In the 2012 presidential campaign, President Obama claimed Detroit as evidence of his successful policies: “We refused to let Detroit go bankrupt. We bet on American workers and American ingenuity and, three years later, that is paying off in a big way.”
Yet last month, Americans were shocked when Detroit — long a symbol of our economic might and cultural vibrancy — filed for Chapter 9 bankruptcy. The collapse has already sent tremors through the municipal bond markets and threatened the economic security of defined benefit pensioners everywhere.
But Detroit isn’t a one-off, exceptional tragedy that we can afford to pity but otherwise ignore. It is on the same trend line as scores of other American cities and even our national government.
In the first half of the 20th century, Detroit’s auto industry produced 200,000 manufacturing jobs. These weren’t government programs or the result of government subsidies nor the product of government “investment” in training programs. If anything, they were the result of government staying out of the way and allowing visionary industrialists working in a decidedly capitalistic system to produce wealth for all. Detroit had a prosperous middle class as well as great buildings, civic spaces and art institutions.
In 1941, the auto companies first began collective bargaining with the United Auto Workers. By the 1950s, Detroit’s eminence in automobile manufacturing begin to fade, as foreign competition emerged and companies were forced into wage hikes, work rules and pension commitments they couldn’t afford.
As jobs and population declined, the city of Detroit made its fatal mistake. Instead of responding to the decline in tax revenues with belt-tightening, a succession of corrupt, incompetent Detroit mayors and City Councils continued to spend recklessly and to negotiate lavish pension funds with a new but immensely powerful political support: public employee unions.
As crime rates soared and schools deteriorated, taxpayers fled Detroit, yet the alliance between unions and the politicians they supported continued to flourish.
The consequences of spending money you don’t have are eventually predictable. Detroit’s debt load today is $18 billion, a sum it can’t pay partly because 38 cents of every new tax dollar goes to retirement benefits, a figure expected to grow soon to 65 cents. Detroit mismanaged itself into a hole it couldn’t get out of. The only question now is whether bondholders or pensioners should take the major hit. Once proud Detroit is a pitiful basket case.
Chicago appears headed on the same course. It’s population has declined over 1 million since 1950. It’s predicted budget shortfall is 1 billion by 2015 while its pension funds are 32 billion underfunded.
Los Angeles hasn’t experienced a population decline but also runs an annual budget deficit and has an unfunded pension liability of 27 billion. Philadelphia’s pension plans are only 50 percent funded even though the city pays 28 percent of its total budget for pension and health benefits.
But the federal government may be in the most trouble of all. For decades now the feds have been operating public retirement and health care programs without evidencing the slightest intent to fund the promises they are making. Instead of saving contributions in the “trust” to fund future benefits for the people making the payments, they spend the money is if there is no tomorrow and no need to save or to reduce debt.
Social Security has unfunded liabilities – not liabilities, unfunded liabilities – of 9.6 trillion over the next 75 years. If you include Medicare and federal employees pension benefits, that number is an unthinkable 86.8 trillion.
It’s bizarre to see our leaders, slack-jawed and vacant-eyed, ignoring all the obvious signs of danger. Even though a modest, expected increase in interest rates on our national debt will precipitate a profound crisis, we still employee recruiters to coerce the dubious into programs like food stamps and SSDI. Even though Americans are aging and every year there are fewer workers to support each retiree, we can’t muster the courage to do something as logical and painless as gradually raising the retirement age to 67.
The lesson of Detroit is clear. Foolish fiscal policies eventually result in less freedom, less opportunity and a declining standard of living for all. Is anybody listening?
• East Valley resident Tom Patterson is a retired physician and former state senator. He can be reached at email@example.com.