The City of Detroit Bankruptcy

Posted by PITHOCRATES - July 22nd, 2013

Economics 101

There is nothing more Dangerous to a City’s Finances than a Shrinking Tax Base

The federal debt is at record levels.  Because federal spending is at record levels.  But those on the left say there’s nothing to worry about.  And try to expand federal spending further.  With more government benefits to hand out to the people.  And an ever growing federal bureaucracy.  Full of new jobs with generous pay and benefits.  All funded by the taxpayer.

Businesses in the private sector cannot operate like this.  Because businesses have to pay their costs with the things and/or services they sell.  That people willingly buy.  So there is a limit on the costs a business can incur.  But not so with government.  For the government has the power to tax.  To forcibly take more money from the people against their will.  Something businesses just can’t do.  And when that fails they can borrow money by issuing bonds.  Which are generally easy to sell.  Because governments have the power to tax.  All but guaranteeing that they will repay those bonds.  And when that’s not enough the federal government has one other benefit businesses don’t have.  They can print money.  Further guaranteeing that they will be able to redeem their bonds.  Making them that much easier to sell.

Government below the federal level, though, doesn’t have that last option.  So when they want to spend more money than they have they have no choice but to borrow.  And hope that their tax base doesn’t erode over time.  For there is nothing more dangerous to a city’s finances than a shrinking tax base.  Especially when the city has a huge and growing public sector.  Enjoying generous pay and benefits.  Especially pension and health care benefits for retirees.  Where promises made must be kept decades into the future.  During which time a lot of things can happen.  Such as that tax base shrinking.

Detroit’s Tax Base plummeted while the Size of the Public Sector did not for Government Never grows Smaller

This is the problem the City of Detroit has.  And it is why they filed the largest municipal bankruptcy in U.S. history.  Thanks to the automotive industry and World War II destroying most of the industrial economies of the world, Detroit became an economic power house.  And one of America’s grandest cities in the 1950s.  Paris of the Midwest they called Detroit.  Automotive capital of the world.  The Motor City.  The mecca of American manufacturing.  Having one of the richest middle class.  And one of the largest black middle classes.  Everyone was doing well in Detroit.  So the City of Detroit did the only rational thing a city could do with a swelling tax base.  They exploded the public sector.  All paid for with higher taxes.  Including a new city income tax.

But that growing public sector soon turned Detroit into a business unfriendly city.  With more red tape, regulatory costs and a corporate income tax.  And rising union demands during contract negotiations made it even less business friendly.  So businesses started leaving the city.  Taking their jobs with them.  And people followed.  Then the race riots hit in 1967.  Five days of unprecedented violence.  Thus beginning the great white flight from the city.  And the great population decline of the City of Detroit.  Culminating in the nation’s largest municipal bankruptcy in history.

At Detroit’s peak her population topped out at about 1.8 million people.  Today there are but 680,000 people remaining.  A loss of 1.12 million people.  About 62% of her peak population.  So Detroit’s tax base plummeted.  But the size of the public sector didn’t.  For government never grows smaller.  So Detroit continued on with the overhead expenses of a city with a population of 1.8 million people.  With the tax revenue of a city with a population of 680,000 people.  Making bankruptcy inevitable.

The Problems of the City of Detroit are the Problems of the Nation Writ Large

At the height of Detroit’s industrial might there were approximately 300,000 automotive or manufacturing jobs in the city.  Today there are a mere 27,000.  That’s a loss of 273,000 jobs.  That’s 273,000 breadwinners whose families are no longer in the city.  If each of them had on average 2.5 children who remained in the city with their parents that would have added about 1.2 million to the city’s population.  Which corresponds pretty closely to the 1.12 million the city actually lost.  So we can see how the loss of the jobs devastated the population.  But we can also see what it did to the city’s finances.

Let’s assume these breadwinners had their children when they were in their 20s.  So the breadwinner was still in the workforce when their children were 20 and had entered the workforce.  Let’s say this happened over a 40-year period.  So, on average during that 40-year period, there were an additional 136,500 jobs per year.  Let’s say they each owned a house and paid property tax of $750.  Over 40 years that’s about $4.1 billion in lost property tax revenue.  If each of these workers earned $35,000 on average over those 40 years and paid a 3% city income tax that’s about $9.8 billion in lost personal income tax revenue.  Finally, if we figure a 50-50 split between labor and material, a 15% overhead and a 2% net profit we can extrapolate that $35,000 average personal income into approximately $448 billion in lost corporate revenue over those 40 years.  At a city corporate income tax rate of 2% that’s about $9 billion in lost corporate income tax revenue.  Adding these all together we see a total loss of tax revenue to the city of approximately $18.8 billion due to the loss of 273,000 jobs.  Plus or minus.

This is a crude guesstimate with an emphasis on crude but it could be close enough to explain what happened in Detroit.  For with the falling tax base Detroit turned to borrowing more and more money to pay for an oversized public sector.  To service a disappearing population.  With those pension and retiree health care benefits being especially burdensome.  Which forced the city to borrow so much it left them with a debt of $18.5 billion (very close to the $18.8 billion in our little exercise above) that they don’t have a chance in hell of ever repaying.  Leaving bankruptcy as the only option.  Unless the federal government steps in.  Which probably won’t happen.  And shouldn’t happen.  For Detroit is not the only government suffering under the weight of unfunded pension obligations and retiree health care benefits.  If they bail out Detroit then they’ll have to bail out all other states and municipalities.  Which they can’t afford to do.  For the federal government has its own problems with pensions (Social Security) and retiree health care benefits (Medicare).  And they’ve just added a new government benefit that will dwarf the costs of Social Security and Medicare.  Obamacare.  All while burdening the economy with a slew of anti-business regulations that has chased jobs out of the economy.  And out of the country.

So the federal government can’t step in to save Detroit.  For the federal government is working to ‘out Detroit’ Detroit.  As the problems of Detroit are the problems of the nation writ large.  What’s happening in Detroit will happen in other states and cities across the country.  That are spending more money than they have to support an oversized public sector.  And in time what’s happening in Detroit will happen to the federal government.  Bailing out these states and cities will only hasten the downfall of the federal government.  Which the federal government will do whatever it can to prevent.  For while the nation can survive a city like Detroit going bankrupt the nation cannot survive a federal bankruptcy.  Because the numbers are just too big at the federal level.

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Bad Liberal Democrat Policies chased the Industrial Base out of Detroit

Posted by PITHOCRATES - June 2nd, 2013

Week in Review

A growing population is to government coffers what growing revenue is to business.  More money.  Governments at all levels collect their money by taxing the population.  The greater the population is the greater the amount of taxes they collect.  So a growing population increases the money coming into a government’s coffers.  While a shrinking population gives you a Detroit (see How to save a city by knocking down thousands of its buildings by Tim Fernholz posted 5/31/2013 on Yahoo! Finance).

The problem with Detroit, which could soon host the largest municipal bankruptcy in the country’s history, is its shrinking population. With its industrial base decimated by automation and outsourcing, a city of 1 million people in 1990 dropped to 700,000 this year, with 200,000 people leaving the city since 2008. That reduced the taxe base to fund public services. Fewer public services coupled with lower population density weighed on crime, public health and the economy.

Yes, its industrial base was decimated by the loss of all those manufacturing jobs.  But the real question is why businesses left Detroit.  And there is only one reason why a business leaves one location for another one.  Because of a more business-friendly environment elsewhere.

Detroit became a liberal Democrat bastion.  Supported by high taxes.  Including a city income tax.  And costly regulations.  These are what chased businesses out of Detroit.  After decades of this nonsense the regulations for doing work in the city grew so great that business just went elsewhere.  Or cheated the regulations.

Money flowed into city coffers.  And the public sector grew.  Including generous pay and benefit packages for their public sector workers.  Paid for with wealth they transferred from the private sector to the public sector.  Until the private sector said enough is enough.  And left the city.  For a more business-friendly environment somewhere else.  Taking all of those jobs with them.  And with no jobs people left the city.  Looking for jobs.  But as the tax base shrunk the public sector remained bloated.  Which was a problem.  A big problem.  As more and more money went for those pay and benefit packages.  Including generous pensions and health care benefits.  And less to city services.  Causing urban decay.  In time this accelerated.  With fewer and fewer people paying the taxes to support the public sector.  And when they could no longer support the public sector the city started running deficits.  Pushing it towards the “largest municipal bankruptcy in the country’s history.”  All because of an unfriendly business environment.

So this is what decimated the city’s industrial base.  Anti-business liberal Democrat policies.  For if the city wasn’t so anti-business the industrial base would still be there going strong.  Attracting new businesses from other anti-business locations.  Instead of what they have in Detroit.  A city half the size it once was.  Where they talk about tearing down houses and turning these old neighborhoods into farmland.  In what once was the automobile capital of the world.  Amazing what bad liberal Democrat policies can do.

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Detroit’s Public Sector Unions may push the City into the Biggest Municipal Bankruptcy in U.S. History

Posted by PITHOCRATES - December 16th, 2012

Week in Review

Michigan just became a Right to Work state in an effort to lure business into Michigan.  Whose high union costs have chased business away from Michigan.  Detroit, The Motor City, auto capital of the world, home of the Big Three, is a dying city.  While Mercedes, BMW, Toyota, Honda, etc, have built new auto plants in the United States not a one of them built in Michigan.  Because of their high union costs.  So Detroit has the Big Three.  But no one else.  And even two of the Big Three recently filed bankruptcy thanks to those union legacy costs (pensions and health care for retirees who outnumbered the active workforce).

So Michigan is bad.  But Detroit is worse.  They’ve lost so much industry that the number one and two employers in the city are the City of Detroit and the Detroit Public Schools.  Both who have unions doing to the City of Detroit what the unions did to the Big Three (see Detroit has “serious financial problem”: Michigan treasurer by Ann Saphir posted 12/15/2012 on Reuters).

A check of Detroit’s finances has found a “serious financial problem” with the cash-strapped city, a step that could lead to the biggest municipal bankruptcy in U.S. history…

That official would have the power to put the city of 700,000 into Chapter 9 bankruptcy if other rescue plans are not feasible or effective.

Detroit, home of General Motors Co., has been hit by a steep population decline, years of severe budget deficits and escalating employee costs, all of which led state officials to begin an intervention process last year.

Detroit’s population peaked at 1,850,000 in 1950.  The city has since lost over half of its population.  First the jobs left.  Then the people.  During this time the size of city government grew.  As did the public sector union pay and benefit packages for those public sector workers.  The city’s costs soared as their tax base disappeared.  So it’s no surprise that the city is facing perhaps the biggest municipal bankruptcy in U.S. history.

At this point in time it’s probably not a question if Detroit will file bankruptcy.  But a question of when.  They’re going to have to do what the Left wants to do for people underwater in their mortgages.  And for students buried in student loan debt with no job prospects (because they got degrees in Philosophy, Religious Studies, Anthropology, Archeology, Area Ethnic Studies, Civilization Studies, Information Systems, etc.).  Forgive their debt.  So these people can crawl out from underneath their debt and return to some sense of normalcy in their lives.  But the Left will not endorse this same solution for Detroit.  Because the city’s debts just happen to be to the Left’s greatest campaign contributors and constituency.  Public sector unions.  The Left will screw banks and mortgage companies every day of the week.  But when it comes to the public sector unions they’d rather screw the taxpayer.

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