaking point by our own federal retiree spending programs — Medicare, Medicaid, and Social Security. You can add Obamacare to that list now.

It won't be enough to draw the line in sand by discouraging other troubled state and local governments from seeking federal bailouts. They must be compelled to put their fiscal houses in order through their own best efforts at reducing spending.

And those we placed in control in Washington must establish a good example by fixing their own fiscal problems.