Thursday, July 25, 2013

Detroit Bankruptcy: Spectacular Failure or Good for Tax Payers?

Ian Ransley Design/Flickr
Since Detroit filed for bankruptcy last week, comments and opinions are pouring in from many corners, laying the blame for this fiasco with different economic players. As I mentioned in my previous blg post Detroit Files for Bankruptcy, here we witness the first consequences of this bankruptcy filing, the blame-game is on:

Come See Detroit, America's Future, is today's New York Times op-ed by Charlie LeDuff, a reporter at the TV station WJBK and author of “Detroit: An American Autopsy” who offers a very bleak view and who blames local government, labor unions,  and management of the car companies:

"........So we went broke, bust, bankrupt. We’ve known that in Detroit for years. Only now it is official with a Chapter 9 filing last week. The biggest municipal default in United States history — at least $18 billion. Suddenly, America gives a rip. How did it get this way, I’m asked? After all, it was just 99 years ago that Henry Ford offered the workingman $5 a day and profit-sharing. How, in less than a century, did it come to this? 

The short answers: municipal mismanagement, race riots, white flight, black flight, dead flight (people routinely disinter their deceased and relocate them to the suburbs). There were the overreaching unions and management that couldn’t balance a ball. Proof? The multibillion-dollar bailout of the auto industry. Thank you, American taxpayers! 

 ...........So Detroit files for bankruptcy. What does this mean? Pay close attention because it may be coming to you soon, Los Angeles, Baltimore, Chicago, Philadelphia. In 2011, Moody’s calculated the unfunded liabilities for Illinois’s three largest state-run pension plans to be $133 billion. (It is expected to be even larger this year.) That’s the size of six Detroit bankruptcies — give or take a few hundred million. 

Of Detroit’s debt of at least $18 billion, about $7 billion is secured by collateral like casino revenues and utility taxes. That means creditors — read: big banks — will get paid. Of the remaining $11 billion dollars or so in unsecured debt, about $9 billion is owed to retirees and current municipal workers, people like firefighters and police officers. These debts come in the form of promised pension checks and health care benefits, all backed by a false, unsecured promise. These are the people who are likely to lose out. 

In simple math, do we sacrifice 30,000 former and current workers to save a city of 700,000 people and their progeny? Most Detroiters will tell you yes. Don’t judge. We feel bad about it. But we’re simply Americans. We are a gaunt dog. We are desperate. And you are watching and studying us.
Pension checks will be much smaller than planned and health care benefits will get foisted off on Medicaid and Obamacare. Thanks again, taxpayers! "
Left-leaning economist Richard Wolff while on the news show Democracy Now! calls the bankruptcy of Detroit a "spectacular failure of  a system that redistributes pay from bottom to top." So not surprisingly, he blames the current and previous administrations, who bailed out the car companies but not Detroit, and he blames the current political and economic system that allows this to happen.

Financial blogger and free market advocate, Mike Shedlock, offers a very different view in his blog "Mish's Global Economic Trend Analysis"  where he clearly blames the public unions:

"Taxpayers should be fed up with ever-escalating property taxes, sales taxes, and fees to pay ridiculous retirement plans for unappreciative public union employees, especially police, fire, and teachers' unions.

So, look on the bright side.  The Detroit bankruptcy is a good thing, and it will be even better when numerous other cities, bankrupted by public union greed, do exactly the same thing."

He also lists, what he calls zombified cities, cities that he expects will go bankrupt due to their pension liabilities, from Baltimore to Chicago, from LA to Philadelphia, and from Miami to New York.

I'm not an expert on public unions or their members' pay structure, it does seem, however, that the blame can be more widely shared, and that each of the three pundits are right in some way: the city of Detroit that has mismanaged its local economy, and possibly agreed to overly generous terms for its employees; the public unions that seemed shortsighted by demanding the best terms for their members in the short run, without thinking of the consequences in the long run; the federal government that bailed out the car companies, but at, as Richard Wolff explains, such low wages for the new car employees that they can't contribute to their local economy; and then there are the bankers, who not only were bailed out by the tax payers a few years ago, but seem to get the best out of the Detroit bankruptcy, being secured creditors. In short,  many losers, and a few winners. Whether the economy and society at large will be a winner, remains to be seen.......

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