Boomergeddon Watch: Detroit

No, that's not Berlin, circa 1945, that's Detroit, circa 2010.

No, that’s not Berlin, circa 1945, that’s Detroit, circa 2010.

Defenders of the leviathan state were getting so hopeful. The U.S. budget deficit is well below $1 trillion a year, the economy is still growing, the health care cost curve shows signs of  bending and even California has a balanced budget. Things may not be great right now, but they’re mending. All that talk about Boomergeddon sounded so quaint and antiquated.

Then along came the Detroit bankruptcy. MoTown’s financial demise comes as no surprise to anyone but until the city actually filed for protection yesterday, the sad state of affairs could be swept under the rug. Sadly, the city of Detroit did file yesterday in the biggest municipal bankruptcy in United States history. No longer can its pathetic performance be ignored. With $18 billion in debt, Detroit dwarfs the previous blockbuster bankruptcies, Jefferson County, Ala., and Orange County, Calif.

Does Detroit’s fate portend other municipal disasters to come? Conservatives, of course, will say yes. Detroit was the apotheosis of the blue state government model, a big-city political machine characterized by high taxes, excessive spending, public employee unions and the politics of racial resentment. Much was done in the name of the poor. Yet, curiously, the poor got poorer… and more numerous. And the productive, tax-paying classes fled. What occurred in Detroit can, and will, occur elsewhere.

Progressives predictably will blame Detroit’s problems on anything but the blue state governance philosophy. They will blame white flight, racism and Republicans. They will point to the hollowing out of the U.S. automobile industry and the hemorrhaging of manufacturing jobs. The economy is a factor, there’s no denying. A stronger, non-automotive economy explains why, say, Chicago has evaded Detroit’s fate… so far. But it’s only part of the story. Other cities have managed to reinvent themselves. Detroit has not.

What happens post-bankruptcy in Detroit will be as interesting to watch as what happened pre-bankruptcy. Once the city’s creditors take a hair cut of 80% or so on their bonds, pension obligations and other city obligations, the city can start fresh financially. But will anything really change? Is the municipal organism capable of truly reforming itself? Or will the city proceed to run up obligations to a new set of creditors and run itself into the ground once again? Let’s hope not. But don’t bet against it.

– JAB

17 Responses to Boomergeddon Watch: Detroit

  1. NoVa = Detroit + 20 years.

    • NoVa = Detroit + 20 years.

      I would not have agreed with Don’s statement as recently as six months ago.

      Today I suspect that such a result within 20 years is a distinct possibility.

      And that, if Northern Virginia does find itself in such a deplorable state, the damage will have been largely self-inflicted. Irresponsible land use and transportation decisions combined with attendant irresponsible spending of public monies on projects that compound existing problems, rather than cure them, will likely drive this astonishing failure.

      Remarkably, this failure will occur amid what had been, and what easily could have remained, a place of astonishing good fortune and abundance.

      • the entities that are most at risk IMHO are the ones that are STILL providing defined benefit pension plans.

        Detroit is in debt to the tune of 18 billion. 9 billion is pensions.

        what about NoVa ?

  2. Having grown up in Michigan and still with many ties there, familial and sports teams, it has always been a bit grim and distasteful to observe the constant and irreversible collapse of what was the poster child of the great arsenal of democracy. Certainly related, I have as a 20 year resident of and military retiree in Virginia always found it comical and frustrating at the same time to listen to Governor after Governor give himself a chest bump for the great Virginia economy which has always, but always they proclaim, been linked to how great a business climate they had created in the Commonwealth. Each Governor and politician, and I suspect nearly all Virginia residents, happily accept this self-pat on the back. In reality, few states have such a gargantuan external stimulus and economic safety net as does Virginia in the form of Billions and Billions of dollars of federal spending dumped within its borders – i.e., money taken from what workers there are left in and around Detroit (Ford still operates the Michigan Assembly Plant in Wayne) and all other states ( http://www.baconsrebellion.com/2013/07/ig-of-the-day-federal-contracts-in-virginia.html ). “We’re something special thanks to my economic plan, you’re welcome”, each Governor seems to smirk. It would be interesting if not downright shell-shock startling what the state of the Virginia economy would be without the hundreds of Billions of other Americans’ money having been dumped into the Commonwealth and all its spin off effects. Be careful of the Virginia politicians, while one hand is patting themselves on the back the other is in your pocket.

  3. I have, as usual, a somewhat contrarian view.

    I think what killed Detroit was the defined benefit pension.

    we now know just how risky such pensions are and are in the process of moving them all to defined contribution pensions.

    and I’ll go one step further.

    it’s the same problem with health care.

    both pensions and health insurance need to be moved from the employer to the individual.

    AND – there needs to be a MANDATE for pensions and health insurance for MINIMAL floor-level, safety-net benefits.

    I very much LIKE the Singapore Model – that requires all employees to set aside money in each paycheck for pension and health care and then lets them choose how to maintain it and spend it.

    We are no longer a world where people spend their entire careers at one place.

    Both pensions and health insurance need to be portable.

    and that allows companies – and government to focus solely on their mission and not “benefits”.

  4. Dr. Jim Baconautics,
    I have to say that Boomergeddon sprang to mind when I read this morning’s headlines. But one Mo-Town does not a society make.
    Bad municipal financial planing has something to do with this, but it is really about the shifts in the U.S. car industry, which pretty much out of the city years ago. Even so, there is something of a revival among U.S. car makers albeit in other places. Some of these are union and some are not (just trying to beat you to your usual union punch, you know, like in the movie Matewan, “Union Man! Beelezebub!”)
    Boomer-G deserves whatever praise it can scrape up, get so congrats.

  5. Union-based industry along with extra-non-cash benefits are going away.

    In the globalized world we now live in – each worker can expect to NOT ONLY not work at one company for their career but also not to work in one particular industry segment their entire career.

    they may well not only change jobs between companies but between industries.

    because of that – it no longer makes sense to tie a company pension to the worker.

    but beyond that – it makes no sense to tie health insurance between a company and the worker.

    both need to shift to the worker. to be maintained by the worker, for the worker to know that beyond safety net benefits – that’s it’s up to them to build a better pension and to have more than basic health care.

    we cannot realistically move away from providing basic benefits to those who would not be self responsible so we are stuck with Social Security and MedicAid/Medicare but we can make it much more clear that “floor” benefits are not what we should aspire for.

    That if we want more/better for ourselves and our families – we have to pursue that effort not depend on the govt to provide it.

    the govt has an important role with regard to floor benefits. People have to have access to trustworthy pension plans and access to basic health care – but along with both – the clear notice – that floor benefits are not nirvana.

    Detroit is an example of what happens when the city paid no attention to what happened to the car companies with regard to pensions – and retirees health care.

    GM went broke once they realized too late of the danger.

    Detroit – either did not have enough time or they just refused to deal with the realities. Not sure which.

    Other cities and other states are going to go down the same way if they do not change and change soon.

  6. Labor unions work when their industry faces little competition. This could be because of a monopoly nature of the industry (telephone companies before 1984) or when everyone plays by the same rules (construction, American automobile manufacturers, truck drivers). In a relatively closed market, consumers have no real choice and, as a result, the industry makes more revenue, which can be apportioned between the union workers and the shareowners. While I personally despise unions because of my history with one, I don’t have a problem with management and unions bargaining in the private sector. They each have an incentive to protect their own interests. I don’t think the model works well in competitive markets, but have no theoretical objection to companies and unions trying.

    With more competition or new market entrants not willing to play by the same rules, prices to consumers become more competitive and its harder for labor unions to win lucrative contracts for their members. When companies now facing non-union competition and their unions continue like nothing new has happened, we see failure – the Big Three Automakers for example. The size of the pie is not big enough for shareowners and unions to get their traditional sized pieces.

    What is worse, IMO, is labor unions in the public sector. FDR and Coolidge were right; labor unions don’t fit in the public sector. They have the monopoly, but there is generally no incentive on management’s part to bargain aggressively. When management is elected by voters and often gets campaign contributions from the unions that will sit across the table for bargaining, the incentive to give away the store. Detroit, for example.

    Collective bargaining in the public sector cannot work unless elected officials are replaced by anti-tax zealots. Then both sides have the proper incentive to bargain.

  7. workers need the right to collectively bargain – but the days when they could tag team detroit automakers are gone.

    re: anti-tax zealots saying “no”.

    maybe.

    we got some guys down here after the last election who have drawn the line on revenues vs spending and the schools have taken a hit – although they did share some revenues from county cuts so the teachers could have their increased health care paid for.

    I’m not sure that will ever happen in NoVa…

    but the big danger is – pensions and health care.

    if we do not deal with them – Detroit is going to repeat.

  8. we ought to admit it. the two biggies that bankrupt people and govt are pensions and healthcare.

    it’s what drives the unions…

    it’s clearly a threat to state finances… witness the unfunded liabilities of the state pension system and look at the percentage of the total budget for the state is for MedicAid.

    We have to confront these things.

    blaming it on govt is a major cop out.

    Fairfax county has (for instance) significant liabilities with respect to pensions and employer-provided health care.

    Those who received MediCare KNOW that 3/4 of their premiums are subsidized by other taxpayers. Most seniors get damned good health care for the princely sum of 100 dollars a month for 80% coverage and can cover the remaining 20% for similarly dirt-cheap, taxpayer-subsidized rates.

    Boomergeddon is OUR FAULT – not the govt fault. we know what the problem is but no one wants to take a haircut…. so we’re all going down together. right?

  9. I raised the labor union question and now I regret it.

    The arguments are getting really retro. The big company town, big union days hit the road back in the 1960s and 1970s when U.S. car executives were so dense-minded they could not get away from building what had worked in the 1940s and 1950s and could not envision the oil shocks. Neither could the unions.

    That and racial politics — the race to the white suburbs around Detroit — spelled doom. Let’s exhaust one point now: it’s is rather pointless and somewhat disingenuous to keep bringing up old, old models. Sure GM got stuck with a $6 billion or more debt for pension health. But hey, guess what? That’s the price for having our f(*&^%d up semi-public-semi-private health care system.

    In Japan, South Korea and other car making spots, the government picks up a much greater share of the health bill and by many accounts, does a better job overall with health care once you get past high tech, high profile surgeries and treatments that benefit a tiny minority as happens in the U.S. These little factoids are what the Boomergeddon types and the ir ilk in the Libertarian and right wing magazines tend to leave out. Of course GM got stuck with the bill — dah! We’d rather talk about no competition, the need for private enterprise and the markets and old dinosaurs.
    The far more important question is what to do with Detroit? What’s the pay off? $20 billion? Maybe the feds should step in. They did it for GM and Fannie Mae. Of course, those were WHITE institutions as a Journal columnist points out. Inner city Detroit is largely an African-American one so there’s no rush to bail them out.
    And as the columnist points out, neither Obama nor Romney had an idea of an urban policy last year. It was all about the (mostly white) middle class. It is going to take some government help and there are models. Pittsburgh was knocked flat when steel burned out (another great moment of Corporate Management failing to sense big changes in their industries and keeping government subsidies propping up their ancient models in the form of import tariffs). But it came back in the form of medical tech and the like. Nice place. I remember visiting in the early 1960s and it was literally darkness at noon. Cleveland also has transformed itself to some extent by playing on the strengths of applied technology and the Cleveland Clinic.
    But, once again, this will take some public, government help. The “magic of the market” will just leave Detroit where it is today.You read it here first and not in “Boomergeddon.”

  10. Hey Peter – that was an EXCELLENT commentary!

    Unions came about initially because working conditions were … well they were literally 3rd world – in the US!

    Unions came about because workers realized that in the US they DID HAVE the RIGHT to assemble, exercise free speech and act vote to act collectively for better conditions.

    There are STILL some VERY GOOD unions around that instead of using advocating for unsustainable compensation, do recognize that we are in a global economy.

    But there were and still are some corrupt unions – and corrupt unions – as we all know are nothing unique with regard to institutions public and private.

    Just because Bob Mcdonnell turned out to be a sleaze does not mean the office of Governor should be one away with – and no more that way with unions either or companies… for that matter.

    there are good, bad and ugly across the spectrum.

    the back beat on the right with regard to Detroit is to overtly blamed unions and Democrat politics and covertly blame blacks – governance and society who the right believes used the power of unions to suck the fiscal life out of a city with too high salary and benefits. A cursory tour of the right wing blogs on the subject of Detroit will help illustrate their narrative.

    there I said it.

    Comparing Detroit to other cities – in a FAIR and RELEVANT way that is motivated to identify the issues and design reforms RATHER than playing the BLAME GOVT, BLAME UNIONS, BLAME BLACKS, etc , etc , etc ad nauseum.

    We DO HAVE some pretty vibrant cities that have BLACK LEADERSHIP, UNIONs for public employees, and corruption not as bad as Va seems to have at this point.

    it is what it is.

    No govt is perfect. All unions are not bad. Blacks can govern just as well as whites, as long as we don’t hold ideological agendas that make perfect the enemy of good.

    The problem with defined benefit pensions (and retiree health care) were originally determined to be a problem – when the govt, yes the govt, was forced to create the Pension Benefit Guaranty Corp which had to take over the pension obligations hundreds of companies who either went bankrupt or were unable to pay promised benefits.

    This happened LONG LONG before Detroit and it was private sector companies not public sector govt.

    I have more but gotta go walk the Lab and will return but I see this as an opportunity to further discuss this in honest and realistic terms – not partisan and ideological terms.

  11. I had a professor in Law School. He was a moderate Democrat – just as I was at the time. His economic theory woven into his classes was: “Every tub must sit on its own bottom.” Years of life have given me the wisdom to see the truth of that statement. In general, every person in society must produce enough to support himself/herself. Obviously, there are exceptions. We don’t expect babies to support themselves. We do expect their parents to support their children. We also expect children, as they grow, to cooperate with the educational system so that they can be employable when they become adults. We don’t expect the aged to support themselves. We expect them to save, invest and pay Social Security taxes while they are working in order to have a reasonable amount to live on when they stop working.

    Society can support a reasonable number of people who are not supporting or cannot support themselves. Ultimately, that support must come from the private sector. Government cannot support itself, but must rely on private sector companies and workers to fund government. Detroit didn’t understand this.

    Places such as Detroit passed the tipping point. It maintained the cost structure for a larger and economically dynamic city, all the while people were leaving because government services declines even though the costs didn’t. And it’s not just whites who left. Middle class blacks left as well. Jobs followed the people. People don’t have an obligation to harm their own well-being to help maintain a failing city.

    Detroit just cannot produce enough to sustain itself. Perhaps, bankruptcy and good leadership will help it come back to some level of economic life.

    • But every member of society does not produce enough to support himself of herself. Not even close. Total government spending in the United States is just under $20,000 per person per year. Median per capita income in the US was $29,056 in 2010. We can debate corporate tax contribution to government but it seems clear from these statistics that every member of society does not support himself or herself.

      Since 1980, US GDP (per capita) has increased 67% while median household income has increased 15%.

      The United States is no longer an economy with too few people for the jobs even during periods of economic growth.

      And that is a far bigger story than debt, taxes, deficits or (perhaps) even demographics.

      America’s economy can grow without employing all of her population. As time progresses, this will become an ever greater problem. A structural unemployment rate of 15% – 20% is quite conceivable over the next few decades.

  12. You say ‘Detroit didn’t understand this.’ What politician ever chooses to ‘understand’ factors that, if acted upon rationally, will cause him to be thrown out of office? Much safer to play dumb and assume someone else eventually picks up the pieces. Jump on board not hoping to turn the train around but for what’s left of the ride.

  13. re: ” Ultimately, that support must come from the private sector.”

    don’t accuse me of being right wing anarcho capitalist or even FAUX libertarian but companies unlike the govt, do not create nor print money.

    Every penny they end up with was obtained by providing a good or service at price people were willing to pay, then paying their costs and expenses – which include taxes , etc.

    The mission of companies is not to ensure that their workers have enough money or benefits to live on – except as a competitive compensation issue in competition with other industries and companies.

    but what happens when a company promises a defined benefit pension plan to it’s workers and then it loses the competition with other companies and goes broke and/or cannot make good on the pension promises?

    You might ask ” well weren’t those companies supposed to set aside money into a pension fund as they went along?

    and so what would your answer be – if they did not?

    Remember – this happened 40 years before Detroit.

    How about the Federal govt? when did they do away with defined benefit contributions? in 1984 – 30 years ago. Now ask yourself if the govt is still paying defined benefit pensions?

    how about it TMT? are they?

    If Detroit got caught short like many companies did – or even if they did reform but they still had a lot of outstanding pensions to pay – but the city itself had downsized from the housing boom bust – which cut their property tax revenues in half or worse.. how would they be able to continue to pay those defined benefit pensions – just like the Federal govt still has to right now – or for that matter- the State of Virginia – as well as every single county and municipality throughout the state that has existing defined benefit pension beneficiaries?

    where does the ideology and partisan anti-govt blame game recognize these realities instead of trying to blame it on Democrats or Blacks or whoever?

    This is not so much about Detroit as it is OUR own refusal to realistically and honestly, in a non-partisan, non-ideological way- understand the issue.

    In terms of DJ’ retort about debt – yes indeed.. we do have it but as I’ve pointed out before – when our National Defense spends more than the next 10 countries combine – as well as 3/4 of our available tax revenues – and we refuse to recognize that and instead want to blame it on entitlements – we are not looking for understanding and a path forward… we are looking backward in a blame game where we say the answer is – our own favorite partisan philosophy.

    Remember this also. Like any company that goes “broke”, it’s not that they have NO revenues, it’s that their liabilities are higher than their ability to pay them – which means it could be by 1% or 50% or more (perhaps like Star Scientific). which is it for Detroit? How bad is their shortfall and can it be dealt with like many companies – like the airlines or auto industry did – in a “reorganization”?

  14. I’ve said it before and I say it again.

    If all of us were willing to put aside the partisan and ideological wedges…

    we would see that Detroit is not unique.

    the state of Virginia has the very same disease with it’s pensions.

    Give the Federal Govt CREDIT – for ONCE – back in 1986 – as TMT probably well knows – the Fed did away with the OPTION to get a defined benefit pension for new employees.

    Doing that headed off major trouble downstream but the Fed govt has, as TMT can attest, a huge pool of retired Federal workers that receive defined benefit pensions – and if you really want to be honest – the Feds pay these pensions by selling treasury notes to the Chinese whereas Detroit has no such option.

    Detroit committed the same sin that 4500 private companies did; it promised people pensions that it could not fund.

    thousands of companies did this 40 years ago – Studebaker, US Steel, Alocoa, JohnsMansville, etc, etc, etc… the irony here is that the PBGC cannot, by law, bail out Detroit – like it DID DO for over 4500 private companies that not only went bankrupt but disappeared.

    What Detroit is the biggest symbol of in my view is our divided politics.

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