Edge of Chaos is a political podcast starring Joe Ryan and Neurotoxin. Its aim is to have a free-flowing discussion of news and current events that also examines the empirical outcomes of public policy, avoiding biases based on ideology and policy intentions. Listener discretion is both advised and encouraged.

Thursday, July 18, 2013

Detroit's Bankruptcy WILL Bite You In the Wallet

Does Detroit filing for bankruptcy indicate that the decades of corruption and can-kicking in America's municipal governments have finally caught up with us? I don't think most Americans understand just how serious this is and just how much it matters to their daily lives - even if you live nowhere near Detroit.

The stereotypical municipal government problem is very simple. Municipal politics affects YOU every day of your life in more ways than you can count - but despite this it receives very little media or other public attention as those are focused on Federal and sometimes State level politics. This lack of public attention leaves municipal politicians at the mercy of powerful local interests when it comes to getting elected - corporate alliances, mega-unions, sometimes religious coalitions but this is far less common than it used to be. Most municipal politicians - mayors, county executives, council members - are relatively young, aspiring to political careers in higher office where public attention ramps up. Hence, you have young, inexperienced politicians seeking name recognition for visible, short-term accomplishments with very little concern for long-term consequences as they don't plan to stick around indebted to powerful special interests for being in office; a match made in Hell. Developers badger them into waiving taxes and fees on which municipal revenues depend or to foot the risk for poorly planned development projects that look pretty and give them short-term credibility. Banks insist on belligerent borrowing and bond-issuing to speed up these poorly planned developments or social service programs with the same intentions. Public employee and contractor trade unions insist on detached-from-reality contacts, pension plans, and benefits funded by belligerent borrowing in exchange for delivering the working-class vote and participating in the apparently sped-up flourishing of a municipality. All this isn't even taking into account the rampant corruption, bribes, and ulterior motives that every municipal government is crawling with - those are self-explanatory. Fast-forward a few decades and the politicians who planted the seeds of decay are long gone in one way or another - but now the municipality cannot afford its obligations. Losses on poorly planned projects, debt, and exorbitant employee compensation eat up most of its revenue, and it can no longer afford to provide the essential public services every resident counts on.

Now I can just hear the cross-accusations, and these are already flying in Detroit. "Sell or dump the city projects!" Those are buildings people live and work in - apartments, nursing homes, community centers, malls. You're proposing letting them collapse? "Default on the debt obligations!" Regular Americans with accounts in those banks own those bonds - they're someone's retirement account or someone's kid's college fund. You're proposing letting those people lose their savings so the city can keep clucking? "Screw the unions and their extravagant compensation!" The city is going bankrupt paying on existing pension and health care obligations to retirees and/or disabled employees; re-negotiating contracts is a long-term solution and will not help this. Are you suggesting screwing 1000s of people out of retirement benefits they worked all their lives counting on? They didn't negotiate these for themselves, mind you; they have their idiot union organizers to blame for the voodoo math involved.

The "pass the costs onto anyone but me" mentality is perfectly normal in an economic crisis, but my larger point here is that there isn't an easy solution and we're all going to feel the pain from the looming wave of municipal bankruptcies one way or another. Between reliance on city-run public services, retirement pensions and other benefits whose pools involve large exposure to public union employees, and personal savings held in municipal bonds OR in private investments that municipalities have an interest in - there are very few Americans whom this will not economically affect. I'm afraid that as a society, we've failed to hold our municipal governments accountable for decades of borrowing from the future, and now the future has arrived to collect. I wholeheartedly agree that the Federal debt is a far more serious problem; but the Federal government forestalls and delays this by manipulating interest rates and printing money, turning what would otherwise be an instant collapse into a gradual economic decay through inflation and a greater gap between the rich and the poor that may take decades more for anyone to notice. The municipalities have no choice but bankruptcy, and we're all about to see the ugly side of Keynesian borrow-now, think-later economics.


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