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George Michael: The meltdown in Motown

August 02, 2013|By GEORGE MICHAEL

Michigan Gov. Rick Snyder and Kevyn Orr, the City of Detroit’s appointed financial czar, recently announced the city was declaring bankruptcy. What happens in Detroit in the next few months will be very significant. Detroit is a microcosm of issues facing many of America’s big cities.

Detroit is the largest city to declare bankruptcy to this point. The obligations that the city cannot pay are about $19 billion.

What are the reasons for Detroit’s demise? Some have suggested that Detroit’s economic woes result from the decline of the auto industry, loss of business enterprise and the flight of citizens to the suburbs or to other states. 

But this is confusing cause and effect. Liberal social policy of high taxes, stringent regulations on businesses, while being soft on crime and subsidizing a welfare mentality contributed significantly to this flight. The one underlying factor for most of America’s cities is that they have been run by left-leaning Democrats for decades. Detroit is a case study of the long-term consequences of liberal social policy. 

Here is a city that had a population of 1.8 million people 50 years ago but it is less than half that now. Photos of the city show large areas of blight and ugliness.  Neighborhoods have been abandoned. Empty houses and boarded-up buildings are common. The city even has a chairman of the Detroit Blight Authority. 

Public safety is a joke. Despite a significant decline in population, Detroit still is among the leading cities in shootings and murders.

The big debate now is about who gets paid what they are owed if there is any money left after going through this bankruptcy process. Will bondholders who loaned the city money be repaid? Will retirees receive their pensions and health benefits?  Or will both be left holding the bag?

Union officials have made it clear that the city has both a legal and a moral obligation to pay pension and health benefits that were promised. But keep in mind that these commitments were made by politicians out to win votes who promised everything to everybody.

Government pensions are very problematic. The core problem with many municipal and state pensions is that the political leaders who made these promises were not willing to adequately fund them.

The bondholders have already suffered declines in the value of the bonds they hold. It will cost all cities in the nation more to service their bonds if Detroit’s bonds are not honored.

The bailout of General Motors comes to mind. Then it was not so much about saving General Motors as it was about bailing out the UAW. Retirees had their benefits guaranteed. Bondholders were not so fortunate. Promises made to them in terms of financial obligations were made null and void. How is that just and moral?  Such was the strategy of the Obama administration. 

The silence of the Obama administration about Detroit is notable. This is the administration that facilitated bailouts for businesses and banks. Will assistance be offered to Detroit?

The reason for the administration’s reluctance to offer help is obvious. If the feds help Detroit, what will be the end of it? Will they then help Los Angeles, Chicago, New York and other large cities in dire straits with their pension and bond obligations? 

More than 100 state pension plans currently have unfunded liabilities approaching $1 trillion. Dozens of large cities are facing serious financial problems besides hundreds of counties and smaller municipal governments. How will these be bailed out? If the Obama administration helps Detroit, the long-term challenges grow exponentially. Who will bail us out as a nation?

You have to feel sorry for the poor of Detroit, who are left without adequate protection and very little public services with little means of escaping the collapse.  They believed in a system that overpromised and underproduced. 

The meltdown in Motown is a sad situation where no one is likely to win. And it portends trouble ahead for a lot more of us.

George Michael, who lives in Williamsport, is a former principal of Grace Academy. His email address is gfmichael46@gmail.com.

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