Detroit: Pensions, Potholes and Promises
Late last week, a Federal Bankruptcy Judge, Steven Rhodes,
cleared the way for Detroit to stiff all of its public-sector pensioners. Pensions, Judge Rhodes said, were no
different than any other type of secured debt, like money owed to bondholders,
and the claims go into (and get paid from) the same pot of degraded assets.
Outside of the sound of the popping of corks in the private
jets of the bondholders, what Judge Rhodes did was tee up the one of the most
controversial issues that the political system must solve: how to adapt on the
fly to a multi-generational series of interlocking promises.
Detroit has been terribly mismanaged, and had been dealing
with the secular decline and globalization of its core auto industry. It has lost nearly a third of its total
population in the last two decades, and whole neighborhoods have been
abandoned. As jobs shrink, those who can
leave do, and the rest become, as a group, more and more dependent on aid that
the city has less and less of a tax base to support.
That leads to a horrible quandary. Pay to fix the pothole, or pay the guy who
fixed potholes twenty years ago? So, whether
Judge Rhodes is right or wrong on the law regarding pensions (and he
disregarded an explicit Michigan Constitution provision to reach his result) he
is almost certainly correct on a core reality: Detroit currently has about two
retired public service workers for every one presently on the job. That is an irreducible fact, and if the
political system can’t deal with it (and, it clearly hasn’t) people will by
voting with their feet. Why resign yourself to decay?
Many Conservative columnists and talk-show jocks are crowing
about Detroit. Punishing the public
service worker is very high on their Christmas gift list. Taking their pensions is even better. Detroit
is the perfect storm of joy for them. “Detroit” is code for everything they
think is pernicious in American society: an urban area with an urban population,
an organized work force, and a higher percentage of Democratic voters. “Detroit”
is what New York City will morph into within three months of Bill de Blasio’s
inauguration. “Detroit” is the barren
wasteland that the nation will become unless we encourage self-help by eliminating
not just the safety net “free goods” but also programs that we have paid into
(like Social Security) or bargained for (like pensions.) All you need is one intoxicating whiff of
economic and social Calvinism and you will be on the path to
righteousness.
Of course, this is complete nonsense. We live in a complex ecosystem, a web of
taxing and spending rules that constantly reallocate benefits. The basis of our system has been a dynamic
tension between two imperatives, the growth-oriented free-market freewheeling
Capitalism that knows no rules and accepts no limitations, and the nanny state
proto-European approach that often makes the government (and, by extension, the
taxpayer or the buyer of Treasury Securities) the writer of too many
checks.
In wealthier times, we dealt with this by making sure that the
largest number of people had stakes in sustaining a stable system. The rich
remained comfortable in the reassuring fact that the government always pampered
the elites. The poor could rely on
social programs like welfare, subsidized housing, and SNAP. We had horrible, intractable poverty in
sections of the country but these were often rural and overlooked sections,
like Appalachia. The working person had
collective bargaining to balance out the power of capital and a secure future
through defined benefit pensions and Social Security.
Those are bygone days.
The elites still have government stacking the deck for them, as should
be expected. But they now also have the
advantage of a system that has created outsized rewards at the expense of the
shareholders of publically traded companies and the people who work for them. The
gap between the compensation of the CEO and the line-worker has grown
astronomically. As has the asset gap. And,
the relentless drive to cut costs stops when you get to the executive suite. Close a plant, fire 1000 people, outsource the
work, and then collect an eight-figure bonus and a bouquet of stock options.
But before we blame the rich, who are, after all, just doing
what comes naturally, we also have recognize that the basic promise that kept
the peace with the middle-class, the workers, and the poor was ultimately one
that could not survive the impact of demography and globalization without
farsighted planning. That is something
that politicians were loath to do. And
this was a bipartisan blindness.
Democrats were cozy with the unions and public service, making hard
bargaining something only the other guy did.
They gave it away. But they
weren’t alone. Republicans cared only about low tax rates and an open community
chest of special interest legislation, below market concessions, and outright
subsidies for their boardroom friends.
George W. Bush himself, Mr. Conservative, fought a war he refused to pay
for, created a giant new entitlement (Medicare Part D) and cut rates
substantially for high earners. Who says you can’t have it all?
You can’t, and anyone with any sense in his or her head
knows it. But Detroit leaves us with a horrible paradox. Because as much as it is an example of the
results of bad management and bad luck, it is also reflective of a core
truth: Whether it’s through loss of job,
loss of pension, reduction in entitlements, or even SNAP, people cannot spend
money if they don’t have it. That means small businesses shrivel up, stores
close, mortgages and taxes go unpaid, and homes and even whole communities fall
into disrepair. You can kill a town with
overindulgence, and you can kill it with austerity. Detroit may suffer both kinds of death.
So, if I were a Democrat and really wanted to be
compassionate, I would learn from Detroit, and spend a little more time
worrying about where employment will come from and how to incentivize work.
And, if I were a Republican, rejoicing in the demise of a
city without friends or resources, and looking at Judge Rhode’s decision as
healthy dose of morality to administer to the folk all across the country who
don’t fund me, I might pause for a moment and reflect. Not only aren’t there enough prisons and
workhouses for every soon-to-be ex-pensioner, but those people might just have been
customers of my biggest donors.
In the meantime, Detroit’s Emergency Manager, Kevyn Orr,
called in Christie’s to appraise the collection at the Detroit Institute of
Art, despite the opinion of Michigan’s Attorney General that it couldn’t be
sold. But the creditors weren’t happy—they
want more. In late November, they filed
a motion with Judge Rhodes to get an independent appraisal. Might as well suck the orange dry before
tossing the peel in the gutter.
Let’s hope there is still someone left to pick it up when
they are done.
Michael Liss
Please follow us on Twitter @ SyncPol
