“Detroit – An Omen?”

Sydney M. Williams

Thought of the Day

“Detroit – An Omen?”

March 6, 2013

The headline in the New York Daily News, on August 29, 1975 read, “Ford to City: Drop Dead.” The quote became iconic, though President Ford never said such a thing, though he had nixed a federal bailout of the city. Instead, responsibility fell to the State of New York and to the people and institutions to handle the crisis themselves. Governor Carey, with Felix Rohatyn installed as chief of the Municipal Acceptance Corp., did just that. On November 18, 2008, Mitt Romney published an op-ed in the New York Times, headlined “Let Detroit Go Bankrupt.” Mr. Romney was pilloried for his comments. (The headline was chosen by the Times.) Governor Romney later said the headline should have been “How to Save Detroit,” which in fact was his message.

In December 2010, Wall Street financial analyst Meredith Whitney told “60 Minutes” that she expected 50 to 100 municipalities to file for bankruptcy in 2011. That didn’t happen and she was loudly lampooned. But there were instances of filings, and the game has not been played out. Jefferson County, Alabama filed for bankruptcy in 2011, as did Central Falls, Rhode Island. Last year, three California cities filed – San Bernardino, Mammoth Lake and Stockton. Already five cities in Michigan and three school districts are under supervision of a state-appointed emergency financial manager. Relatively low interest rates and the fact that a third of the $878 billion in the Obama Stimulus funds went to local governments temporarily staved off further defaults. If Detroit fails now it would represent the nation’s biggest municipal bankruptcy.

Four years and about $85 billion after the reorganization of the auto industry – an investment on which taxpayers are still looking at a loss of about $20 billion – the situation in the “Auto City” has grown more dire. In announcing that the city of Detroit faced a “fiscal emergency,” Governor Rick Snyder, taking the advice of a Michigan financial review committee, said he planned to send an emergency manager to repair the troubled finances of Detroit. The Governor explained that the problem in Detroit is too fundamental, too lasting and too large to be resolved by the city. The city has long been dominated by Democrats and has become increasingly African-American in terms of population. In contrast, the state of Michigan is mostly white and the Governor is a Republican; so one can expect fireworks.

City officials have ten days from last Friday to seek reconsideration from the governor before a state board appoints a manager. If the manager does get appointed, he or she would be in place for at least eighteen months and would have the powers to cut city spending, change contracts with unions, merge or eliminate city departments, sell city assets and, if all else fails, recommend bankruptcy.

The failure of America’s auto industry’s management to compete in the global economy was certainly instrumental in the collapse of Detroit, but they had lots of help. Unrealistic demands by the UAW played a crucial role, as did municipal unions whose concern for retirees optioned the future of younger employees. City managers who saw government as a panacea for the city’s ills and who made the city unattractive for business, either through regulation or taxes bear their share of responsibility. Like most desperate situations, this one had many fathers.

But it didn’t have to be this way. While most of the nation’s growth has come in the Sunbelt, there are Midwest cities that have grown over the past two decades – Indianapolis, Columbus and Pittsburg, to name just three. Fifty years ago, Detroit ranked as the fifth largest city in America, with a population of about 1.7 million. Today, the city is ranked 18th, with a population just north of 700,000. In the past decade alone, the city lost 25% of its population. More than a third of the people subsist below the poverty line; unemployment is 18.2%.The city is burdened with $14 billion in long term debt, the responsibility of a diminished and impoverished populace. As the population shrunk, the number of retired city workers grew. In a very real sense, what’s happening in Detroit is an extreme example of the consequences of a welfare state.

Yesterday’s front page article on Detroit in the New York Times was an attempt to put lipstick on what has been a failed city. General Motors, it is true, is doing better, but so would most companies if they could walk away from their creditors. Even after abrogating contract law, the stock price indicates that American taxpayers are out $20 billion on their “investment.”

Following the credit crisis and recession, there were three directions governors, mayors and council members could take their states and cities. One, they could seize the reins and promote pro-growth policies, such as making their communities more attractive to businesses by minimizing regulation and lowering taxes. Two, they could increase taxes on the expectation that higher revenues in the short term would reduce deficits and liabilities. Or, three, they could continue on the path they were on with the expectation that the sidewalk pavement would not end. Very few chose the first step. Most were unable to implement the second. Detroit (and many states and cities, especially those heavily taxed and regulated) chose the third, cruising merrily along, hoping beyond reason that the sun would come up in the morning.

Bankruptcy is not the preferred choice, but it may prove to be the necessary one. There is a Latin phrase, “extremis malis extrema remedia,” which, loosely translated, reads “desperate times call for drastic measures.” Living beyond one’s means has been endemic to Americans for years. We tend to be optimistic by nature and that optimism has proved wise as the country flourished in the post war years. As we grew rich, our concern for the less well off increased, but became institutionalized. When things turned down, for individuals and businesses, we were forced to retrench. We had no choice. But the public sector, starting at the federal level, has not had the same restrictions. While individuals and businesses curtailed borrowing and spending, government increased theirs. In part, that was a necessary and proper response to recession. But the question is one of degree. Government’s credit allowed it to keep borrowing, so that standards would not have to be reduced. But that is a rope that can only be let out so far. We have now reached a point that demands drastic measures.

A federal government that is forced to reduce its budget by a mere 2.5% has caused the President to go forth with a message to instill fear. His cabinet utter proclamations insinuating the world will end – planes will stop flying, terrorists will proliferate, teachers will be fired, the military will grind to a standstill. Much of mainstream obliges this hyperbole. Mr. Obama is correct in that any cutback in expenditures has consequences. Whenever and wherever moneys spent decline, someone suffers. That fact cannot be avoided. U.S. GDP today is only about one percent higher than it was four years ago, yet the population has grown by about two percent. That means there are less goods and services on a per person basis than there were four years ago. As a nation, we are poorer. Yet our government employees live on as they always have.

The answer to such a plight is not trying to achieve fairness. It has to be growth. The multiplier effect of moneys spent is more pronounced when it comes from the private sector rather than the public. That should be the focus. Regardless, there is no way extrication from the pit into which Detroit has fallen is possible without pain. The point is to do as little damage, while laying the foundation for future growth.

That is Detroit’s challenge – allowing a Phoenix to arise from the ashes of a city that has been mismanaged for too many years. Such miracles have happened in the past (think Pittsburgh), and could again. Other cities like Chicago should take heed before it becomes too late. Detroit does not have to be an omen of impending doom. Properly managed, Detroit could become an example that a stronger tomorrow is worth sacrifice today. God speed.