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Detroit: Resurrection Through Bankruptcy

Written by Gary North on November 27, 2013

Warren Buffett came to a meeting of Detroit’s leaders. So did Lloyd Blankenfein of Goldman Sachs. It was time for cheerleading.

Buffett pointed to the recovery of the American auto industry as the model. “Look what happened.”

How did it happen? He failed to mention these factors: (1) federal government bailout money, (2) violation of bondholders’ contractual rights, (3) massive Federal Reserve monetary base expansion.

We would be wise to understand this. Violating the contractual rights of investors in private companies is bad for business. Scared investors shift to investing in government IOUs. Violating the contractual rights of investors in government bonds is good for business. Scared investors shift to investing in business.

Goldman Sachs is teaching people how to start small businesses. That is a good idea. Where are they teaching this? In Detroit’s public schools (disintegrating) or in Detroit’s churches? I recommend the latter. There is hope inside the latter. Entrepreneurs thrive on hope, not bureaucracy. The schools are run by tenured bureaucrats. The churches are not.

The city declared bankruptcy. It stiffed the city’s retirees. The city’s unions are fighting this decision in the courts. They will lose. Even if they win in the courts, you can’t get blood out of a turnip.

The city’s decline began 40 years ago with federal subsidies and rising taxes. This money was used to support welfare programs. Are these taxes and programs still on the books? Yes. Is the city’s bureaucracy still on the payroll? Yes. Is the money there to fund them? No.

Here is a short list of what went wrong.

A “living wage” ordinance, far above the federal minimum wage, for all public employees and private contractors.

A school system that spends significantly more per pupil than the national average.

A powerful school employee union that militantly defends the exceptional pay, benefits and job security it has won for its members.

Other government employee unions that do the same for their members.

A tax system that aggressively redistributes income from businesses and the wealthy to the poor and to government bureaucracies.

Then what has changed? Bankruptcy. The city is not in a position to run up the bills again. The municipal unions have had their heads handed to them.

The bankruptcy of Detroit was a great thing. It said this: “Don’t trust government promises.” That is an uplifting message. It is also accurate.

If you refuse to identify the causes, and you provide no economic incentives to change people’s behavior, the same causes will produce the same effect.

Detroit’s leaders have not recognized the causes. But they have run out of credit. Their bad ideas do not have easy access to the capital markets any longer.

Detroit’s leaders would do it again if they could. But they can’t.

There is a solution to Detroit’s problems. It is not courses on entrepreneurship. It is the repeal of the welfare state. Bankruptcy is a good way to start on this repeal.

The state of Michigan has another approach: a $444 million hockey sports complex paid for with tax-exempt bonds.

The state is just like the Detroit city council: stupid. But there is this advantage. Money spent on this boondoggle cannot be spent on something else. Better hockey bonds than school bonds. “Better the Red Wings than pinko textbooks.” Better circuses than indoctrination.

Can Detroit recover? Yes. Will a bankrupt city finally pull back on the welfare state? It will have to. Does this offer hope? Yes.

Are some entrepreneurial people moving back? Yes. The welfare state is pushing its limits. A reversal will take place. It’s a matter of when, not if. The sooner, the better.

Old ideas die hard. The welfare state has a large constituency. I can think of no better city in America to test the resiliency of the free market. De-fund the welfare state’s programs, and Detroit will recover.

The welfare state seems to work until it runs out of other people’s money. Detroit is the poster child of a busted welfare state. Now let’s see if it can become the poster child of economic resurrection.

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5 thoughts on “Detroit: Resurrection Through Bankruptcy

  1. Igor Karbinovskiy says:

    I'm not so sure that Detroit can recover anytime soon. Is it still a democracy? Yes. In other words, majority rule. Who are the majority there? Progressives. Aren't they the same people who wrecked Detroit in the first place? Yes. They wrecked it by looting the productive people with low time preferences, and driving them away, so that the only ones who were left were unproductive parasites. Now a few productive persons have returned. They will rebuild Detroit to some extent. Then the progressives in charge will go right back to looting them and driving them away.
    I really hope you, and Mrs. DeCoster, are both right and I'm wrong. But I doubt it.

  2. I agree with you Igor. The people have not changed, neither have their leaders. Some people will come back to Detroit, until they are mugged by reality. The crime problem has not gotten better, and people will not live without security. You cannot have civilization when 90% of the children are born illegitimate. Family structure has been destroyed, unleashing terrible destructive forces (similar to the destabilization of the basic structure of the universe, the atom). Ultimately it's a moral problem. Unless morals are reformed and family structure put on a firm foundation, crime will remain rampant and Detroit's rebirth will be strangled in its crib.

  3. If Lloyd Blankenfein (actually it's Blankfein) is involved, don't expect a civics lesson in "How To Start A Viable Small Business" or "How To Put The Customer First". Detroiters will learn how to "Rip Off Your Investors And Avoid Jailtime" and "How To Dump Your Company's Losses On The Taxpayers".

  4. Re. the auto industry, you should have also mentioned that even worse, Obama gave away Chrysler to the Italians Fiat for nothing…..thanks.

  5. 305Katydids says:

    excellent article providing a good analysis of what happened and what is happening all over America, which should not only be a warning but a push to change tactics and get busy fixing before the bottom totally falls away.