After arduous negotiations with Detroit’s creditors and pension beneficiaries failed to produce a resolution, city officials finally threw in the towel and filed for bankruptcy last week. Detroit’s disintegration exposes the basic failure of what have become modern America’s failed paradigms: too much debt, too much entitlement, and hindered economic growth.
Detroit is in ruins. The sprawling mid-century industrial metropolis of nearly 2 million people has been whittled down to roughly 700 thousand residents. While the Detroit community has experienced a steady exodus for decades, some 250 thousand people have abandoned the city since 2000.
Stripped of its erstwhile vibrant manufacturing base, plagued by overpowering unions, and governed by anti-competitive federal policies dating back to the first federal bailout of Chrysler in the 1980s, Detroit’s transformation is complete. City lights throughout the city don’t work, public parks are closed, entire neighborhoods are ghost towns, and drug gangs roam the streets with impunity.
The city, or what remains of it, is completely broke. Detroit’s total debt is projected to be at least 14 billion and likely as high as 20 billion dollars. The budget deficit alone is over 300 million dollars. As a result, public services have collapsed—police and firefighting services, public maintenance and administration have all been slashed.
In the past, borrowing was the answer. Instead of offloading unsustainable pension and health-care obligations, Detroit issued debt to make up the difference. Instead of reforming poor administration and correcting incompetent accounting, city leaders decided to push the problem into the future. Thus, dysfunctional public administration and a culture of entitlement combined with anti-competitive economic policies are responsible for the malaise that has taken root.
The tragedy of Detroit is likely to be glossed over; many will pretend that it is an outlier not reflective of America’s general state. Others will bemoan what has happened while shifting responsibility away from where it properly rests.
But the paradigms that bankrupted Detroit are acting on America with similar results. In 2010 Meredith Whitney, a prominent financial analyst, made headlines when she predicted 50-100 municipal defaults in 2011. She was widely rebuked for her comments, which turned out to be wrong in the short term. Nevertheless, accounting shortfalls around the country, particularly at state and local levels, is an explosive problem that has not been fixed.
The sources of America’s debt are the same as Detroit’s: an oversized public sector, unsustainable retirement benefits, and general economic slowdown. States in the worst financial conditions, blue states like New Jersey and California embraced massive entitlement spending, appeased strong unions, and indulged in unwieldy regulations. Also like Detroit, they suffer from some of the worst public school systems in the country.
Defaults have already started in California. Just last year Stockton, a small city in Northern California declared bankruptcy. Amazingly, even cities like Los Angeles are flirting with insolvency. In fact, former Mayor Richard Riordan has warned people publicly not to buy LA muni bonds, citing unfunded liabilities as his main concern.
Washington’s budgetary problems have and will continue to dominate national headlines. Indeed, the national debt is perhaps the gravest single threat to America’s economic stability. Still, Detroit’s bankruptcy should serve as an awakening.
Sometimes the worst disasters are the ones we all see coming, the ones that develop slowly right before our eyes. The paradigms that conspired to bring Detroit to its knees are doing the same to the entire country. It just might take longer.
Cameron Macgregor is a former naval officer. He is currently a graduate student at George Mason University.