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Tuesday, July 23, 2013

It Finally Happened

“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.” — Thomas Sowell

Before I begin this blog I want to share a video that was done by Steven Crowder of PJTV in December of 2009. In the video Crowder takes you on a tour of the motor city and shows what has and is happening to the once great manufacturing center of the world.

And there is another video from the Reason Foundation address the issues causing the demise of Detroit.

In my search of YouTube videos about Detroit I found several hundred that would have be suitable for this article, but you can do that on your own by simply typing “Detroit in Ruins” in the search field.

In December 2010 I posted an article about the “Vanishing Detroit” in which I wrote about the history and potential demise of the motor city. In the concluding paragraphs of the article I state:

“This is a condition not limited to Detroit. Cities such as Oakland, St. Louis, Cleveland, and many others are approaching the same precipice of economic bankruptcy. With the massive costs for welfare and social services, shrinking tax base, poor schools, unfunded liabilities for public service workers pensions, teachers unions with the protection of underperforming teachers and increasing demands for higher wages and guaranteed pensions and a political class that panders for votes we are approaching a time in our history when cities are beginning to fail.

Until now cities have been relying on funds from state and the federal government to bails them out of their financial woes. With states experiencing the same malaise and the rising deficits of the federal budgets money for these cities are no longer going to be available. Perhaps the time has come for these cities to realize the mess they are in and declare bankruptcy rewrite their public service and teacher union contracts and tighten their belts in all areas of spending so they can survive. No more promises, no more pandering to special interest groups and no more fountains and stadiums unless they are totally financed with private money.”

Most rational economists and rational thinking people have been predicting the demise and eventual bankruptcy of Detroit for years. Now it has become official and no amount of state or, God forbid, federal funds can solve the problem.

Last week Governor Rick Snyder filed for Chapter 9 bankruptcy for the city of Detroit. The once leader of American industry has now joined the junk heap as a third world city. Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities that assists them in the restructuring of debts..

Why did this happen and will it happen to other American cities?

Michigan Gov. Rick Snyder and the bankruptcy specialist he appointed to fix Detroit’s1019-Rick-Snyder-ads.JPG_full_600 unprecedented financial problems put the blame Sunday squarely on the city and defended their decision to file for Chapter 9.

The Republican governor said Detroit created the problems and stood steadfast behind his decision to file Thursday for bankruptcy, with the city roughly $19 billion in debt.

“This is a tragic, difficult decision, but a right one,” he told CBS' "Face the Nation." “It’s not about just more money, it’s about accountable government.”

He said corruption and city leaders ignoring warning signs for 60 years contributed to the problems. Among his biggest concerns, Snyder said, is the decline of municipal services for Detroit’s remaining 700,000 residents, including police response times of nearly one hour.

Snyder said the state cannot help and asking for a federal bailout is “not the right answer,” though Washington has that option.

The Obama administration has extended no offer to help, after Congress and the White House agreed to bail out Chrysler and General Motors during the recent recession.

“Can we help Detroit? We don’t know,” Vice President Joe Biden said last week. His remarks followed White House Press Secretary Jay Carney appearing to rule out such assistance.

“That's something that local leaders and creditors are going to have to resolve,” he said. “But we will be partners in an effort to assist the city and the state as they move forward.”

Among the emerging concerns is that the federal government would have to help repeatedly, considering Chicago reportedly has an unfunded pension liability of at least $19 billion while Los Angeles’ is estimate to be as much as $30 billion.

The bankruptcy filing for Detroit marks a final step in the chrome-plated city’s decades-long decline — which started with the country’s overall manufacturing slowdown and continued with the departure of U.S. automakers and residents, leaving behind a sprawling city trying to survive on dwindling coffers.

Detroit was in the 1950s a worldwide hub of auto manufacturing, making it the fourth-largest U.S. city with one of the country’s highest per-capita incomes.

However, the so-called Motor City’s decline started soon after with residents — following their counterparts in other U.S. cities — starting to move to the suburbs and take with them businesses, jobs and tax dollars.

Historians argue the deadly 1967 riot in Detroit, one of the many so-called “race riots” across the country in the 1960s, accelerated the trend.

And as the population dwindled from roughly 1.8 million to 700,000, city officials struggled to keep up with municipal services in the 142-square-mile city, with a tax base just half of what it was in the 1950s.

Meanwhile, auto companies began opening plants in other cities as Japan-made cars dominated the international market. By 2009, the U.S. auto industry collapsed with the entire economy, eventually pulling down Detroit with it. When the UAW demanded high wages and more benefits the auto companies began moving to right to work states in the south so they could better compete with the Japanese car companies that were manufacturing cars and trucks there. As this happened the unions got what they wanted, but the jobs began to vanish and with that the tax base declined.

The city’s efforts to provide and maintain such basic services as law enforcement andDetroit Then And Now Photo Gallery trash removal were further complicated by the costs of paying union contracts and benefits, which have contributed to nearly $15 billion in unfunded liabilities for the city.

Once again these public service unions got the raises and pensions they demanded and the Democrats gave into their demands to get their financial support and their votes but the city did not have the money to fund these liabilities.

In addition, Detroit has a roughly 18 percent unemployment rate, one of the country’s highest violent-crime rates and about 80,000 blighted or abandon buildings.

“Chronic budget problems have taken a significant toll on everyday life for citizens,” Snyder said recently. “Detroiters deserve to feel safe when they walk down the street, to have their street lights on, to have the bus show up to take them to work.”

However, the city also has a history of corruption that has led to its financial problems, including Mayor Kwame Kilpatrick resigning in a 2008 sex-and-perjury scandal that cost the city almost $9 million from a lawsuit and legal fees.

Years of Democratic Party rule, corruption, escalating social welfare programs, failing public schools, high taxes, demands of the teachers and public service unions, racial tensions, gangs, and a rising crime rate have finally taken heir toll on Detroit.

The recent bankruptcy filing in Detroit is raising red flags about other major U.S. cities also dealing with billions in under-funded retiree benefits, prompting the question — who might be next?

Just last week, Chicago’s credit rating was downgraded as a result of its $19 billion in under-funded pension liabilities.

Moody's Investors Service called the liabilities “very large and growing" and warned that Chicago, the country’s third-largest city, faces a “tremendous strain’’ in trying to meet future funding requirements and public safety demands.

A similar scenario, though decades in the making, largely doomed Detroit, whose average police response time has grown to more than 50 minutes.

And like Michigan, which appears in no position to bail out Detroit, Illinois is dealing with its own $97 billion pension shortfall.

To be sure, other smaller cities have filed for bankruptcy, most notably California’s Stockton and San Bernardino in 2012. No other city of Detroit's size appears to be on the cusp of imminent financial collapse.

However, those bankruptcy filings together have resulted in speculation about whether more are on the horizon

Other cities now on the radar include Cincinnati, Minneapolis, Portland, Ore., and Santa Fe, N.M. — following Moody’s saying in April that they and 11 other municipalities were being reviewed for a possible credit downgrade, the result of a new analysis system that further considers pension liabilities.

Though much of the national concerns have focused on pension liabilities, heath care costs for retired municipal employees pose an equally if not larger problem.

Amid the $18.5 billion in long-term debt that led Detroit to file for bankruptcy is roughly $3.5 billion in under-funded pension liabilities. However, roughly $5.7 billion of that debt is health care costs and so-called “other post-employment benefits.”

The situation is highlighted a Pew Charitable Trusts Study of 61 major U.S. cities that found they collectively had enough money to cover 74 percent of pension liabilities but only 6 percent of health care liabilities.

The total difference between what the cities owed to retired employees and what was covered equaled $217.2 billion, according the report, “A Widening Gap in Cities.” It was released in January and based on 2009 numbers, the most complete data at the time.

The nonprofit group also released a report in March that found New York City has a combined $1.15 billion in under-funded pension and health-care costs, followed by such major cities as Philadelphia, at $8.6 billion. In comparison, that figure for Detroit was $12.9 billion.

The video clip shown here is from PJTV and the three commentators summarize the reasons Detroit and other cities will continue to fail.

As our nation continues down the road of higher taxes, more regulations, and runaway spending by politicians only interested in the next election more cities will fail. Just wait until 30 million illegal immigrants are added in the equation.

Today we have 47 million people on food stamps. That’s 15% of the population. Even college students are receiving food stamps today.

Rather than use the meager funds available to cities and states for big union contracts, luxury projects like light rail, and promoting more welfare programs they need to pay attention to the basic municipal functions of police and fire services, garbage collection, repairing crumbling sewer lines, streets, and bridges — the things people pay property taxes for.

Since the early days of the Republic, America’s cities have been centers of innovation, wealth, and power. As they grew larger and their governments more commanding, places like Boston, Chicago, Newark, New York, Philadelphia, and St. Louis also became battlegrounds where political machines contended for influence. The early ideal of the part-time citizen-legislator gave way to the professional pol. In his 1904 “The Shame of the Cities, Lincoln Steffens observed that big-city governments across America had been undermined by a series of problems, including police corruption, politicians using the public till for their own gain, and rampant bribery in awarding public contracts, known at the time as “boodle.”

The Democratic Party is a party of special interest groups, or “factions” as James Madison called them. There are racial groups, LGBT groups, unions (both private and public sector), teachers unions, environmentalists, and pro-abortion advocates. All of these groups want something and the Democratic Party is who they turn to for it. They want plunder and the Democrats will give it to them as long as it brings them votes. They don’t care about the future. They only care about the next election and how to retain their power.

Decades of corruption built a mountain of liabilities, while scaring off the taxpayers needed to finance those promises. It’s like a movie trailer for the blockbuster disaster film to come, when America’s declining demographics catch up with the federal government’s vastly higher mountain of unfunded commitments. Detroit is the city our debt monster destroyed to get limbered up for the greater fiscal carnage to come.

Death spirals spin even faster when it’s possible for productive workers to escape. Thedetroitbt12_20130723_030548 population implosion in Detroit was swifter and more dramatic than our national workforce collapse, because it was relatively easy for citizens to escape the degenerate loop of declining municipal services and rising taxes but in the long run, the result will be the same. There are people capable of fleeing the United States entirely, when our moment of truth arrives. Their departure will be a good sign that the Great Crash is at hand. The loss of their capital and business acumen will hasten our collapse.

We should stop the death spiral before things get bad enough for the smart money to take a powder. Of course, there were people in Detroit who said the same thing, twenty or thirty years ago. They were drowned out by a perpetual-motion political machine, which promised the good times would keep rolling forever. Even now, frantic liberals are gibbering that Republican austerity measures somehow killed Detroit, even though Democrats held absolute power for fifty years. You’ll hear the same things right before the end at the national level too. In the very near future, you’ll be told your Social Security and Medicare benefits are being cut because evil rich people don’t want to pay enough taxes to fund them. It won’t matter that there literally isn’t enough money in the entire world to cover Uncle Sam’s long-term liabilities. Anger and resentment will be milked for power until the very end. Those who do the milking will soar away from the wreckage with millions of dollars in their pockets.

Pension and benefit liabilities are really just a concentrated form of the same toxin eating away at every level of government: deficit spending. They’re just another way to spend tomorrow’s money, which is easy, because tomorrow casts very few votes in today’s elections. The people who fret over “sustainable” development at environmentalist conferences are nowhere to be found when it’s time to discuss sustainable government. Forward-thinking “progressives” are perfectly happy to be ruled by the dead hand of past entitlement promises. Those who regard the U.S. Constitution as a dead scrap of old parchment think union benefit plans are chiseled on tablets of stone.

Here’s a trick question for you: What does the government buy with its billions in deficitDetroit money? The correct answer is: commitments. Very little of that crazy deficit spending is a one-time outlay, evaporating without trace in the next fiscal year. Governments use money they don’t have to rack up long-term spending commitments, which quickly acquire human faces. Cut a million in spending, and you’ll be putting this government employee out of work, or trimming back a program that person depends on for their livelihood. Lay a finger on the pension plans of Detroit, and you’ll outrage people who are counting on those payments to finance their lengthy retirements. Promises were made. Reform is betrayal. You’ll never see a more motivated group of voters than people who believe their well-earned benefits are at risk.

Maybe the people who made all those unsustainable promises should have thought about the grim day when it would become impossible to keep them. Perhaps the outraged beneficiaries should direct their ire at the people who bought their support by making commitments that can no longer be fulfilled. But it doesn’t work that way. The people who made the unsustainable commitments are long gone. Criticizing them is living in the past. All that’s left to discuss is how today’s young people will be indentured to pay off bills they never had a chance to vote against. Fate is written one borrowed dollar at a time, and the “progressives” tell us it cannot be unwritten. We surrender control of our fate whenever we allow the government to spend money it doesn’t have. We leave our children with a hope chest full of chains.

Liberals pretend that debt is only a concern when they want to talk about tax increases. And even then, it’s not that big of a concern. They’re not interested in balancing the budget, much less paying off the mountain of debt already incurred. Skeptics are told there’s no reason to worry, we’ll always be able to borrow more money. And then the day arrives that we can’t. It happens fast. The final promises of unlimited government credit are still ringing in our ears. Contrary to the promises of charlatans, government debt is not an abstract number floating on some spreadsheet. Money cannot be printed forever. There comes a moment that the cost of financing debt abruptly explodes, and suddenly the government’s financial commitments balloon by 30 percent, 50 percent, or more. Draconian tax increases are presented as the only possible solution. The geese that lay our golden eggs are duly strangled. And then what? It’s funny how quickly political rhetoric can shift from bright futures of unlimited possibility, to grim demands for the cash needed to fulfill ironclad entitlement commitments.

Private corporations and unions make unsustainable problems too, but at some point0722-Business-Detroit_full_600 unsupportable demands will kill off the host organism. The company and its unions collapse together, leaving others to pick up the pieces and devise a more workable business plan. That’s what happened with the Twinkie — it’s back on store shelves following a cycle of creative destruction. But that’s not what happened with Big Auto or Detroit, is it? When the operation reaches a certain size, we’re told it can’t be allowed to undergo the cleansing cycle of death and rebirth which means suddenly it’s everyone’s problem.

As goes Detroit, so goes America. The steering wheel is lashed in place, a cement block has been dropped on the gas pedal, the emergency exits are welded shut, and nervous passengers are told to swallow their complaints. The commitments that were so very easy to make yesterday will become impossible to fulfill tomorrow. The range of options available to deal with fiscal crisis will be dramatically restricted, as every strategy to increase economic growth is pronounced unthinkable. How much flexibility does Detroit have to win investors, and attract productive labor back to the city? How much flexibility will Barack Obama’s successor have to restart the American economy? Promises become curses, then wither away into epitaphs.

For more photos of crumbling Detroit please click here.

As Stephen D. Eide, a senior fellow at the Manhattan Institute’s Center for State and Local Leadership, writes in the Daily Beast:

“However long it takes, bankruptcy will cut Detroit’s debt, but that’s a necessary, not sufficient condition of any revitalization. On its own, bankruptcy can’t reform city government, reduce unemployment, bring down the crime rate, or reverse depopulation. Eventually, Kevyn Orr will exit the stage, and leave those challenges for Detroit’s citizens and public officials to resolve. In the near-term, the task for Detroit city government is usefully simple: bring down the debt. If progress is made on other fronts along the way, private sector actors will most likely be responsible. Government was not the only cause of Detroit’s decline, and will play, at most, a supporting role in the city’s revival.”

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