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.

Why the Two-Party System is Pure Mythology

My Twitter timeline is growing more and more libertarian all the time. And, truth be told, so am I. There was a time when I accepted the reality of the two-party tradition in America. Today it is little more than slight distinctions about which party's candidates can convince us they can manage the intricacies of big government better.

Congressman Paul Ryan (R-WI)

Sadly, while I still like Paul Ryan a lot, the release of his latest version of the budget features only a slightly lower baseline over the next ten years than the trajectory of the Senate's version, released last week by the Senate's budget chairperson, Senator Patty Murray (D-WA). Give her credit - at least she came up with the first Senate budget in over 1400 days. That said, we have yet to pass a federal budget during the administration of Barack Obama, much less seriously consider balancing one. Finally, last week Barack Obama admitted he has no intention of balancing the budget nor reducing the deficit during his remaining term. At least now we know where he stands, since he no longer is accountable to voters. His budget "proposal" merely calls for more taxes and more spending.

According to Ryan’s version of what he would advocate (these numbers are lifted straight from his proposal) we would reduce federal spending as a percentage of GDP from 22.2 percent this year to 19.1 percent in 2023. That is at least a start in the right direction, but hardly draconian in its import. However, if you believe what the Democrat/progressive/liberal elements tell us, such a brutal meat cleaver reduction in the federal spending projections over the next ten years would inflict almost incomprehensible pain on Americans.

Here's what caught my attention from Ryan's CPAC speech last week: “We don’t see the debt as an excuse to cut with abandon, to shirk our obligations. We see it as an opportunity to reform government, to make it cleaner and more effective. That’s what conservatives stand for.”

But here's the rub. Isn't that exactly what Democrats believe too? Aren't they always proclaiming their efforts are designed to give us more effective and efficient government too?

I studied Ryan’s proposal to see if I could find anything that would forever end the federal government’s involvement in education. We've been talking about that since the days of Reagan who wanted to close the doors on the Department of Education. No sign of that in Ryan's budget. All the federal programs that sponsor job training are still there in the Ryan budget. There is nothing to eliminate the Departments of Energy, Transportation, and all the rest. There are so many bloated federal agencies that could be eliminated presidential candidate Rick Perry stumbled during a debate on his recitation of the list of agencies he would cut and it cost him the nomination. But nowhere in the latest Ryan budget do you find provisions for cutting them out.

There is a plus, however. Ryan's budget calls for ending Obamacare, but that isn't going to happen now as that train left the station and is picking up speed on the implementation rails as it rumbles into an insurance plan near you soon. But even if that were a successful legislative coup (and it won't be) the Ryan budget fails to eliminate the federal government’s involvement in health care. At least Ryan wants to cap higher education subsidies, but that doesn't terminate the federal government’s involvement in education. Well, you get the idea. The core problem is simple: More efficient government isn’t the same as limited government. That's the important Constitutional mandate we have bargained away over the years as both political parties have given us more and more government. Whether the federal government is efficient or effective is a debate I don't even care about. I'm becoming more libertarian because it's the only option left to us.

I'm just old enough to remember when we thought we could believe a two-party political system consisting of Republicans and Democrats representing vastly different values and objectives existed. However, true patriots who value liberty and freedom from tyranny, those who are accurately informed, well researched and historically astute know otherwise. Now I see things much differently. The thin veneer of political differentiation has finally peeled away. By the time George W. Bush and Henry Paulson at the end of the Bush era decided to bail out Wall Street and bankers, the illusion was forever evaporated. Government can only fund solutions with money it collects from taxpayers, and so far there seems to be insufficient angst among voters to stop it from escalating.

Senator Rand Paul (R-KY)

Something extraordinary happened a couple of weeks ago on the Senate floor. Senator Rand Paul (R-KY) launched a nearly 13-hour filibuster over an issue that barely aroused any interest among Americans, yet it clearly illuminated this rising tide of awareness of the thinly-veiled differences between the establishment powers in both political parties. What stunned me was the reaction by certain members of the Republican party we must not minimize. I happen to like the old Jimmy Stewart movie "Mr. Smith Goes to Washington," only because it's about the little guy who dares to take on the establishment against all odds. Rand Paul's filibuster was a throw-back to earlier times. Here's at least one man (and there are growing numbers) who still recognizes the Constitution of the United States and Bill of Rights as the supreme law of the land. I include Mike Lee (R-UT) and Ted Cruz (R-TX) in that group. John McCain called them "wacko birds." Then he thought better of the comment and apologized. That defiant act of filibuster by one man had much deeper meaning on many more levels than the topic at hand. When "wackos" are people who believe in limited government and liberty, then I choose to stand with the wackos.

Senator Paul asked for a simple response about the potential use of drones on American citizens on American soil from the Attorney General who represents the Executive branch of our government. Attorney General Eric Holder did not respond, so Senator Paul took to the Senate floor and spoke for 13 hours. As painful as it was for the Executive and Judicial branches and their media surrogates to even acknowledge Senator Paul’s persistence, his actions eventually generated a response. A short letter signed by Attorney General Holder was begrudgingly released. The answer was “no.” As remote as the possibility may seem to some, at least this administration is now on the record if that means anything.

Every freedom-loving American should be heralding Senator Rand Paul for what he did. It was evidence that every American who still cares about the rule of law and our God-given rights as enumerated in the United States Constitution and Bill of Rights has at least one voice who speaks for them on the Senate floor. One would think that kind of issue would resonate throughout America without regard to political party. But he received nothing but ridicule for what some claimed was a cheap political grandstanding maneuver. I saw it as much more.

I consider myself a Conservative. I used to think I was a "moderate" Conservative. I find I must distinguish what that means to me and what it means to Paul Ryan, however. My loyalty is to our Constitution and Bill of Rights. I'm increasingly more interested in like-minded individuals who share that desire above party label. To stand for only a better-managed big government is now bordering on tyrannical and treasonous in my mind.

On the morning of the 9/11 attacks, I watched in horror as the Twin Towers collapsed and the realization we were attacked by foreign enemies slowly sank in that morning. Looking back on the aftermath of that day, I think I supported wholeheartedly, as many Americans did, the passage of legislation that formed even more agencies of the federal government. The Patriot Act and the Department of Homeland Security are only two examples. Now I believe I was wrong in my initial embrace of those moves. In the subsequent bursting of the bubble of Wall Street excesses with securitized mortgages and other dicey investment vehicles, there came clarity. I have discerned we were then, and still are to an increasing rate, being lied to by elected officials on both sides of the political spectrum. The "BIG LIE" is that we are going to be okay with the status quo they so desperately seem determined to perpetuate.

I've stopped listening to the so-called "Conservative" talk radio pundits and the TV talking heads. Like an old soap opera where you can tune out for months at a time, then tune in for a few minutes, the story lines never change and the themes are repetitive. The search for truth is paramount in these last days. And the truth cannot be found in the political realm.

Jesus Christ laments over Jerusalem

You are either loyal to God the Father and His Son, Jesus Christ, or you are not. It really won't matter much which political logos you're wearing when the elements melt down in the fervent heat yet to come. What will matter instead is your allegiance to God and our Constitution and Bill of Rights in America. As Christ was rejected of His own in His day, so He is being rejected once again in our day. I surmise He laments over Washington D.C. today as He once did over Jerusalem. The imperial government, the pervasive institution to which we are all being asked to pledge allegiance and to turn for sustenance, has forsaken her birthright. These are values our great nation once represented. There is no political party left, however, to claim the crown of champion for those values. Both parties have been corrupted. As long as I live I will resist any and all attempts by others to impose a godless theocracy upon us. If America fails, there will be no other contender left on earth in the running among the super powers to champion the cause of freedom.

Merely proposing that the federal government borrow and spend less than what is currently projected is certainly better than the alternative of burying our heads in the sand and pretending we are not in a spending and debt crisis. But those who accept Paul Ryan's version of the proposed federal budget cannot be serious if their goal is limited government. We must come to a point where we must find the collective will as free citizens to impose limits all the areas where government has intruded on our rights.

Some people worry what will happen if draconian measures are taken to cut federal spending. Think of the "safety net" suddenly being snatched out from underneath everyone. Think of all the unemployment if federal employment for millions of Americans suddenly terminates. In the garden of Eden, were Adam and Eve firmly clutching their Social Security checks and food stamps? When did we lose sight of working by the sweat of our own brows? There were no promises then, and there are none now. Ryan is defending a mythological fantasy when he says he can ensure the promises their government has made to Americans in the years ahead. What he's really saying is I can do it better than Democrats, when both have moved this country beyond the ability to deliver on those promises without severe cutbacks in the status quo. That's a political agenda politicians don't dare enunciate for fear of losing the next election.

I've heard the list of horribles of what might happen if we take control of our own debt and spending now, but what if we are already at the tipping point where the collapse is imminent anyway? Isn't the path we are on amply demonstrated by now to be unsustainable? Seems to me we must prune back the spending and debt bushes voluntarily now, or the pruning will be imposed at a time not of our own choosing and by circumstances we cannot possibly foresee or control.

I'm happy for the thought and preparation that has gone into Ryan’s latest budget proposal. But it only represents a step toward a slightly cheaper big government in a time when what is needed is a return to limited government we can actually afford.

Top Four Reasons Liberalism is Failing

I hate to be the messenger of bad news -- I'm always looking for the bright side.  However, there are hard data now emerging to suggest the liberal agenda advanced by President Barack Obama for the past eighteen months is failing miserably.  It isn't just your imagination.  I have been stunned -- more honestly AMAZED -- that we have been revisiting socialist ideas as the way to heal America's economy.  I thought we had grown up in our thinking.

But I digress.  Here are the top four reasons I'm seeing:

1.  The housing market is still in dire straits despite all the bailouts and the stimulus legislation that's been thrown at it.  Instead of the government trying to solve this problem, letting foreclosures proceed and the market finding its own bottom, the administration has actually slowed the readjustment in pricing by artificially trying to prop it up.  The first-time home buyer tax credit expired in July.  The result from this artificial "prop" to housing pricing was predictable, reaffirming we haven't found the bottom yet.  This week, the National Association of Realtors reported July sales of existing homes fell by 27 percent from June of this year and by 25.5 percent compared to July 2009.  The annual sales rate of 3.83 million homes, they stated, was the lowest since NAR began keeping track of sales in 1999.  Further, the Commerce Department reported July sales of new homes fell 12.4 percent from June and by 32.4 percent compared to July 2009.  The annual rate of 276,000 new units sold is the lowest since 1963, when government records were first kept.  The source of the plunge is no secret: July's numbers reflect the first month when existing home sales received no boost from the home buyer tax credit.

2.  New automobile sales are drying up after the ill-fated "Cash for Clunkers" program ended.  Again, it was an artificial "fix" that didn't fix anything.  New automobile sales tanked when the program ended.  General Motors' sales dropped 36 percent in September 2009 compared with August.  Ford collapsed by 37 percent, and Chrysler sales dropped by a similar percentage, 33 percent.  So who's benefiting in the car market?  It's not the manufacturers of new vehicles.  Used car sales have rocketed up this year, and your local mechanic is doing a land office business.  Because everyone's credit has been dinged, people are hanging on to their used cars and getting them repaired or buying a lower-priced used car.  It can be traced to the government's intrusion into the marketplace.  When does the government finally wake up to the reality that you can't provide a "free lunch" to everyone?  When you provide this grab bag of goodies with borrowed money from the Chinese, you don't create new wealth in the U.S.  All that happens is the government moves money around from one "pocket" to another, but nothing of value is being created.  It's Economics 101.  Unfettered markets would find the right places to put the money without a government-mandated program.

3.  Stimulus spending isn't stimulating much at all. Government spending does not stimulate economic growth. All it does is move resources away from one sector of the economy to another. Pick any "central government" in the world -- their track record for correctly and efficiently allocating resources is abysmal.  The USSR, with a GNP 1/6 the size of the U.S. economy in the 80s was outspending us in military spending 3:1.  We all know how Ronald Reagan exploited that disparity and convinced Mikail Gorbachev their priorities were going to bankrupt them.  All Reagan had to do to end the cold war was to convince them we were not the least bit interested in their destruction.  Remember "MAD?"  It was the acronym for Mutually Assured Destruction, and it was flawed.  When government attempts to allocate resources, jobs are lost, not created, in the shuffle and the transfer of the resources.  Why liberals can't see this simple fact is hard to fathom.  I was astounded back in February 2009, when I heard President Obama, say:  "This is not something that we're just doing to grow government. We're doing this because this is what the best minds tell us needs to be done." That statement is either naive or intentionally misleading.  Evidence from past history suggests exactly the opposite.  The "best minds" in today's administration must be dead wrong in their assumptions.  Forty-five years ago, when he was still Governor of California, Ronald Reagan asserted: "Anytime you and I question the schemes of the do-gooders, we're denounced as being against their humanitarian goals. They say we're always 'against' things — we're never 'for' anything. Well, the trouble with our liberal friends is not that they're ignorant; it's just that they know so much that isn't so."  I told you he was the "common sense purveyor," remember?  You could lift that line right out of today's headlines -- "The Republicans are the party of 'No.'"  Things haven't changed much.

4.  The Home Affordable Modification Progam has been a dismal failure.  I was invited to participate in the program last year -- one year ago this month -- by making three months of reduced mortgage payments during a "trial period."  So I made the first three trial payments, then the fourth, fifth, sixth, seventh, and eighth without so much as a word about what was happening to my loan.  Finally, four months ago I was told I was approved for my modification, and to be sure to look for my new modified mortgage papers in the mail "within a matter of days."  You guessed it -- nothing yet, and we're now in the second year of waiting patiently for President Obama's rescue package.  Some stimulus.  At a meeting last week with leading economic bloggers, attended by Obama's economic advisor, Treasury Secretary Timothy Geithner, the program designed to help homeowners avoid foreclosure was discussed.  Not surprisingly, the "best minds" in government judged "HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock."  Really?  Because it "helped banks" it's a success?  Really?  And what about the little people?  How's that been working out so far for all of you? 

Shocked at the admission that HAMP was meant to bail out banks and not help owners, Media Matters fellow Duncan Black wrote: "When Liberalism Doesn't Work It Discredits Liberalism." 

Liberalism is not working. Socialism is a failed experiment.  Charles Krauthammer weighed in on this topic in the Washington Post.  As usual, he nailed it on the head with even more ammunition than I've used here.  The sooner we leave it in our rearview mirror, the sooner the American economy can get back on track unaided by its government's "best minds." 

We'll find out in the coming months just how discredited it is in the eyes of the American people.  The best gauge you can watch is what happens in the mid-term elections on November 2nd.  And, yes, I AM wishing time away until then. . .