Detroit was the place that epitomized the whole “American Dream” sales pitch, where anybody could scrape up a second chance and win a decent living for yourself and your family. The landless, the uneducated, the minor hooligans, and even people so stupid that they wasted their youthful years chasing graduate degrees could get a fresh start in work that mattered and be rewarded their efforts. Detroit got there first.
It ended long ago, but a car can still roll on for a while after engine cuts out. It is now grinding to a halt; the final halt.
All the World’s an Unfunded Liability
Almost 40 percent of Detroit’s operating budget goes to debt service and legacy costs, and in the wake of the bankruptcy we all got a peak at the debt being carried by the city, approximating:
- $3 billion in general obligation bonds
- $6 billion in water and sewage bonds (asset-backed, they will still get paid)
- $3.5 billion in unfunded pension
- $5.7 billion in unfunded retiree healthcare costs
It has been an old trick in politics to keep the peace with municipal workers by buying them off with pensions in the future instead of pay raises in the present. Detroit may be the first big city to hit the wall, but cities across the country have borrowed too much even as legacy costs grew out of hand. One of these cities rhymes with Rickago.
Urban redevelopment bonds are almost always rated lower than general obligations. This is because urban redevelopment is usually an effort by amateur politicians to play urban planner in areas of town that have fallen into disuse. Seriously, check them yourself.
It is a perennially unlearned lesson in the political mind; communities and economies have more in common with the organic than the mechanical. When force is applied to make them behave as central authorities which they would, they are more likely to fold completely than comply.
It is a lesson available on display at every suburban “walk-able community” development – designed to be trendy, now sitting empty.
It was on display in Detroit when the neighborhood of “Poletown” was grabbed using eminent domain and handed to GM. Poletown Neighborhood Council v. Detroit became a landmark case in land use law. Decades later the nation was treated to similar treatment in the infamous Kelo decision, but Detroit got there first.
Greet the Future
Too much debt, unfunded legacy costs, aggressive state corporatist cronyism, a lack of jobs. This stands in no stark contrast to the debt, unfunded social security and Medicare liabilities, the subsidies for favored pseudo-industries and ongoing poor employment situation on the national level.
The country still has a few things going for it; while we buy consumer and durable goods from China at bankrupting pace, we are able to export to them agricultural produce, medical supplies, heavy machinery – I am even told that it is quite possible to get work in manufacturing this heavy equipment depending on where you are – and scrap metal.
Actually, if you are a train watcher you might even catch a shipment of Detroit scrap passing by on its way to be made into rebar, which will be used in China to build cities that nobody will inhabit.
The legal formalities of bankruptcy aside, in economic terms bankruptcy is the transfer of assets from the title owners to the creditors. So the Chinese will purchase our companies, the products of our land, and the remnants of our cities. Having stored our currency in reserve, they are our creditors – and that is the way of things.
Detroit will be dismantled. The bond holders, pensioners, and employees will all take a hit. The residents will continue to leave. The city owns much land, and perhaps that can be given in kind, but land in Detroit is not the asset it once was, and even after the debts have been settled and the screws have been screwed – even then – there might not be a way back.
Detroit cannot be contained; Detroit has been the vanguard of change in American society since the first Model T. It defined the industrial age and middle class consumer taste; then, it defined economic degradation, debt, and the welfare state. This crisis belongs to all of us – Detroit got there first – and second chances are hard to come by these days.
About the Author
Mr. Waechter is an attorney and a recent graduate of Drake University.
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