The Problem with Detroit is the same as that in Europe – a Burgeoning Welfare State

Posted by PITHOCRATES - December 10th, 2011

Week in Review

Detroit is sucking air.  The city is broke.  And about to be taken over by the state.  So what happened in Detroit?  Kind of what’s happening in Europe (see Detroit within months of bankruptcy by Eileen Norcross, in City Life, Pensions, Public Finance, Tax and Budget, posted 12/9/2011 on Mercatus Center).

The city’s pension and health care costs represent 13 percent of Detroit’s budget, or $218.5 annually. Unless Detroit’s 45 unions agree to structural changes, the Mayor warns, Detroit will be taken over by a state-appointed receiver according to Michigan’s emergency manager law.

Once again it’s pensions and health care costs.  And unions.  Forty five of them in Detroit.  Wow.  That’s a lot.

The problem with Detroit is the same as that in Europe.  It’s a social democracy with a burgeoning welfare state.  Which was put into place with an expanding population growth rate and a booming motor city economy.  Put the two together and you can pay for any welfare you want with money left over.

But the population growth rate isn’t what it used to be.  People just aren’t having as many babies.  And the days of the domination of the Big Three are over.  They can’t sell crap at whatever price they dictate.  Like they tried during the Seventies.  Now they have to compete in value.  Meaning offering high quality.  At affordable prices.  Like the Japanese imports started doing during the Seventies.

Unless Detroit cuts their pension obligations and health care costs.  Unless they get better contracts from their unions.  Unless they can do these things willingly before the state takeover they will do them unwillingly after the state takeover.  Only they probably won’t get such a generous deal.  Because the industry just isn’t there to tax.  And neither are the jobs.  This is their new world.  City workers are going to have to start living like the rest of the people.  Like it or not.

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