Will the U.S. Heed Detroit’s Lesson?
In his 2012 campaign for re-election, President Obama claimed saving Detroit as one of his success stories from his first term. He said, "We refused to let Detroit go bankrupt. We bet on American workers and American ingenuity, and three years later, that bet is paying off in a big way." The auto industry was “saved” in skeletal fashion, and is working its way back, but Detroit proper became the largest U.S. city to file for bankruptcy last month. And what should be alarming to all Americans is that the policies and politics that controlled the city for the past 60 years are the same that are leading the nation today.
Let’s just lay out a few facts on where Detroit was six decades ago, and where it is today. In 1960 the city of Detroit boasted the highest per-capita income in America. There were nearly 300,000 manufacturing jobs. The city was the fourth largest in the country with nearly two million residents. In many ways, it was the golden-boy of free-market America.
Today, it’s a broken and dilapidated city with nearly $20 billion in debt and unfunded liabilities, and no way to pay for them. The city has lost 63% of its population, has lost over 90% of its manufacturing jobs, over 48% of them lost in the last decade alone. The city is more reliant on casinos for city revenue, about $11 million per month, than on automaker tax revenue.
About one-third of Detroit’s 140 square miles is vacant or dilapidated, and there are over 78,000 abandoned homes. Two-thirds of the parks were permanently closed over the past five years. Only about a third of the city’s ambulances are functional, and the average response time to a 911 call is 58 minutes.
As disheartening as that is, the human toll is even greater. The murder rate is 11 times higher than New York City’s, and the violent crime rate is five times higher than the national average. Less than half of Detroit’s residents over the age of 16 have jobs, and over 60% of the children live in poverty. An astonishing 47% of Detroit’s citizens are functionally illiterate.
So what happened to this once proud symbol of America’s manufacturing successes? In short, they proved the validity of “Stein’s Law.” Herbert Stein was an economist and Chairman of the Council of Economic Advisor’s under President Nixon. To him is attributed the succinct yet obvious economic truth, “If something cannot go on forever, it will stop.” Or, as he later restated, "Trends that can't continue, won't." It’s ironic that Stein, father of author and actor Ben Stein, claimed Detroit as his hometown.
The trends that could not continue for Detroit were: steadily increasing city spending as tax revenue steadily declined, continued expansion in the size and scope of city government, and increasingly unrealistic benefit and wage concessions to municipal unions.
The latter is what syndicated columnist Charles Krauthammer referred to as “legal corruption.” He described it this way. “The legal corruption was the cozy symbiosis of Democratic politicians and powerful unions, especially the public-sector unions that gave money to elect the politicians who negotiated their contracts — with wildly unsustainable health and pension benefits… The market ultimately forced the car companies into reform, restructuring, and eventual recovery. The city of Detroit, however, lacking market constraints, just kept overspending — $100 million annually since 2008. The city now has about $19 billion in obligations it has no chance of meeting. So much city revenue has had to be diverted to creditors and pensioners that there is practically nothing left to run the city.”
If something can’t go on forever, it will stop. A family, city, state, or nation, simply cannot continue to spend more than it collects in revenue. It will eventually stop, as it did for Detroit with their Chapter 9 bankruptcy filing last month, and as countless families learn too late when they’re headed to their own bankruptcy court.
Many other municipalities that have made the same egregious spending mistakes will undoubtedly learn the lesson Detroit has; the hard way. But will the nation follow suit?
Presidents cannot continue to propose spending for every idea that sounds good. Congress cannot continue to kick the can down the road for future generations to deal with, by perfunctorily raising the spending limit, and spending beyond our means. And the size and scope of government cannot continue to expand inexorably, providing services and programs that we cannot afford. And the habit of perennial increases in benefits and pensions to public employees must be broken.
Remember, trends that cannot continue, will not. Detroit is now facing their day of reckoning. Will the nation, as well, or will we finally learn to demand fiscal accountability of our elected officials before it’s too late?
AP award winning columnist Richard Larsen is President of Larsen Financial, a brokerage and financial planning firm in Pocatello, Idaho and is a graduate of Idaho State University with degrees in Political Science and History and former member of the Idaho State Journal Editorial Board. He can be reached at rlarsenen @ cableone.net.
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