Is Chicago the Next Detroit?

Posted by PITHOCRATES - February 9th, 2014

Week in Review

Another big American city is having ‘Detroit’ problems.  And may soon follow Detroit down the Road to Serfdom.  The warning signs are all there.  But will this big American city—Chicago—listen?  Well, Chicago like Detroit is a big Democrat city.  So, no.  They will not heed the warning signs.  And will make things even worse by going more ‘Detroit’ (see Chicago Votes to Go the Way of Detroit by Michael Auslin posted 2/6/2014 on National Review).

Chicago mayor Rahm Emanuel is increasingly a textbook example of how far the Democratic party has moved to the left since Bill Clinton’s day.

Emanuel, who cut his teeth in Clinton’s administration, just presided over a $1.9 billion increase in Chicago’s debt, only months after Moody’s downgraded the city’s bond ratings three notches based on its growing and unsustainable spending and debt obligations…

Old-line Democratic cities, it seems, have learned nothing from Detroit’s collapse. Wishful thinking, ignorance of the parallels, and misleading excuses are the common defenses trotted out by city administrators who have no intention of having to deal with the mess they have either made or worsened. Indeed, Emanuel explicitly rejected the Detroit comparison, arguing that, unlike the Motor City, which was fatally dependent on the auto industry, Chicago has “an extremely diverse economy where no one sector is more than 13 percent of the employment.”

That may be true now, but surely Emanuel knows that Illinois’s and Chicago’s high tax rates are causing a business exodus. The Chicago Tribune recently highlighted ten major companies threatening to leave Illinois and the Chicago area, including the Chicago Board of Trade, U.S. Cellular, and CME Group, the world’s biggest futures exchange company. Part of Chicago’s problem is being stuck in Illinois, which has the country’s third-highest unemployment rate, a dysfunctional state government, and crippling taxes that have led over 30 companies to cross over the state line to Indiana recently. But Chicago’s own borrowing and profligate pension promises will continue to eat away at its credit rating and desirability of doing business there. All this will help hollow out the city and its tax base, and eventually could lead to an all-too-familiar downward spiral once the productive elements of the city decide the benefits of staying don’t outweigh the costs of moving.

Of course the reason why Emanuel is throwing Chicago into this black hole of debt is because he is a Democrat.  And that’s how Democrats win elections.  By buying votes.  With a lot of good-paying jobs in the public sector.  Jobs with generous benefits.  Especially in retirement.  Thanks to profligate pension promises.  Requiring a large portion of city taxes to go to pay these underfunded pension obligations.  That are so underfunded they need to borrow money in addition to those high taxes to meet those pension obligations.

This is exactly what happened in Detroit.  The massive cost of their public sector became harder and harder to pay for.  So they began to fleece businesses as much as they could.  With higher taxes, fines, fees, regulations, etc.  Which only chased businesses out.  Making their problem worse.  For they never cut their spending.  Even though half of their tax base had disappeared they still tried to spend as if their tax base never shrunk from its high in the Sixties.  And we see where that led to.  Bankruptcy.  Something Chicago is now flirting with.  And a fate they will share if they don’t cut back their spending to what they can support without fleecing businesses out of the city.

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Obamacare will require more Tax Revenue just as it Shrinks the Tax Base

Posted by PITHOCRATES - February 9th, 2014

Week in Review

President Obama’s economic policies have given us the worst economic recovery since that following the Great Depression.  With some of the greatest economic carnage coming from the Affordable Care Act.  Obamacare.  The great hiring dissuader.  Because of the high cost of compliance for employers.  And now people will even be choosing to leave the labor force.  For it will be less costly for them not to work and collect subsidies for their costly Obamacare (see Obamacare will push 2 million workers out of labor market: CBO by Stephen Dinan posted 2/4/2014 on The Washington Times).

Obamacare will push the equivalent of about 2 million workers out of the labor market by 2017 as employees decide either to work fewer hours or drop out of the job market altogether, according to estimates released Tuesday by the Congressional Budget Office.

The analysis set off a furious debate in Washington. The White House argued that the reduction is positive because it means Americans will forgo jobs or extra work to stay home with their children or strike out on their own as entrepreneurs…

“This is one of the perverse incentives in this terrible law. It actually encourages able-bodied people to not work,” said Sen. John Barrasso, Wyoming Republican. “We should be doing all that we can to increase labor force participation. The health care law actually pushes it in the opposite direction.”

Taking the budget as a whole, the CBO said Congress has made substantial headway on cutting spending and raising taxes, which will reduce the deficit to $514 billion this year and $478 billion in 2015.

But it will rise by 2016 and steadily grow to more than $1 trillion in 2022.

If these people choose not to work and become entrepreneurs who will they hire if others like them choose to leave the labor force?

People choosing not to work is a very bad thing for a big-spending government.  Because government taxes workers to pay for all of that spending.  And if people are leaving the workforce leaving fewer workers in the workforce to pay the taxes government needs that can mean only one thing.  Higher taxes on those with jobs.  To help offset the loss in tax revenue as people leave the labor force to spend time with their kids.  Or become entrepreneurs.

Of course anyone becoming an entrepreneur in this economic climate is a glutton for punishment.  For President Obama has created a very anti-business environment.  Higher taxes, more costly regulatory policies and lest we forget, the Affordable Care Act.  To quote Jed Clampett in the Beverly Hillbillies when he asked cousin Pearle if he should move to Beverly Hills after discovering oil on his property.

COUSIN PEARL BODINE

Jed, how can you even ask? Look around you. You live eight miles from your nearest neighbor. You’re overrun with skunks, possums, coyotes, and bobcats. You use kerosene lamps for light. You cook on a wood stove, summer and winter. You’re drinkin’ homemade moonshine, and washin’ with homemade lye soap. And your bathroom is fifty feet from the house. And you ask should you move!?

JED CLAMPETT

Yeah, I reckon you’re right. Man’d be a dang fool to leave all this.

This is how a lot of people feel today about the Obama economy.  “Man’d be a dang fool to” try and be an entrepreneur in this economy.  Especially with the Obamacare Sword of Damocles hanging over their heads.  So those 2 million people plus leaving the economy is not a good thing.  It is a very bad thing.  Which will require some large tax increases.  Or massive cuts in government benefits.  Because federal tax revenue will fall if people leave the tax base.  It’s just that simple.

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FT184: “If our big Democrat-controlled cities seceded from the US to form a liberal utopia they’d all become like Detroit.” —Old Pithy

Posted by PITHOCRATES - August 23rd, 2013

Fundamental Truth

The President basically said he doesn’t like Representative Government

President Obama recently said that some Republicans in Congress told him in private that they agree with his policies.  And would like to vote for his policies.  To do what is right for the American people.  But they won’t because they have a primary election coming up.  And if they agree with the president that will hurt them in that election if they go up against some Tea Party candidate.  And they’re afraid what Rush Limbaugh will say.  Him and his conservative extremists.

Now think about what the president is saying.  He said that these Republicans would vote for his policies if they weren’t afraid to vote against the will of the people they represent.  For if these Republicans are afraid they will lose a primary election by voting for the president’s policies that could only mean the people they represent don’t want them voting for the president’s policies.

This is very telling.  For what the president is really saying is that he could do what he wants to do if it wasn’t for representative government.  That is the big obstacle preventing him from passing policies the people oppose.  The people.  Which is why his administration is full of czars to help write and execute policy.  Because they have no elections to worry about.  And can do things against the will of the people all day long without worrying about the consequences of doing so.

If you want to see the Result of Failed Liberal Policies just look at the Big Democrat-Controlled Cities

There’s a reason why those who want to implement liberal policies like the president have to use deceit.  The nation is about twice as conservative as it is liberal (see Conservatives Remain the Largest Ideological Group in U.S. by Lydia Saad posted 1/12/2012 on Gallup).  This is why Republicans in Congress fear the Tea Party.  Because the Tea Party represent about twice as many of the people than they and their liberal friends in Congress do.

There’s a reason why the number of people who call themselves liberal has hovered around 20% for decades.  Because liberal policies are not good for America.  They are only good for the ‘connected’ class.  Those with friends in high places.  America’s aristocracy.  Who hate the Tea Party.  And most of America.  As they talk condescendingly down to them from their lofty perches in academia, the mainstream media, union leadership, Hollywood, government bureaucracies, etc.  People who are wealthier than most.  Who like to force people to live the way they want them to live through the heavy hand of government.  While exempting themselves from the laws they pass for us.  Like Obamacare.

If you want to see the result of their failed policies just look at the big Democrat-controlled cities.  Like Detroit.  Detroit was controlled by Democrats for decades.  Democrats there ushered in their liberal utopia.  They raised taxes so much to fund a massive city government that they chased business out of the city.  While layer upon layer of costly regulatory policies helped chase even more businesses away.  And with the jobs gone the people soon followed.  Now they have half the population they once did.  With their tax base imploded they are now left with unfunded pension and retiree health care obligations for their public sector that can never pay.  Sending them into bankruptcy.

Just imagine all the Good that could come from Paying an Entry-Level Worker $75,000

There are a lot of people on the left that want a federal bailout for Detroit.  They want people who have long suffered the high taxation and the job-killing legislation that caused Detroit’s problems in the first place to bail out the city.  People who do not benefit from those generous pension and retiree health insurance benefits.  And who will not benefit from a bailout.  They will only see higher taxes.  More federal debt.  Or more inflation to eat away the money THEY saved for their own retirements (if the government chooses to monetize the debt).  Just so the people in the public sector can enjoy better and longer retirements than they will enjoy.  Because they’ll have to work closer to their own death as they will never be able to save enough to enjoy a ‘public sector’ retirement if they have to pay for the public sector’s retirement as well as their own.

Here’s a thought, why not have the other big Democrat-controlled cities bail out Detroit?  Oh, wait a minute, they can’t.  Because their public sectors have left them greatly indebted, too.  These cities are irresponsibly running up debts that they never will be able to repay.  No matter how much they raise taxes and implement new taxes.  There’s never enough.  In fact, in creating their little liberal utopias they have chased a lot of business, and their tax base, out of their cities.  Yet these cities vote overwhelmingly Democrat.  Perhaps these cities should band together.  If they are so much more enlightened than the rest of the knuckle-dragging Neanderthals in this country perhaps they should secede from the US.  Declare themselves city-states.  And join a federation with other Democrat city-states.  Then they can live like they want to live.  And tell the rest of us (the 80% or so who don’t think like they do) to go someplace warm but not at all pleasant.

They could raise taxes on everyone to really redistribute wealth.  They can do away with drug laws.  Lessen the severity of our criminal laws so there isn’t such a disparity of offenders in our jails.  Make it a hate crime to criticize anyone who isn’t a conservative.  Have government-funded birth control, abortion and morning-after pills.  Government-funded housing.  Government-funded food.  And government-funded health care.  They can outlaw profits and force businesses to maximize the social good.  Raise the minimum wage to a true living wage.  Say, $75,000 a year.  Just imagine all the good that could come from paying an entry-level worker $75,000.  There would be no more student loan debt.  For there would be no reason to go to college to become engineers, doctors, nurses, dentists, paramedics, pharmacists, etc.  Wouldn’t that be lovely?  Wouldn’t you love to work and live in a city where you could do any kind of drug wherever you wanted?  Even while you were cooking food in an entry-level job?  Where there was no punishment for breaking the law?  And no one was so puritanical to tell us not to have sex as often or with as many people as we wanted?  Wouldn’t women love this?  Sure, there would be an epidemic of venereal disease but there would be free health care to treat that (if anyone still worked hard to learn to become a doctor, nurse, dentist, paramedic or pharmacist, that is).  Can you just see these utopian city-states?

Actually, you can see it right now.  For I dare say anyone wanting to open a business or raise a family would NOT want to do so in a city like this.  The jobs would leave first.  Then the people.  Imploding the tax base.  Until you’d have nothing but Detroits dotting the landscape of this utopian federation of liberal city-states.  This is what the president and those in the 20% want.  While of course exempting themselves from this world.  Living in their gated fortresses.  Comfortably.  Where they’ll blame the people who abandoned their utopian city-states as unpatriotic.  Who wouldn’t have fled if it wasn’t for the Tea Party.  Rush Limbaugh.  And, of course, George W. Bush.  Who the left will never tire of hating.  Or blaming.

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The Rising Costs of the British Welfare State has the Taxing Authority shaming People using Legal tax Avoidance Schemes

Posted by PITHOCRATES - August 11th, 2013

Week in Review

Britain’s aging population and her vast welfare state is making government very expensive per taxpayer.  As the tax base shrinks and people live longer into retirement state pensions and the National Health Service are consuming an ever larger percentage of the available pot of money.  Forcing the taxing authorities to get more money from each individual taxpayer.   Especially the wealthy.  Who are paying confiscatory tax rates to make up for that shrinking tax base.  So these people use every law in the tax code to minimize their tax liability.  Which the taxing authority strongly objects to.  As they want rich people to submit and pay.  No matter the amount they must pay (see Britain plans to name, shame ‘cowboy’ tax advisers by William James posted 8/12/2013 on Reuters).

British authorities would get the right to name and shame tax advisers who deliberately steer their clients into tax avoidance schemes that are likely to break the law, under a government proposal announced on Monday…

Tax avoidance schemes seek legal ways to reduce tax bills for companies or wealthy individuals. But some which take advantage of complex ownership structures, often involving overseas tax havens, are illegal.

The new policy would empower Her Majesty’s Revenue and Customs (HMRC) to name the so-called high risk tax advisers it considers to be promoting schemes which are deliberately opaque and likely to be hiding illegal activity.

Despite tax avoidance schemes being legal and the fact that only some people may be breaking the law the taxing authority will shame tax advisors who help their clients to not willingly submit and pay.  No matter how high those tax rates get.  Of course it’s nothing new in Britain.  For they have a record of excessively taxing some of their people.

The British Americans, for example.  But in the 1700s it was the cost of world war that they were trying to pay off.  Today it’s the cost of their massive welfare state they’re trying to fund.  Of course, that war debt may have lost the American colonies.  But it built an empire that lasted for a century.  So that war debt could be looked at as an investment into the future of all British people.  Unlike the cost of the welfare state.  Where it is just generational theft.  For those taxes today pay for obligations from the past.  Which doesn’t invest into the future of all British people.  But discounts their future.

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Saint-Domingue Slave Rebellion, Great Migration and 1967 Detroit Race Riot

Posted by PITHOCRATES - July 23rd, 2013

History 101

The Brutal Slave Rebellion on Saint-Domingue created Haiti and opened the Door to the American West

Haiti was born from a slave rebellion.  Inspired by the French Revolution, which was inspired by the American Revolution, the slaves on Saint-Domingue could taste the liberty in the air.  The slaves outnumbered the whites on the island.  And when they rose in rebellion in 1791 their white overlords were powerless to stop them.  The slaves massacred the white planters.  Those lucky enough to survive fled the island.  The French tried to reestablish control.  Then they went to war again against the British.  Which complicated matters.  And led to a British invasion of Saint-Domingue.

Toussaint Louverture, a former slave, and educated, eventually led the now former slaves to victory.  And won the peace.  He invited the planters back.  Replaced slave-labor with paid-labor.  Reestablished trade with Great Britain.  And the new United States.  While the French did away with slavery in their colonial possessions.  For a while.  During the convulsions going on in France following the French Revolution there were many changes in government.  And the government in 1802 lent a sympathetic ear to the former white planters who wanted their plantations back.  And their slaves.  Napoléon Bonaparte, interested in reestablishing New France in North America, sent a military force to take back Saint-Domingue.  Who captured and sent Toussaint Louverture back to France.  But things did not go well for the French.

Jean-Jacques Dessalines continued the fight in Louverture’s place.  A determined enemy, and Yellow Fever, were too much for the French.  They pulled out their remaining soldiers.  Gave up on Saint-Domingue.  And on New France in North America.  Causing another exodus from the island.  And if you ever wonder why New Orleans is so French this is why.  A lot of those fleeing Haiti settled in New Orleans.  Doubling the city’s population.  Needing money to continue the war against Great Britain Napoléon offered to sell the Louisiana Territory, the thick center part of the United States between Texas and Canada, to Thomas Jefferson.  And did.  So the brutal slave rebellion on Saint-Domingue not only created Haiti.  It gave the Americans the Mississippi River and its tributaries.  The Mississippi Valley.  The Great Plains.  And opened the door to the West.

The Great Migration brought some 6 Million Blacks from the Rural South to Northern Factories

But that brutal slave rebellion did something else.  It made the southern planters nervous.  Over half of the 40,000 white colonists were killed during that slave rebellion.  A fact that weighed heavily on the minds of the highly outnumbered white planter class in the South.  Who lived in fear of a similar slave rebellion happening in the United States.  Which lead to a more oppressive control over their slaves.  So they could snuff out any rebellion at the first sign of trouble.  And there was a reversal of policy.  The Founding Fathers had shelved the issue of slavery for 20 years to get the South to join the new nation.  Believing that the institution of slavery would die out on its own.  And in the following two decades some slave owners were freeing a slave or two.  But that all stopped following the revolution in Saint-Domingue.  When the life of a slave went from bad to worse.  For the last thing the white planter class needed was a Toussaint Louverture in their midst.

By the time of the American Civil War the slave population had grown much larger.  Which added another element to the Civil War.  Especially for the South.  The North was fighting for a noble purpose.  To free the slaves.  And fulfilling the declaration that all men were created equal in the Declaration of Independence.  But what then?  What happens after the North wins the Civil War?  And they free the slaves?  Where are the slaves going to go?  Back to Africa?  Even the ones who have no idea what or where Africa was?  Having been born and raised in the United States?  No.  They weren’t.  They were going to remain in the South.  Nothing would change in the North.  But life in the South would be changed into something that just didn’t exist.  A biracial society.  Worse, this was going to be a biracial society where the majority was once brutally oppressed by the minority.  Thanks in large part to the slave rebellion on Saint-Domingue.

With this backdrop the odds for a peaceful reconstruction were slim.  The South did not adjust well to the new reality.  There were fears.  Anger.  And the old prejudices.  While in the North life went on as it always did.  Predominantly white.  And industrializing.  Creating more and more factory jobs.  That drew immigrants to the industrial north.  As it drew southern blacks.  Leading up to the Great Migration.  From 1910-1930.  Pausing during the Great Depression and World War II.  And picking up again from 1940-1970.  When some 6 million blacks left the rural south.  And headed to the jobs in the big cities in the Northeast.  The Midwest.  And the West.  Working and living in the big cities.  Like Detroit.

The 1967 Detroit Race Riot accelerated the White Flight from the City which decimated the Tax Base

Detroit dominated following the post-war period.  It was an economic powerhouse.  Thanks to a booming automotive industry.  And a war-torn Europe and Asia.  Whose industrial capacity suffered greatly from Allied bombing.  Leaving the motor city the auto capital of the world.  And making Detroit one of the richest cities in the nation.  With their population peaking in 1950.  As people came to the city for those manufacturing jobs.  But the housing did not keep up with the growth in population.  Blacks and immigrants often faced discrimination.  Getting the worst jobs.  And the worst housing.  Things that changed in the Sixties.  Thanks in large part to a shift of the auto industry out of Detroit.

Following World War II Packard, Hudson, and Studebaker went out of business.  And the Big Three went on a building spree.  In the suburbs.  And a lot of white Detroiters followed them.  Relieving the housing pressure a little.  Allowing a black middle class to grow.  But the suburbs kept growing.  As businesses moved their jobs to the suburbs that were a little more business friendly.  With sprawling spaces for new factories.  And a brand new interstate highway system to easily ship material and parts from one to another.  The same interstate highway system that converged four expressways in the city of Detroit.  Destroying a lot of neighborhoods.  Which were predominantly black.

Many of those displaced people moved to the 12th Street area.  An area that become twice as crowded as the city average.  Unemployment was rising.  As was crime.  Including prostitution.  Where white johns were coming to the neighborhood to solicit black prostitutes.  A big complaint of the black community.  So the police cracked down on prostitution.  And a black prostitute ended up dead.  The people blamed the cops.  The cops blamed a pimp.  Tensions were rising.  Then on July 23, 1967, the police raided a blind pig.  An unlicensed after-hours bar.  On the corner of 12th Street and Clairmount.  Where a party of some 80 people were celebrating the return of two soldiers just back home from the Vietnam War.  The cops arrested them all.  While they were waiting for the paddy wagon to take them away a crowd formed outside.  Someone threw a bottle at a cop.  And thus began the 1967 Detroit race riot.  Which only accelerated the white flight from Detroit.  Caused an exodus of jobs, too.  As businesses fled the city.  Which just decimated the tax base.  Accelerating the urban decay.  Soon the black middle class followed the whites.  In pursuit of those jobs.  And to escape the dying city.  Which it did in 2013.  Die.  Figuratively.  By filing the largest municipal bankruptcy in U.S. history.

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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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Japan’s Low Replacement Birthrate gives them an Aging Population and Soaring Debt

Posted by PITHOCRATES - July 7th, 2013

Week in Review

The United States debt as a percentage of GDP is approaching 100%.  Meaning that we owe as much as we produce in goods and services each year.  A frightening prospect.  For imagine if you earn $50,000 a year and were $50,000 in debt.  How easy do you think it would be to repay your debt?  Chances are that you will never be able to repay your debt.  But here we are.  Our government borrowing more than ever.  Without any concern of that rising debt.  They say it isn’t that bad.  Just look at Japan.  Their debt is about 200% of their GDP.  And they seem to be doing just fine (see Elderly shoplifters outstrip teenagers in Tokyo by AFP posted 7/8/2013 on France 24).

The number of elderly people caught shoplifting in Japan’s capital city has outstripped that of teenagers for the first time since records began, a report said.

A quarter of the people arrested on suspicion of the crime in Tokyo last year were at least 65 years old, figures showed, amid warnings of increasing isolation in the age group…

Around a quarter of Japan’s 128 million population is aged 65 or older, and the country has a far-below replacement birthrate of an average 1.39 children for every woman.

There are regular reports of bodies lying unfound for weeks or even months after a single, elderly person has died alone. Commentators say the phenomenon is a result of the fraying of familial ties as Japan has modernised.

When you have a replacement birth rate of 1.39 you have an aging population.  One that is growing so old that the rate of people leaving the workforce will soar while the rate of those entering the workforce will plummet.  So just as these elderly people start consuming their pensions and health care benefits the tax base that pays for them will be disappearing.  Perhaps explaining why these people are shoplifting.  As the burden to care for an aging population eventually becomes too great for a government to sustain.  So they cut back.  And leave the elderly to fend for themselves.

When people are having only 1.39 kids on average that means couples are not just having one child.  But a lot of them are having no children.  This is what birth control and abortion have given advanced nations.  The ability to wipe themselves off the map.  Either by a negative population growth rate.  Or by throwing open your borders to try and offset the population decline with new immigration.  Transforming the nation from the native population to the immigrant population.  Replacing the native culture and traditions with the immigrant culture and traditions.  Just like when the Americans moved west and replaced the culture and traditions of the Native Americans.

Two things that just don’t go together are an expanding welfare state and a declining replacement birthrate.  As you have a shrinking tax base paying for that expanding welfare state.  If you want an expansive welfare state you have to have more babies.  Plain and simple.  You have to stop using birth control.  And stop having abortions.  So you can grow the population.  To always have more people in the base of the pyramid than you do at the top.  Like any good Ponzi scheme should.  It’s either that or you have to reduce the size of the welfare state.  So you can live within your means.  That is, what your tax base can afford to pay.

Or you can keep borrowing and printing money like Japan.  And wonder when the deflation and recession of the Lost Decade of the Nineties will ever end.

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The Public Sector and the Tax Base

Posted by PITHOCRATES - June 3rd, 2013

Economics 101

All Government Bureaucracies Grow Bigger and Pay their People Very Well

Big cities throughout the United States are suffering financially.  They are drowning under the costs of their public sector employees.  For when the Great Recession hit tax revenues fell.  People lost jobs and paid less income taxes.  People out of work spent less in the local stores causing a fall in sales taxes.  People drove less and paid less gas taxes.  Home values plummeted, reducing property taxes.  Tax revenue fell at all levels of government.  Leaving the big cities unable to pay their bills.  With less help from the governments above them.  While their infrastructures crumbled.  And they struggled to furnish basic city services.

Governments don’t make anything.  They just have people doing things.  So there are little economies of scale.  Just a lot of people.  The public sector includes every worker in the city paid by tax revenue.  The mayor, city council, school teachers, police officers, firefighters, garbage collectors, boiler operators, electricians, janitors, building inspectors, meter readers, bus drivers, etc.   And all the civil servants and bureaucrats that push paper.  Requiring a huge payroll.  And lots of benefits.  In a large city with a population of 1.5 million those costs can look like this:

Public Sector Costs 1

All government bureaucracies have two things in common.  They always grow bigger.  And pay their people very well.  So the above table has three columns.  Showing the growth of the public sector.  (Assuming a constant population to simplify our math).  From 1% of the city population to 2% then to 3%.  So the number of city employees goes from 15,000 to 30,000 to 45,000.  By the time you add in pay, holiday pay, vacation pay, sick days and health insurance the active employee costs are huge.  Going from $1 billion to $2 billion to $3 billion.  Today it is not uncommon for a big city with a population of 1.5 million to have 45,000 public sector workers.  So we will build on that figure.  And add in retiree costs.

As City’s Population Declines so does its Tax Base

Another big perk of working in the public sector are the great pensions.  Something that has long since disappeared in the private sector.  While most of us have to put money away in a 401(k) public sector workers can count on a generous pension during a long retirement.  Perhaps getting as much as 80% of their base pay.  Plus they keep their health insurance.  Which is unlike the health insurance most of us get in the private sector.  For it covers everything.  With few co-pays.  And only the best name-brand pharmaceutical prescriptions.  This is why people want to work in the public sector.  And why they want to retire from the public sector.  Because no one else pays as well.

Public Sector Costs 2

Public sector workers retire long before their counterparts in the private sector.  Allowing them to live a long retirement.  And because they live so long into retirement the city ends up paying for almost as many retirees as they do active workers.  Putting great cost pressures on these cities as more of their workers retire.  Within as few as 2 decades the cost of retired workers can go from $648 million to $1.9 billion.   When we add this cost to the cost of their active workers we get the total cost of the public sector.

Public Sector Costs 3

As time passes and more people retire from the public sector we can see how the cost of the public sector (active and retired) rises from $3.7 billion to $4.4 billion to $5 billion.  Which, of course, the people living in the city have to pay.  The taxpayers.  They pay income taxes, property taxes, sales taxes and a variety of other taxes and fees.  Who by the time the number of retirees reach 40,500 must pay $3,336 per year.  Or $278 per month.  Or $64.15 per week.  Or $9.16 each day.  Just to get a true feel of how much this is do the following exercise.  Each day take a $10 bill out of your wallet or purse and throw it away.  This will approximate the cost of the public sector you pay for.  Until the people start leaving the city.  And as the population declines so does the tax base.  Requiring each person to pay a larger share of the public sector cost.

To pay for an Expanding Government you need a Growing Population

If a city starts losing population it doesn’t reduce the need to pay the bloated public sector.  Both active and retired.  So the fewer people remaining in the city have to pay a larger share of the public sector cost.  Because the public sector union isn’t going to allow the city to lay off any workers.  So it’s up to the taxpayers.  But as the population shrinks it becomes more painful to do.

Public Sector Costs 4

By the time the population falls to 500,000 the amount of taxes a person must pay to support the public sector amounts to a house payment.  Or $192.46 per week.  Or $27.49 each day.  Can you imagine taking three $10 bills out of your wallet or purse every day just to throw them away?  Probably not.  Because no one would.  Cities just can’t keep increasing the tax burden on their people.  For there is a limit.  And when a city reaches it they start borrowing.  Which is how cities go into debt.  And flirt with bankruptcy.  Because of these bloated public sectors.  That grew when the cities grew.  But they didn’t shrink as their populations shrank.

We have ignored corporations in our exercise.  Which increase the tax base.  But we have also excluded additional costs.  Buildings, vehicles, equipment, housing assistance, food assistance, fuel for city vehicles, car insurance, property insurance, liability insurance, lawsuits, etc.  If we factor these things in the numbers will only look worse.  As the cost of the active and retired workers increases there’s less money to pay for the basic city services.  So they deteriorate.  Which when added to the higher taxes chase even more people out of the city.  Reducing the tax base further.  Leaving even less money for the basic city services.

When the population declines so does the city.  As the public sector workers consume a greater percentage of the shrinking tax base cities suffer increasing urban decay.  As there is little money for anything but the public sector workers and their benefits.  For when it comes to paying for government population is key.  You need a growing population to pay for expanding government.  To spread the costs of a bloated public sector over as many people as possible.  And you can’t do that with a declining population.  Which is why big cities flirt with bankruptcy during bad economic times.  For they can pay for their bloated public sectors only during the best of economic times.  And only during the best of economic times.

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Marriage, Babies and Taxes

Posted by PITHOCRATES - March 28th, 2013

Politics 101

The Women’s Movement encouraged Women to Choose a Career over Having Babies

It is common for a married couple planning to have children to both work.  To put as much money into the bank for a down payment on a house to raise their family in.  In a nice neighborhood with good schools.  After they buy that house and have their first child it is common for the woman to quit working to stay home and take care of their newborn child.  And the other children they have.  While the husband continues to work.

The women’s movement changed that.  It encouraged women to have fewer babies (or none at all) and to have a career instead.  Those who had children were encouraged to return to work as soon as possible.  To just dump their kids into daycare and continue their careers.  But it doesn’t always work that way.  Sometimes a woman determined not to let her children interfere with her career has a change of heart after having her first child.  Deciding not to return to work.  Choosing to, instead, stay at home and raise her children.  And not dump them into daycare.

This, of course, causes problems for employers.  Making it more risky to hire women.  Especially in this litigious world.  They have to hold a woman’s job for her when she goes on maternity leaves.  And if her job is a critical job, like doing payroll, others will have to split up her job responsibilities.  Perhaps hiring a temp to pick up the less critical tasks (filing, answering phones, etc.).  For mistakes in payroll do not make happy employees.  And mistakes in payroll taxes can cause some very costly problems with the government.  If a woman doesn’t plan on returning to work after having her baby the business can hire a new employee.  And in her last weeks before leaving to have her child she can train her replacement for an orderly transfer of her responsibilities.  Something she can’t do if she changes her mind while on maternity leave.

In the Marriage Contract the Wife gives up her Career to Raise the Children while her Husband provides Financial Support

This can be a reason why men earn more than women.  Because there is less of a chance of his changing his mind to be a stay-at-home parent.  It happens.  But not as often as it happens with women.  Because women have a biological clock ticking.  Which can greatly influence her thinking on her long-held career plans.  For a woman has to leave work to have a child.  And to recover from the birth.  Men don’t.  Their lives can go on with little change.  And because a woman has to take time off she spends more time bonding with her newborn child.  Which is a powerful force.  Mothers are very protective of their babies.  And even though she had all intentions of returning to work having the welfare of her newborn dependent on her can change her best laid plans.

Of course, leaving the workforce not only affects her employer it affects the household budget.  For that lost paycheck can make life more difficult at home.  Forcing the new family to get by on less.  Government understands this.  And they design the tax code to help families raise children.  Because the government needs people to have babies.  And they need them to have more than two.  For if they only have two the population will not continue to grow.  These children will only replace their parents.  Not expand the tax base to help pay for an expanding menu of government benefits going to an aging population.  But having more than two children is very expensive.  Which is why married families get a lot of deductions and credits in the tax code.  To help offset the high cost of having children.  So they will have more children.

And there are other legal issues and traditions to help families.  Such as the baby’s last name.  A woman may hyphenate her name when married.  But you can’t do that with children.  For in a generation or two a person’s name will grow so long with multiple hyphens that it will make it difficult to use on forms, to sign a contract or a check.  Put on a nametag.  Tradition has the father being the financial provider.  As the father is not physically impacted by pregnancy.  He can keep working.  And providing.  So giving the child the father’s last name makes it easy for the child to go through life.  And makes it clear that the father is financially responsible for that child.  Just like it’s a man’s work benefits that cover his wife and children.  Because in the contract of marriage the wife gives up her career to do something more important.  Raise their children.  But she can only do that if her husband provides the income, the health care benefits, house, car, groceries, etc., the family needs.

If Same-Sex Marriage is about an Unfair Tax Code the Left could just vote Republican so we can Lower Taxes for Everyone

The institution of marriage developed to help a man and a woman raise children.  Having children came first.  People have been having children long before they even talked or used tools.  Then civilization advanced.  The economy grew more complex.  This advanced civilization was costly.  Especially when raising children. Then the institution of marriage came along to help families have children.  Governments and business help families have and raise children.  For we need families to have and raise children.  Businesses need an expanding population.  For a business needs more people to grow.  To buy the goods and services of their expanding business.  Just as government needs an expanding population.  To pay the taxes to fund an expanding government.  An expanding population translates into a growing and prosperous economy.  And a growing and more generous government.  Because the more people there are the more people government can tax.

Men and women have married without raising a family.  Yet they still get some of the benefits we developed to help married people raise children.  Such as one spouse being covered under the other’s employer’s health insurance benefit.  Raising the business’ costs without providing an expanding population benefit for this additional cost.  And it’s the same for government.  A married couple may get some favorable tax benefits that cost the government while not providing an expanding population benefit for this additional cost.  So there is a short-term benefit for a childless marriage.  The woman doesn’t leave the workforce.  She builds her career and earns more income.  Providing more tax revenue.  But there is no long-term benefit.  For when this couple leaves the workforce there will be no one to replace them.  So while they start consuming Social Security and Medicare benefits they have not added new people to the workforce to pay for these.

Understanding how and why we have the institution of marriage makes the current same-sex marriage debate puzzling to say the least.  For marriage is not about civil rights.  It’s about lowering the cost of raising children.  Which both business and government needs.  For if couples don’t have more than two children then the population will no longer expand.  And it will age.  Making it more costly for government.  While providing a shrinking customer base for businesses.  A couple that does not bring new children into the world provides no return on the cost of the marriage benefits they receive.  And a same-sex marriage will be no different than a childless marriage between a man and a woman.  From an economic/government funding point of view. They will not help grow the economy.  They will not lower the future cost of government.  And there won’t be a legal or traditional need for giving a newborn child a last name.  As they can’t procreate.

If procreation is out of the equation people can enter committed relationships without the institution of marriage.  During the sexual revolution the Left belittled the institution of marriage and asked why anyone needed a piece of paper to sanction their love.  And these people lived together flaunting convention.  And tradition.  Using birth control and the recently legalized abortion to make sure no children resulted from these new living arrangements.  These marriage-less committed relationships.  Now marriage is the number one issue of the Left.  If it’s for same-sex couples the institution they hated and worked so hard to destroy is now the greatest thing in the world.  And on top of everything else the Left, who supports higher taxes, are arguing that the tax code unfairly discriminates against same-sex couples.  If that is the basis of this being a civil rights issue the Left could just vote Republican so we can lower taxes for everyone.  Then they could have everything they want.  The free love of the sexual revolution.  Low taxes.  And no reason to get married.

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The Federal Government’s Finances may be a Mess but they could be Worse…like in Detroit

Posted by PITHOCRATES - March 2nd, 2013

Week in Review

President Obama has posted the largest deficits in history.  Exceeding $1 trillion dollars.  In every year of his first term.  Exceeding Ronald Reagan’s maximum deficit of $452.67 billion (adjusted for inflation).  Exceeding George H.W. Bush’s maximum deficit of $474.51 billion.  Exceeding Bill Clinton’s highest deficit of $404.92 billion.  And exceeding George W. Bush’s maximum deficit of $501.21 billion.  President Obama’s average deficit is twice the highest of the 4 previous presidents.  Is anyone a more irresponsible spender than President Obama (see Michigan Gov. Snyder to Appoint Detroit Emergency Manager by Marilisa Sachteleben posted 3/1/2013 on Yahoo! News)?

Detroit has been operating in deficit for some time… The treasurer’s report found that Detroit is currently $327 million in debt, including retiree pensions and healthcare benefits, and owes $14 billion in long-term debt. The Detroit News reports that Dillon said that city officials were borrowing to cover the deficit and treating loans as revenue. Had they not borrowed, the deficit was projected to reach $937 million in fiscal year 2012. The review team’s recommendation was to appoint an emergency manager for Detroit, and Gov. Snyder had 30 days to make the final call…

On March 1, Gov. Snyder made the call and announced that Detroit would be getting an emergency manager.

Well, we have the answer to our question.  Detroit is.

To put this into perspective let’s compare the federal government to Detroit.  With total federal outlays about $3.8 trillion the federal deficit is about 26.3% of total outlays.  Under the 2012-13 budget Detroit will spend approximately $1.12 billion.  Making the real deficit about 83.7% of total outlays.  Is it any wonder the City of Detroit will be getting an emergency manager?

The problem with Detroit is that they’re still spending money like they have a population of 1.8 million (their peak).  The tax base is long gone but spending obligations for pension and health care for retirees are still there.  Why did this happen?  Detroit became one of the most unfriendly places to do business.  High taxes, including a city income tax, and exceptionally high regulatory costs chased the jobs out of Detroit.  And with those jobs went the people.  The tax base.  An object lesson of what liberal Democrat policies gone wild can do to a city.

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