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July 31, 2013

It’s a Bankruptcy, Not a Bailout

By

Washington would send the wrong message by rescuing Detroit from Detroit.

Picture two gamblers. Both of them head to Atlantic City one weekend, bet irresponsibly and rack up some big losses at the gambling tables. One has his debt wiped off the books by an inexplicably forgiving casino owner. The other has to go into debt to cover his losses. Many months later, though, he has paid it all back.

Who is most likely to learn the right lesson? The second gambler, obviously. Sure, it wasn’t easy, but what’s the likelihood that he will repeat his mistake? The first gambler, by contrast, might turn around and do it all over again.

Which brings us to Detroit, which recently filed for bankruptcy.

It’s a shameful chapter for a city that once exemplified American industrial might. The modern middle class sprang in part from the production line that Henry Ford set up there. During World War II, more than a third of U.S. war materiel was manufactured in the Motor City. During the postwar boom, cars made in Detroit embodied the American success story.

But, as they say, that was then and this is now.

Detroit is bad for the adults: Its unemployment rate of 16 percent is more than double the national average. It’s bad for the children: The city’s public schools have failed, with just 7 percent of eighth-graders proficient in reading.

It’s notoriously dangerous, with vacant lots dotting the landscape and police taking about an hour to respond to calls. It’s a fiscal mess as well, carrying more than $18 billion in debt and unfunded liabilities on its books.

This naturally has prompted a severe case of urban flight: Hundreds of thousands of residents, about a quarter of the city’s population, have left in just the past decade.

How did it get to this point? According to some, it’s more or less a case of bad luck. According to New York Times columnist Paul Krugman, “for the most part the city was just an innocent victim of market forces.” Poor Detroit, right?

Wrong. The blame can be placed squarely on something that Mr. Krugman is barely willing to allow played a part: “bad governance.” Consider how Detroit responded to the manufacturing decline.

The city’s leaders could have spearheaded policies that would encourage the private sector to revitalize the city by creating more jobs and, therefore, more economic activity. Instead, they decided to employ a blunt and frequently ineffective tool: the heavy hand of government. They raised taxes. They increased rules and regulations.

Worse, “city leaders took their cues from the auto industry by growing government through generous promised but unaffordable future pension and health care benefits,” Heritage Foundation analyst Alison Acosta Fraser writes. “In fact the biggest share of Detroit’s debt comes from these unaffordable promises: $6 billion in health and other post-employment benefits for retirees and $3 billion in pensions.”

Now, when you govern by taxing, borrowing and deferring on pension payments, you can postpone the day of reckoning, but you can’t deny it entirely. Sooner or later, the bills come due. Detroit finally reaped the bitter fruit of its ill-advised policies when it was forced to file for bankruptcy.

This brings us back to our gamblers. Just as it would be easy to make the natural consequences of their irresponsible actions magically vanish by covering their debts, some are calling for a federal bailout of Detroit. This seemingly compassionate action, though, is the worst thing anyone could do for the city.

It’s bad enough that a bailout would be patently unfair to taxpayers who aren’t at fault in Detroit’s failure to govern itself, but the city itself would learn nothing. The bad behavior that led it to this point would go uncorrected.

What would other cities that are dealing with some of the same fiscal problems conclude from seeing Washington step in to “rescue” Detroit? That the solution to their problems lies in putting their financial woes in Uncle Sam’s hands? What about union leaders across the country who already have been agitating for higher taxes?

The solution is not a bailout. It’s bankruptcy.

- Ed Feulner is founder of the Heritage Foundation.

First appeared in The Washington Times

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