Monday, July 22, 2013

Detroit's Got Nowhere to Run and Nowhere to Hide

The Greatest Car Ever Made in Detroit
The 64 1/2 Mustang Convertible
Among the more fascinating discussions we have had over the past 5 years have been with people who believe this following statement with all their heart, souls and minds:

'More government spending on infrastructure, civil servants and public welfare programs is the way to solve our economic troubles ranging from unemployment, stagnant or non-existent economic growth and the heartbreak of psoriasis' for all we know.

'Detroit' is going to be Exhibit A#1 in any future consideration and debate about whether that is a good idea or not. Or at least it should be.

The question should always be framed as such going forward:
'What is more important to do first: encourage solid economic growth and investment with sound economic policies and non-excessive regulations so that jobs can be created...or more government spending in infrastructure, public sector union salaries and retirement benefits named above?  
Let's look at the facts as they have unfolded:

At one time in the mid-1950's, Detroit was the nation's 5th largest city in the nation behind New York City, Chicago, Philadelphia and Los Angeles. There were over 1,849,000 people living in Detroit mid-decade in the '50s due to the automobile boom post-World War II. Businesses and entrepreneurs in the Motor City created hundreds of thousands of well-paid jobs for the assembly lines and brought many working-class families into the burgeoning middle-to-higher middle class in America.

It was a miracle of the American free enterprise system set into motion by the genius of Henry Ford and GM back in the early part of the 20th century. With that came an expanding tax base that supported the expansion of the public sector services from public school teachers to the police force to the fire department.

Private enterprise is the straw that stirs the drink of any flourishing city, state or nation. Not the other way around with the public sector leading the way as the sad case of Detroit's current bankruptcy and demise as a great American city is going to prove once and for all.

Today, Detroit is down to around 770,000 people. Detroit is the only American city to grow beyond 1 million in population to fall back below 1 million which is astounding when you think about it.

40% of the street lights in Detroit don't work. Unemployment is around 16.7% which is bad but it is an improvement from the 27% unemployment rate not too long ago when the economy collapsed and people stopped buying new cars for awhile in 2008-2010. The statistics that come out of Detroit sound more like a developing country rather than a once-proud bastion of American pride and ingenuity.

So here's the question of the day:

'Would increased amounts of federal, state or local government spending have turned Detroit around?

Based on some of the debate we heard from Big Government aficionados after President Obama embarked on the largest federal economic stimulus spending boom since FDR, there are some of you out there who would say emphatically: 'Yes!'

The theory is that more government spending will build more bridges and roads in and around Detroit and put some of these 16.7% of the unemployed people in Motown back to work. Nobel Prize winning economist Paul Krugman no doubt would be in this camp.  He thinks the federal government should spend twice as much on stimulus packages out of Washington and keep borrowing more money to get the economy moving once again. More government spending on civil servants such as teachers, police and public safety workers supposedly will be enough to jumpstart the local economy and get things back to normal.

Or so the story goes.

Here's the problem with that theory, one that has plagued big government spenders back to the Age of the Pharaohs and the Greeks and the Romans after that.

'At some point in time, people stop loaning spendthrift governments money. And then you are up the creek without a paddle' to put it nicely.

Detroit has $18 billion in public debt right now. No sane lender would loan to them giving their current financial condition which is why they had to declare bankruptcy. They can't meet their obligations.

What would it take to turn Detroit around with more government spending, assuming they can get funding from some crazy lender or political body?

Build bridges direct from Detroit to Buffalo, Erie and Cleveland across Lake Erie? Hire 10,000 more policemen and women to police the city? And then what? Where will these people spend their money...on products made in China, India or South America? That won't help anyone in Detroit get a job, will it?

There is absolutely no amount of infrastructure spending or public sector worker support that can turn Detroit around now. Can we all agree with that, even the King of all Government Stimulation Packages, Nobel Prize-winning economist Paul Krugman?

The only thing that can save Detroit is some sort of diversification into other industries as many other cities have done to recreate themselves over the years. Perhaps another Henry Ford will somehow magically combust in some now miniscule endeavor that will produce a product or service that will transform the area as Bill Gates did with Microsoft in Redmond, Washington where they employ over 42,000 people alone in the state.

The sooner Detroit goes through bankruptcy proceedings to restructure their pensions and financial obligations to current public sector workers and retirees, the sooner the city can set about finding a economic renaissance of some sort along the lines that other industrial cities such as Pittsburgh have created. Who wants to move a business or family to a dying area such as Detroit when so many other places beckon with lower costs, better weather and far less turmoil?

The thing that has killed Detroit, besides the demise of the US auto industry manufacturing solely in Detroit, that is, is the enormous amount of unpaid liabilities past mayors and city councils of Detroit have approved for public sector employees of the city. These include generous health care benefits now being paid to retirees of the Detroit teachers and civil service public unions that can't be paid for out of current tax revenues generated by the current taxpayers of Detroit.

Detroit's current unfunded liabilities total $3.5 billion and they had to seek bankruptcy protection. That's not too bad considering Chicago has at least an $19 billion unfunded liability and possibly as high as $36 billion according to Moody's. LA has unfunded liabilities officially plugged at $30 billion today. Hold on to your hat because the day of reckoning for those cities is just around the corner most likely.

There's something about elected officials and public sector unions and public sector workers: The politicians never want to disappoint the unions by not granting them what they want in terms of salary and retirement benefit packages. Meaning: 'i.e. They want the unions to get their people to vote for them in the next election'.

The elected officials who granted these benefits now obligated left office decades ago, many of them who are no longer alive. So what did they care if they left Detroit with an insoluble financial and fiscal mess on their hands 20 years into the future?

The lessons of the Bankruptcy of Detroit should be seared deeply into the brains of every elected official in this country. Because it could be coming to a town near you very soon and there is 'nowhere to run and nowhere to hide' once things get out of hand like they have done in Detroit.

*(Note: Now if Ford Motor Company would just find the body molds to the 1964 1/2 Convertible Mustang and start making them again, we have to believe the Motor City would snap back to life overnight as long as they make them in Detroit)

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