Where would a Detroit bailout end?

posted at 12:01 pm on July 23, 2013 by Ed Morrissey

Even after Detroit’s announced bankruptcy — stalled momentarily in the courts — there has been surprisingly little appetite in Washington or anywhere else for a bailout.  The Detroit Free Press’ editors made that explicit in their editorial on Sunday, even before Governor Rick Snyder appeared on Face the Nation to oppose it — not even a bailout from the state of Michigan.  “And there’s no obvious relief on the way from Lansing,” they wrote, “which (for better or worse) seems unlikely to build the necessary statewide support for a bailout or to change laws to permit new tax levies for Detroit or anywhere else.”

If the state of Michigan — which has more to lose in a collapse of Detroit than any other stakeholder other than the city itself — isn’t interested in a bailout, why should Washington step up to the plate? Washington has its own problems, Detroit native Ron Fournier writes, including some of the same problems that felled Detroit. See how familiar some of these descriptions are to the rest of us outside of Motor City:

Economy: Detroit failed to adapt to the global economy and to diversify for the post-industrial era. “Sometimes the losers from economic change are individuals whose skills have become redundant; sometimes they’re companies, serving a market niche that no longer exists; and sometimes they’re whole cities that lose their place in the economic ecosystem,” wrote economic columnist Paul Krugman in today’s New York Times.  Sometimes, the victims are whole countries, a fact that seems lost on Washington, where the leadership is polarized and smart ideas go to die. …

Bad government:  “The city’s operations have become dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifferences or corruption,” Detroit’s emergency manager Kevyn Orr wrote in May.”Outdated policies, work practices, procedures and systems must be improved consistent with best practices of 21st-century government.” It would not be a stretch to apply Orr’s words to the federal government.

Broken promises: The group most at risk in Detroit’s bankruptcy may be the city’s 20,000 retirees (including my father as well as many friends and family members). Of Detroit’s overall debt, about half represents pension and health benefits promised to retirees, according to the Washington Post. This is because city leaders borrowed against pension funds and mortgaged the future – not unlike what Washington’s leadership is doing to Social Security and Medicare.

Rigid institutions: Government agencies, businesses, schools, churches, the media, and virtually every other city institution failed to help residents weather the tumult of the last four decades of the 20th century. In particular, Big Labor never managed a second act after anchoring the rise of the American middle class in Detroit. Union membership and influence has declined in Detroit and elsewhere, considered by many to be more of an obstacle than solution.

I’d disagree with the last point, at least in part.  Public-employee unions have remained very influential in Detroit and other large urban centers, and drive public policy through union dues turned into political campaigns and contributions that oppose reform of big-spending policies.  That’s why they’re seen as an obstacle now rather than part of the solution.

Still, this is a disaster for the residents of Detroit, and likely for its workers, who relied on contracts and promises for pensions.  There is simply no escaping the fact that the retirees will be the most vulnerable players in the drama that will unfold over the next several months, and that the resources they put into those pension plans will most likely be severely damaged, if not almost utterly destroyed.  That would explain the impulse for a federal bailout if and when it materializes — but it’s not likely to happen.  In my column for The Week, I explain that the problem isn’t just Detroit, and the solutions won’t be found in dodging the real issues for state and local governments:

Governor Snyder hits the mark when he notes that a federal bailout won’t fix the underlying problems, at least not without drastic reform. It also would send a bad message to investors, who have poured money into Detroit bonds despite its performance over the last decade. “Basically, Detroit hasn’t had a positive fund balance since 2004 in its general fund. 2004,” Snyder emphasized to Bob Schieffer on Face the Nation. “If you were lending to the city of Detroit in the last few years, didn’t you understand there were major issues and problems?” In other words, investors looking for premium returns on municipal bonds allowed local politicians to paper over the collapse — so why should they get a bailout on their bad investment?

That points to the much larger danger in a federal bailout. If Detroit were a singular event, a collapse from uniquely incompetent management or corruption, then in isolation the federal government might be tempted to step in. That’s not the case, though, as the escalating numbers of Chapter 9 filings attest. More cities, counties, and states teeter on the brink of insolvency, thanks to the same kinds of structural problems and the failure of political leaders and voters to address them. For instance, Stanford University warned three years ago that California’s unfunded pension liabilities amounted to a whopping $500 billion — 100 times that of Detroit and six times the state budget for FY2010. A year later, a former Orange County treasurer put the total at $884 billion. A Boston College study estimates that the total of all state and local pension liabilities is $3.8 trillion, with $1 trillion unfunded, which is almost certainly a conservative estimate.

Federal bailouts will not solve this problem, nor the other problems of urban mismanagement and incompetence. Bailouts would obscure them, as well as the need to fix the structural and political issues that have led to the collapses already in motion, and those to come. Politicians and citizens who want to avoid the unpleasant duty of reform have already put off these issues for far too long. The White House can send a strong signal for responsibility by refusing to rescue cities and states from their own folly, starting with Detroit.

We can’t afford to bail everyone out, nor would that address the underlying structural issues that created the crises in the first place.  At some point, Detroit has to take responsibility for Detroit, just as California will have to take responsibility for California.  And a lot of other state and local governments had better learn that lesson quickly, or else we’re not going to have any more buckets for any kind of bailouts at all.


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