The UAW and Public Sector Unions devastate Three Michigan Cities

Posted by PITHOCRATES - February 24th, 2013

Week in Review

It’s not been a good year for Detroit.  Well, it’s been more than a year.  It’s been a few bad years.  Actually, it’s been a great many bad years.  Since 1970.  When Ford Motor Company Chairman Henry Ford II joined with other business leaders to form Detroit Renaissance.  To revitalize the City of Detroit.  And some 42 years later, the City of Detroit is still struggling (see Detroit’s Misery Can Be Its Turning Point by Micheline Maynard posted 2/23/2013 on Forbes).

Detroit boosters were dealt a one-two blow this week by the kind of outsiders they have come to resent.

First, a state review panel declared that a financial emergency existed in the city, making it likely that Michigan Gov. Rick Snyder will appoint an emergency financial manager with sweeping powers.

Then, Forbes weighed in by declaring Detroit the nation’s most miserable city, based on a series of criteria that include crime, unemployment, foreclosures and home value…

Although General Motors is based in Detroit, and Chrysler recently opened an office there, the automobile industry is not going to provide the vast numbers of jobs the city needs to become solvent.

And there lies the problem for Detroit.  A city that grew big and rich off of the automobile industry saw a steady exodus and a declining tax base when the automobile industry declined.  Live by the automobile.  Die by the automobile.  And it’s just not Detroit.  A couple of other Michigan cities broke into the top 10 of Forbes’ America’s Most Miserable Cities 2013.

#7 Warren, Mich.

Troy and Farmington Hills are part of the government-defined Warren metro division. Like Detroit, the Warren metro has seen home prices collapse–off 53% the past five years.

#2 Flint, Mich.

Flint has been demolishing homes as the city shrinks with residents leaving in search of jobs. Only Detroit has a higher net out-migration rate. Flint ranks third worst for violent crime, behind Detroit and Memphis.

#1 Detroit, Mich.

Violent crime in the Detroit metro was down 5% in 2011, but it remains the highest in the country with 1,052 violent crimes per 100,000 people, according to the FBI. Home prices were off 35% the past 3 years, which is the biggest drop in the U.S.

If you seek a pleasant peninsula* you’d do better looking for one where the UAW isn’t dominant.  Perhaps Florida.  For the UAW is a city killer based on these Michigan cities.  (*The official state motto of Michigan is “If you seek a pleasant peninsula, look about you.”)

The Big Three dominated these cities.  Where fat pay and benefit packages were passed on to consumers in overpriced vehicles.  The Big Three’s monopoly on car sales allowed them to make fat profits.  And pay enormous amounts of taxes to the cities that had the factories that assembled their cars.  City coffers were so flush with cash city governments grew.  And city workers enjoyed fat pay and benefit packages.  This was the high water mark of the UAW.  Just after public sector unions had joined them on the gravy train.  But then something happened that devastated the UAW.  Consumers got choice.  They no longer had to buy overpriced ‘rust buckets’ the Big Three was putting out during the Seventies.  For the Japanese gave them choice.

And so began the great decline of the Big Three.  Quality and value did them in.  It’s what the people wanted.  While the UAW wanted consumers to pay more and get less.  So they could continue to enjoy their fat pay and benefit packages.  As the jobs went away so do did the taxes.  The cities bloated with all those government workers with their fat pay and benefit packages tried to maintain the size of their governments even while the tax base was declining.  Reducing other government services as they had little money left over after paying those fat pay and benefit packages.

With fewer and fewer jobs available people left these cities.  Empty houses dotted the horizon.  And housing prices fell.  With the tax base continuing to decline.  Poverty rates rose.  As did city services for the impoverished.  Leaving even less for other city services.  Causing a further exodus from the city.  Urban blight followed.  As did crime.  Causing a further decline in property values.

Low interest rates helped boost housing prices.  For awhile.  President Clinton’s Policy Statement on Discrimination in Lending kicked off subprime lending in earnest as lenders bowed to the Clinton Justice Department to put more low-income and minorities into homes they couldn’t afford.  Creating a huge housing bubble.  Built on easy credit.  Artificially low interest rates.  And the adjustable rate mortgage (ARM).  When rates went up all those low-income and minorities who bought houses they couldn’t afford defaulted on their higher mortgage payments.  Creating the subprime mortgage crisis.  Giving us the Great Recession.  Creating a flood of foreclosures.  A free fall in housing prices.  And more of the same that helped put those three Michigan cities into the top ten of Forbes’ America’s Most Miserable Cities 2013.

Michigan recently opted to become a Right-to-Work state.  Greatly angering the UAW and those public sector unions.  But it may be just what Michigan needs to reverse the great decline caused by the UAW and the public sector unions that devastated some of Michigan’s greatest cities.  One thing for sure it can’t get any worse.  Not when being a union state for so long secured three places in the top ten of Forbes’ America’s Most Miserable Cities 2013.

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China to Eclipse the American Empire?

Posted by PITHOCRATES - April 25th, 2011

Detroit is a Microcosm of American Decline

If you want to see a potential future of the United States, take a look at one of our big cities.  Say Detroit, for example (see Motor City finds labor clout weakened amid spending cuts, new legislation by Michael A. Fletcher posted 4/25/2011 on The Washington Post).

Bold action by Republican governors to rein in government spending and labor power by curtailing collective bargaining rights have been met with raucous, if ultimately unsuccessful, protests from union leaders and their allies in places including Wisconsin and Ohio.

But [Mayor] Bing’s move to extract new concessions from Detroit’s 12,000 municipal workers has been met with no such outpouring…

First of all, let’s get are arms around the size of 12,000 municipal workers.  On average let’s say each worker grosses $35,000 annually.  That is just under half a billion dollars in wages.  Now add in their benefits and it approaches a billion a year.  Just for wage and benefits for city workers.  It doesn’t count the cost of light bulbs, electricity, toilet paper, road salt, buildings, vehicles, etc.  That’s just the cost of people.  And that’s a lot of money.  For an impoverished city with a declining population.  And a declining tax base.

By the way, Mayor Bing is a Democrat.  He is not alone.  The sinking weight of the big city budget deficits transcends political party.

The absence of any large protest highlights the conundrum facing labor and its progressive allies as more states, cities and towns run by their putative Democratic allies are confronted with staggering debt and budget problems…

In New York and California, Democratic governors have not attacked collective bargaining, but they have also demanded major concessions from workers to help close yawning budget deficits.

In Wisconsin and Ohio, new Republican governors have significantly curtailed or eliminated collective bargaining rights for public employees, moves they said were made to give themselves as well as local leaders a freer hand to make badly needed cuts.

Michigan’s new Gov. Rick Snyder (R) signed legislation last month empowering his appointed emergency financial managers to void municipal union contracts in distressed municipalities across the state.

Of course, we got here for a couple of reasons.  People are living longer.  Living retirees consume pensions and health care.  And these benefits are generous.  Created at a time when they could be generous.  Following World War II, the United States rebuilt war-torn countries.  Everyone worked.  And bought a car.  Some bought a couple.  From Detroit.  The Motor City could charge what they wanted.  For where else were people going to buy a car?  UAW line workers lived like kings.  Worked hard.  Retired early.  And doctors kept them alive with ever improving health care.  Some lived longer into retirement than they actually worked.  And all of these costs began to build up in the pipeline.  Waiting to burst out at the other end on some future generation.

And that’s what happened.  War-torn countries eventually rebuilt their manufacturing.  They began to provide for themselves.  Some even provided for others.  They started building quality products at affordable prices.  Long story short, Toyota surpassed General Motors (GM) as the number one car manufacturer.  And GM, saddled with those legacy costs from what proved to be a too generous time, went belly up, bailed out by the government.  And as went the U.S. automotive industry, so did the Motor City.

Decades ago, when Detroit earned the proud moniker Motor City, it was home to a thriving and decidedly blue-collar middle class built largely by the clout of organized labor. Detroit is now renowned as a national symbol of urban dysfunction, and as Bing tries desperately to change that reputation, he often finds himself at odds with the city’s labor unions…

Even as the city is shrinking, Bing calls the current state of city services unacceptable. And he says they are not going to improve unless he can reduce the city’s personnel costs, which are overwhelming the budget. This year, the city paid $200 million in pension benefits, which Bing said was $25 million more than the city paid for fire department and ambulance services last year.

“The old days when getting a good city job meant that you put in your 20 years with the expectation that city government could take care of you for the next 40 is no longer a realistic or viable option,” Bing said.

Generous automotive jobs could pay a lot of taxes.  And did.  The city government grew right alongside the U.S. automotive industry.   But with those auto jobs went the city’s tax base.  And now the municipal workers are going through the same thing the auto workers did.  Only worse.  Because their benefits were even more generous.

Now he wants workers to take on an additional 20 percent of their health insurance premiums. He also wants them to take smaller pensions, and to eliminate defined-benefit pensions for all new employees.

Bing said he has no choice. “If we do nothing, by 2015, fringe benefits are on pace to consume half of our entire general fund revenue,” Bing said. “That is not sustainable. We can’t afford benefit packages so rich.”

Supporters of the public sector will argue they aren’t getting rich.  They’ll argue that they could earn more in the private sector.  True, some could.  But most couldn’t.  Because if they could they would go to the private sector to make more money.  No one chooses to stay somewhere to earn less.  There’s a reason they stay.  And it’s not the wage or salary.  It’s the benefits.

That’s how it was for [a retiree], who went to work for the city as a typist in the health department in 1968. She retired as a 911 operator in 1998 at age 48, and the city is obligated to pay her $24,000 a year for life.

The current Social Security retirement age is 67 for anyone born after 1959.  And there’s talk about raising it still because people aren’t dying soon enough into retirement.  Improvements in health care are keeping people alive longer to consume ever more retirement benefits.  It’s busting the federal treasury.  As well as the treasuries in the big cities.  You just cannot have people retire at 48 years of age these days.  Not if you expect to remain solvent.

This kind of generosity is just not sustainable.  Retirees are consuming more than they ever contributed to their retirement and health care.  And the working young are paying more and more to support them while cutting into their own retirement savings.  Something’s gotta give.  To reverse the American decline.

China the new Japan of the Eighties?

What, you may ask?  What may give?  Perhaps the United States (see IMF bombshell: Age of America nears end by Brett Arends posted 4/25/2011 on MarketWatch).

According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now…

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.

China is still communist.  Like the Soviet Union was.  So the Age of China may feel more like the Cold War.  Only without us being a superpower.  So how will that feel in America?  Possibly like it felt to live in Eastern Europe behind the Iron Curtain.  Economically dependent on your overlord.  And wholly at their mercy.

“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

This sounds like what they were saying during the Nineties about Japan Inc.  Just before they entered a devastating deflationary spiral.  Before that, though, some were saying here that we needed to do what the Japanese were doing.  Business and government were working together.  It wasn’t that laissez-faire capitalism nonsense we were clinging to in the United States.  Japan Inc. was a juggernaut.  They got so rich that they were buying up landmark U.S. properties.  A National Lampoon cover showed a Japanese CEO sitting at his desk with a sign saying the United States was a wholly own subsidiary of his company.  It was the end of America as we knew it.

Well, it wasn’t.  The government built a huge asset bubble.  And the thing about bubbles is that they eventually burst.  And when it did, the Japanese economy tanked.  For a decade.  Or two.  The Japanese called the Nineties the Lost Decade.  The lesson the Japanese learned?  A “state-guided form of capitalism” doesn’t work.  It may in the short term.  But not in the long term. 

China may be surging now like the Japanese were in the Eighties.  Will they be able to avoid Japan’s fate, though?

The Difference between China and the United States is Labor Costs

The MarketWatch article misses one salient fact.  First of all, let’s consider the Soviet Union.  If the state was good at ‘guiding’ an economy, why did the Soviet Union fail?  I mean, they had a prosperous manufacturing industry.  Lots of people were building things.  The problem was, they were building things that no one wanted to buy.  Whereas the things they did want to buy (soap, toilet paper, etc.) were always in short supply.  You waited in line to buy those things.  Look at Cuba.  And North Korea.  These are all state-guided.  And they all suffer from abject poverty.  And, at times, famine.  Clearly, the ‘state-guided’ is not the reason why China is doing so well.  It’s that other thing.  The capitalism.  Which the Soviet Union, Cuba and North Korea did not/do not have.

Now we have capitalism.  As did Great Britain.  And at one time, we each had the world’s largest economy.  But we surpassed Great Britain.  And China is about to surpass us.  So is there anything we can draw from this.  Something the British and the Americans have that the Chinese don’t?  I’ll give you a hint.  Think about Detroit.

How many times do we hear about unions striking Chinese industry?  Not many.  For one, there is only one Chinese trade union.  All-China Federation of Trade Unions (ACFTU).  It’s not exactly what you would think of when you think of a union in the UK or the USA.  Some would say that the ACFTU represents the government’s interests more than the workers.  And that’s the difference.  China doesn’t have the high labor costs we have (or the British).  Or the generous benefits.  And they have no legacy costs.  For their industrial workers.  (Or their municipalities.)  And this is why manufacturing jobs left the U.S. and went to China.  They could make things cheaper.  And as we pay more of our income in taxes to support an ever growing public sector, the less we have to spend on material goods. 

It’s just simple arithmetic.  It’s not a matter of greed on the consumer.  Just like union workers want higher pay and benefits, so do they.  So they can buy more stuff.  And if they can’t have the higher pay and benefits like they have in the unions, they at least want low taxes.  Or low prices.  But their paychecks aren’t as generous.  And their taxes are high.  Which leaves them with less disposable income than their union brothers and sisters.  Making them the ideal market for those low-priced Chinese imports.  And as long as the ACFTU holds Chinese wages down, they’ll keep buying those imports.

But can they?  Will the Chinese workers rise up one day?  They have nothing to lose but their chains.  As Karl Marx would say.  Will they overthrow the ‘capitalism’ in ‘state-guided capitalism’?   Making it a more pure form of communism?  More like in the former Soviet Union?  It may be the only thing that can stop this Chinese juggernaut.  A workers revolt.  An authentic communist revolution.  In already communist China.

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