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Detroit declares bankruptcy

Not in Canada though. We regulated our banks and to a much greater degree our pension funds. Banksters were not allowed to sell questionable financial products to local government bureaucrats. We also went all the way for a public health option. Making our health care costs less than half what Americans pay. America's experiment of relaxing regulations looks like an utter failure.
 
Nemo888 said:
Not in Canada though. We regulated our banks and to a much greater degree our pension funds.

What? Have you any clue what the pension fund requirements are sitting on the books of cities, provinces and the federal government plus some pretty major businesses? We are sitting on a powder keg!


Banksters were not allowed to sell questionable financial products to local government bureaucrats. We also went all the way for a public health option.

Making our health care costs less than half what Americans pay. America's experiment of relaxing regulations looks like an utter failure.

You do realize that health care consumes 41% or more of provincial government's budgets....right?
 
Our health care costs are not totally unreasonable ~ they are too high, but nothing like the American model. What's wrong with health care is that the "outcomes" are poor; we pay too much and we get too little. And that, too, is part of the "dream" which we voted for ourselves. But it's really a nightmare, isn't it, when as GAP says, healthcare spending goes up and up and up, crowding out education and infrastructure and public safety and good sewers, and all for worse and worse outcomes?
 
Here, reproduced under the Fair Dealing provisions of the Copyright Act from Bloomberg is the right answer:

http://www.bloomberg.com/news/2013-07-19/detroit-goes-from-motor-city-to-junkyard.html
Bloomberg_logo.png

Detroit Goes From Motor City to Junkyard

By Megan McArdle

Jul 19, 2013

A Michigan judge has just declared that Detroit must withdraw the petition for bankruptcy that it filed yesterday, criticizing Michigan's governor Rick Snyder for rushing the filing before she could rule on a bid by bond investors and pensions to stop the city from stiffing them.

But notwithstanding the judicial ruling and attempted procedural trickery, Detroit faces an ugly and unyielding truth: It can’t pay its debts and obligations. The city’s financial condition has been weak for decades, and over the last 15 years, it has collapsed. Since peaking in 1950, the population of the city has fallen by more than half; what’s left is poor, with a median household income of only $27,862. Unfortunately, Detroit still has the size and government benefits structure of a much larger, more prosperous city. Something has to shrink.

igu5wAFmgv7I.png

Source: Office of Emergency Manager Kevyn D. Orr, City of Detroit

Unfortunately, most of that “something” looks to be its promises to retirees. Much of the city’s private debt is secured, and while investors in its general obligation bonds will probably take a huge loss, that won’t be enough to protect pension funds and other retiree benefits, which have billions and billions of dollars in outstanding unfunded obligations. The 2008 financial crisis whacked Detroit’s pension assets, just as it did every other pension in the country. But the city was in a particularly bad position to recover, because it had no cash to make up the deficits, and no prospect of getting any in the future. The city has been borrowing to make up for its contribution deficits. Meanwhile, firefighters and police have been rushing to retire early so that they won’t get their pay cut by Detroit’s emergency management plan.

This hasn’t done them much good; instead, they may yet get their pension benefits cut. The judge can order the bankruptcy stayed. She cannot, however, order into existence the resources needed to pay the pensions. Cutting pensions is monstrously unfair to city workers who have been planning on those benefits for decades -- and particularly hard on police and firefighters, who are not eligible for Social Security benefits. But the city has no choice. A median income of $27,000 a year is not enough to cover the generous benefits that more prosperous governments promised decades ago.

iQH.o_YUHHQg.png

Source: Office of Emergency Manager Kevyn D. Orr, City of Detroit

The pale blue space represents pension obligation certificates -- borrowing to fund the gap between the pension funds’ liabilities, and their assets. The rest of the debt can be written down, but pension obligations will keep racking up every year unless something drastic is done. (Source: Detroit Emergency Manager’s Report)

Even a big haircut for both bondholders and pensioners may not be enough. If the city defaults on its general obligation bonds -- bonds voted in by taxpayers, and “secured” by future tax revenue -- it will have to balance its budget every year. Shedding bond payments will buy a temporary reprieve, but over time, the need to keep the budget balanced is going to force ever-deeper cutbacks in other areas, including pensions, unless something changes.

You never want to count a city entirely out. Still, it’s hard to see where Detroit’s recovery will come from. In earlier decades, the suburbs that absorbed much of the city’s population could at least be counted on to provide a trickle of commerce; now, the whole region is ailing along with its biggest industry. The modern automobile industry is dispersed, no longer dependent on the cheapness of shipping iron and coal across the Great Lakes. Detroit’s once prime location has become a snowy northern outpost, far from every thriving urban center except Chicago. Large swaths of the city are slowly reverting to the farmland they were built on.

Detroit’s Chapter 9 filing is necessary; everyone except the bondholders and the union members seems to recognize that much. But will it be enough? Bankruptcy can shrink the obligations the city must pay. Yet what is really needed is to shrink the city itself, and its workforce, into a size more appropriate to today’s economic realities. And unfortunately, no judge has the power to order such a transformation.


The key bits are: "Detroit still has the size and government benefits structure of a much larger, more prosperous city. Something has to shrink," and "what is really needed is to shrink the city itself, and its workforce, into a size more appropriate to today’s economic realities."
 
E.R. Campbell said:
Our health care costs are not totally unreasonable ~ they are too high, but nothing like the American model. What's wrong with health care is that the "outcomes" are poor; we pay too much and we get too little. And that, too, is part of the "dream" which we voted for ourselves. But it's really a nightmare, isn't it, when as GAP says, healthcare spending goes up and up and up, crowding out education and infrastructure and public safety and good sewers, and all for worse and worse outcomes?

This may be a simplistic view but isn't the ballooning healthcare costs temporary in nature? In that the baby-boom generation is aging and therefore eating up more healthcare resources with the 'worse outcomes' being due to the fact that they are old and have a lower survivability rate? So once this tidal wave of elderly persons dies off it'll balance out?

I stand-by to be corrected of course.
 
Towards_the_gap said:
This may be a simplistic view but isn't the ballooning healthcare costs temporary in nature? In that the baby-boom generation is aging and therefore eating up more healthcare resources with the 'worse outcomes' being due to the fact that they are old and have a lower survivability rate? So once this tidal wave of elderly persons dies off it'll balance out?

I stand-by to be corrected of course.
There are other ways to address the problem...
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The tail end of the Boomer generation will be around into the 2040s, so "temporary" means that a young person just entering the work force will spend their productive earning years paying for health care, pensions and accumulated debt racked up by this generation.
 
Towards_the_gap said:
This may be a simplistic view but isn't the ballooning healthcare costs temporary in nature? In that the baby-boom generation is aging and therefore eating up more healthcare resources with the 'worse outcomes' being due to the fact that they are old and have a lower survivability rate? So once this tidal wave of elderly persons dies off it'll balance out?

I stand-by to be corrected of course.


The "boomers" have an impact, as they do on most consumption issues, but the costs appear to not be driven solely (or even mainly?) by by gross demand. Cost have soared, especially in the USA, on the supply side of the equation. There is an inherent conservatism in medicine, I think, driven, in part, by doctors' desire to "do no harm" and, also partly, by their desire to keep the costs of medical malpractice insurance within bounds. Test after test piled upon test is now the norm for every annual check-up. All those tests are, certainly, "comforting" (if not always "comfortable") for the patient and the physician but they all cost money.

In the domain of unintended consequences, governments, in their efforts to control costs, attacked the supply of doctors, nurses and hospital beds, rather than demand, and, thereby, actually seem to have raised rather than lowered overall delivery costs.
 
Thucydides said:
The tail end of the Boomer generation will be around into the 2040s, so "temporary" means that a young person just entering the work force will spend their productive earning years paying for health care, pensions and accumulated debt racked up by this generation.

To add:  All of whom are well past working age and no longer contribute into the system.  Leading to a large overall drain, and leaving less for the current generation for when they retire.

Japan is probably one of the worst off in the world with its rapidly aging population, where the average age is upwards of 46.  By 2030; 25% of the population will be over the age of 65.
 
The tail end of the Boomer generation will be around into the 2040s, so "temporary" means that a young person just entering the work force will spend their productive earning years paying for health care, pensions and accumulated debt racked up by this generation.

To add:  All of whom are well past working age and no longer contribute into the system.  Leading to a large overall drain, and leaving less for the current generation for when they retire.

We had a 2% pension accrual rate with the city I worked for. It has since been negotiated up to 2.33%. This will benefit candidates now coming on the job by allowing them to "max out" five years faster than we did.

 
Robert0288 said:
To add:  All of whom are well past working age and no longer contribute into the system.  Leading to a large overall drain, and leaving less for the current generation for when they retire.

Japan is probably one of the worst off in the world with its rapidly aging population, where the average age is upwards of 46.  By 2030; 25% of the population will be over the age of 65.

Tell you what, pay me back all the money I've paid (and am still paying) into the system and I won't ask the government for anything.

That's all the UI premiums I've paid and never used. All my CPP contributions and everything else they take that is supposed to weather me through old age.

Give it all back now and I'll go away. You won't have to worry about supporting me when I retire.
 
mariomike said:
We had a 2% pension accrual rate with the city I worked for. It has since been negotiated up to 2.33%. This will benefit candidates now coming on the job by allowing them to "max out" five years faster than we did.

The problem is that Detroit (like many other bankrupt and near bankrupt US cities) made very generous pension promises, but had no viable plan to  actually accumulate the money to pay these promises out. The unfunded liabilities for US State and Municipal pensions and benefits for government workers is estimated to be $2 Trillion dollars. The violent reaction of Wisconsin public service union workers to being asked to contribute more to fund their pensions shows what US politicians are up against, and there is a certain amount of vitriol on this board to the increasing pension contributions we are being asked to make.

Before we get too smug, Canada has an unfunded liability for Federal pensions of $500 billion (in the same order of magnitude as the national debt). I have been trying to see what the figures might be for the Provinces and Municipalities, but so far have not been able to come up with any sort of comprehensive or even comprehensible set of figures.

So unless there is a pretty dramatic pension overhaul or drastic changes to the tax and regulatory structure to boost economic growth to Indian or Chinese levels, we might be seeing this conversation being repeated about Canadian institutions as well.
 
there was an article in the Wpg Free Press a couple of weeks ago decrying the unfunded liabilities the city owes for it's police/fire pensions....it would be a fair guess this is not the only city/municipality cringing at the future payouts....
 
GAP said:
there was an article in the Wpg Free Press a couple of weeks ago decrying the unfunded liabilities the city owes for it's police/fire pensions....it would be a fair guess this is not the only city/municipality cringing at the future payouts....

Winnipeg owes $130M to the police pension plan: http://www.winnipegsun.com/2013/02/27/live-from-city-council and http://winnipeg.ca/cao/media/news/nr_2013/nr_20130219.stm



 
Walter Russel Mead on how Detroit is caught between a rock and a hard place. I somehow doubt that there is any sort of viable solution without a hard reboot (essentially tossing the administration, the bureaucracy and ripping up every contract and agreement and starting from zero). Not mentioned is the further fallout for Windsor and the rest of Michigan...

http://blogs.the-american-interest.com/wrm/2013/07/20/detroit-court-case-presents-an-impossible-choice/

Detroit Court Case Presents an Impossible Choice

Detroit’s bankruptcy has just teed up one of the most consequential court cases in recent memory. As part of the plan to help the city exit bankruptcy, the government will likely cut pensions promised to city workers, a move allowed under federal law. But there’s a catch: the state constitution of Michigan forbids it. Citing this fact, a state judge ruled the bankruptcy unconstitutional (she also rather bizarrely argued that the bankruptcy doesn’t ”honor the (United States) president, who took (Detroit’s auto companies) out of bankruptcy”). The WSJ has more:

But despite the judge’s ruling on Friday, the issue is likely far from settled, said legal experts.

“It’s an issue that’s completely up for grabs,” said Gary Klausner, a bankruptcy lawyer at Stutman Treister & Glatt in Los Angeles, who has worked on Chapter 9 cases. “You just haven’t seen too many courts deal with it.”

Detroit’s situation seems almost unprecedented, and it’s not clear how the city can best respond to it. The unions’ biggest problem is that Detroit simply cannot pay their pension claims without destroying city services. Detroit doesn’t have the money to provide even minimal services to its current population while paying off the large numbers of retired workers, many of whom hail from times when the city was larger and richer.

Because there is no money, there is no solution that gives the unions the relief they seek.  Total obedience to the state constitutional mandate might not be possible, and that’s a problem. The government can pass a law saying that everyone has a constitutional right to a free trip to the moon, but if it doesn’t build the spacecraft that can get you there the right is void.

While the principle that federal law trumps state law on most issues is pretty clear, there are real arguments on both sides in this complicated case. But if the state constitution is unenforceable as well as being in conflict with federal law, it would be that much harder for the state constitution to block the execution of federal bankruptcy law.

However the courts eventually decide, decades of misgovernance, the criminal corruption of the Democratic Party in Detroit, and the depraved indifference of politicians at every level as crooks and hacks conspired together to loot and wreck a great American city have brought us to a place where Detroit’s problems seem almost beyond solution. The saddest part of this story is that there is still much, much more pain to come for a lot of people. Both the residents of current day Detroit and the cops, teachers, firefighters and others who trusted in the promises of Detroit politicians and union officials face a world of hurt.

Detroit is going to need some outside help to get back on its feet, but that help should be tied to deep reform in the way city government works. Many liberals will want to offer the help without requiring reform; many conservatives will want to impose the reform without offering the help. Republicans need to do more than gloat over the ruins, and Democrats need to do more than wring their hands. Detroit can become a great example of a post-blue city emerging from the ashes, but that won’t happen unless some smart people in both parties take the crisis as the call for creative thinking.

At Via Meadia, we’ll be looking for practical ideas for making Detroit work again; this crisis is a challenge for everyone who cares about the future of the United States. It’s not enough to find fault with what has been done in the past; what matters is figuring out how to make a better future. We’d like to see more competition between the left and the right to develop creative approaches to the problems of Detroit: that’s the kind of intellectual and political competition the whole country needs.
 
recceguy said:
Tell you what, pay me back all the money I've paid (and am still paying) into the system and I won't ask the government for anything.

That's all the UI premiums I've paid and never used. All my CPP contributions and everything else they take that is supposed to weather me through old age.

Give it all back now and I'll go away. You won't have to worry about supporting me when I retire.

I'm not calling you out on this.  Simply stating the facts.  As a generation; You (if your of that age) had to support a much smaller group infront of you, who generally lived shorter lives, and still managed to eat up a lot of your collective UI and CPP contributions.

Now as the babyboomers are leaving the work force and no longer providing as many goods and services (in terms of production of goods or sale of labour) to the community.  There is a much smaller group supporting a much larger group with less resources and who are statistically living longer lives (supported longer).

Whats going to end up happening, is that somewhere along the line the system will break.  Because it wont change, the classic failure of a democratic system will kick in, a 'tyrany of the majority'.  Where the system can't be changed, because the majority of the country will not allow their own benefits to disappear and be voted away.

Other than doubling our fertility rate or importing immigrants by the million to keep the economics stable.  You tell me what the answer is.  Because in the next 20 years japan will collapse under its own weight, and we wont be far behind.
 
If you factor out infant mortality, childhood mortality and deaths of women during childbirth people live to the same age now as they always did. Your average number of years left if you hit 65 is essentially unchanged. Making most of the talk about cutting pensions rather dubious.

Add Mike Harris's "megacity" amalgamations to cheaper healthcare, banking and pension regulations. I don't see Detroit happening here thanks to a far right wing leader's visionary forward thinking. There is a huge difference between Detroit and greater Detroit.

http://robertreich.org/
Detroit, and the Bankruptcy of America's Social Contract

By Robert Reich

21 July 13


One way to view Detroit's bankruptcy - the largest bankruptcy of any American city - is as a failure of political negotiations over how financial sacrifices should be divided among the city's creditors, city workers, and municipal retirees - requiring a court to decide instead. It could also be seen as the inevitable culmination of decades of union agreements offering unaffordable pension and health benefits to city workers.

But there's a more basic story here, and it's being replicated across America: Americans are segregating by income more than ever before. Forty years ago, most cities (including Detroit) had a mixture of wealthy, middle-class, and poor residents. Now, each income group tends to lives separately, in its own city - with its own tax bases and philanthropies that support, at one extreme, excellent schools, resplendent parks, rapid-response security, efficient transportation, and other first-rate services; or, at the opposite extreme, terrible schools, dilapidated parks, high crime, and third-rate services.

The geo-political divide has become so palpable that being wealthy in America today means not having to come across anyone who isn't.

Detroit is a devastatingly poor, mostly black, increasingly abandoned island in the midst of a sea of comparative affluence that's mostly white. Its suburbs are among the richest in the nation. Oakland County, for example, is the fourth wealthiest county in the United States, of counties with a million or more residents. Greater Detroit - which includes the suburbs - is among the nation's top five financial centers, the top four centers of high-technology employment, and the second-biggest source of engineering and architectural talent. Not everyone is wealthy, to be sure, but the median household in the region earns close to $50,000 a year, and unemployment is no higher than the nation's average. The median household in Birmingham, Michigan, just across the border that delineates the city of Detroit, earned more than $94,000 last year; in nearby Bloomfield Hills - still within the Detroit metropolitan area - the median was more than $150,000.

The median household income within the city of Detroit is around $26,000, and unemployment is staggeringly high. One out of 3 residents is in poverty; more than half of all children in the city are impoverished. Between 2000 and 2010, Detroit lost a quarter of its population as the middle-class and whites fled to the suburbs. That left it with depressed property values, abandoned neighborhoods, empty buildings, lousy schools, high crime, and a dramatically-shrinking tax base. More than half of its parks have closed in the last five years. Forty percent of its streetlights don't work.

In other words, much in modern America depends on where you draw boundaries, and who's inside and who's outside. Who is included in the social contract? If "Detroit" is defined as the larger metropolitan area that includes its suburbs, "Detroit" has enough money to provide all its residents with adequate if not good public services, without falling into bankruptcy. Politically, it would come down to a question of whether the more affluent areas of this "Detroit" were willing to subsidize the poor inner-city through their tax dollars, and help it rebound. That's an awkward question that the more affluent areas would probably rather not have to face.

In drawing the relevant boundary to include just the poor inner city, and requiring those within that boundary to take care of their compounded problems by themselves, the whiter and more affluent suburbs are off the hook. "Their" city isn't in trouble. It's that other one - called "Detroit."

It's roughly analogous to a Wall Street bank drawing a boundary around its bad assets, selling them off at a fire-sale price, and writing off the loss.  Only here we're dealing with human beings rather than financial capital. And the upcoming fire sale will likely result in even worse municipal services, lousier schools, and more crime for those left behind in the city of Detroit. In an era of widening inequality, this is how wealthier Americans are quietly writing off the poor.
 
Thucydides said:
I have been trying to see what the figures might be for the Provinces and Municipalities, but so far have not been able to come up with any sort of comprehensive or even comprehensible set of figures.

Thucydides, this may be of interest to you ( and possibly others ).

The Ontario Municipal Employees' Retirement System (OMERS) recently made three proposals that would affect benefits earned in the future. There would be no effect on benefits / pension earned before the effective date.

1) Reduce Pension Benefit Indexing to 50% - Members retiring after the effective date of the proposal will continue to be entitled to indexing at 100% of the increase in the Consumers Price Index (CPI), for service up to the effective date (December 31, 2015 as amended). Pension benefits earned after the effective date will only be subject to indexing at 50% of the increase in CPI. In the future, the SC would decide whether pension benefits earned after the effective date would receive additional indexing (i.e. up to 100% of the increase in CPI). The proposal, in its amended form, provides for additional indexing up to 100% of the increase in CPI for the ten years following December 31, 2015, for any pensions in payment during that period. The amended proposal also contemplates a commitment by the SC to fully restore the indexing provisions of the plan when financial conditions allow.

2) Delay Early Retirement Eligibility – Members can still retire 10 years before their normal retirement age (i.e. age 50 or 55). However, pension benefits earned after December 31, 2015 may be reduced by a larger amount for those who elect to retire more than 5 years prior to their normal retirement age.

3) Reduce Annual Benefit Accrual Rate – This proposal would reduce the formula for determining the pension benefit earned after December 31, 2014 (but only on earnings over the CPP maximum earnings level – the YMPE). There is no effect on benefits that will have been earned before the effective date.

The vote was held at the 25 June, 2013 meeting. All three proposals failed.

 
Nemo888 said:
If you factor out infant mortality, childhood mortality and deaths of women during childbirth people live to the same age now as they always did. Your average number of years left if you hit 65 is essentially unchanged. Making most of the talk about cutting pensions rather dubious.

Add Mike Harris's "megacity" amalgamations to cheaper healthcare, banking and pension regulations. I don't see Detroit happening here thanks to a far right wing leader's visionary forward thinking. There is a huge difference between Detroit and greater Detroit.

http://robertreich.org/
Detroit, and the Bankruptcy of America's Social Contract

By Robert Reich

21 July 13


One way to view Detroit's bankruptcy - the largest bankruptcy of any American city - is as a failure of political negotiations over how financial sacrifices should be divided among the city's creditors, city workers, and municipal retirees - requiring a court to decide instead. It could also be seen as the inevitable culmination of decades of union agreements offering unaffordable pension and health benefits to city workers.

But there's a more basic story here, and it's being replicated across America: Americans are segregating by income more than ever before. Forty years ago, most cities (including Detroit) had a mixture of wealthy, middle-class, and poor residents. Now, each income group tends to lives separately, in its own city - with its own tax bases and philanthropies that support, at one extreme, excellent schools, resplendent parks, rapid-response security, efficient transportation, and other first-rate services; or, at the opposite extreme, terrible schools, dilapidated parks, high crime, and third-rate services.

The geo-political divide has become so palpable that being wealthy in America today means not having to come across anyone who isn't.

Detroit is a devastatingly poor, mostly black, increasingly abandoned island in the midst of a sea of comparative affluence that's mostly white. Its suburbs are among the richest in the nation. Oakland County, for example, is the fourth wealthiest county in the United States, of counties with a million or more residents. Greater Detroit - which includes the suburbs - is among the nation's top five financial centers, the top four centers of high-technology employment, and the second-biggest source of engineering and architectural talent. Not everyone is wealthy, to be sure, but the median household in the region earns close to $50,000 a year, and unemployment is no higher than the nation's average. The median household in Birmingham, Michigan, just across the border that delineates the city of Detroit, earned more than $94,000 last year; in nearby Bloomfield Hills - still within the Detroit metropolitan area - the median was more than $150,000.

The median household income within the city of Detroit is around $26,000, and unemployment is staggeringly high. One out of 3 residents is in poverty; more than half of all children in the city are impoverished. Between 2000 and 2010, Detroit lost a quarter of its population as the middle-class and whites fled to the suburbs. That left it with depressed property values, abandoned neighborhoods, empty buildings, lousy schools, high crime, and a dramatically-shrinking tax base. More than half of its parks have closed in the last five years. Forty percent of its streetlights don't work.

In other words, much in modern America depends on where you draw boundaries, and who's inside and who's outside. Who is included in the social contract? If "Detroit" is defined as the larger metropolitan area that includes its suburbs, "Detroit" has enough money to provide all its residents with adequate if not good public services, without falling into bankruptcy. Politically, it would come down to a question of whether the more affluent areas of this "Detroit" were willing to subsidize the poor inner-city through their tax dollars, and help it rebound. That's an awkward question that the more affluent areas would probably rather not have to face.

In drawing the relevant boundary to include just the poor inner city, and requiring those within that boundary to take care of their compounded problems by themselves, the whiter and more affluent suburbs are off the hook. "Their" city isn't in trouble. It's that other one - called "Detroit."

It's roughly analogous to a Wall Street bank drawing a boundary around its bad assets, selling them off at a fire-sale price, and writing off the loss.  Only here we're dealing with human beings rather than financial capital. And the upcoming fire sale will likely result in even worse municipal services, lousier schools, and more crime for those left behind in the city of Detroit. In an era of widening inequality, this is how wealthier Americans are quietly writing off the poor.

Kind of what I already said, without the fluff.
 
I notice the US media is being very quiet about the "how" Detroit failed. This is unfortunate, because many of Detroits faults are being replicated on greater or lesser scales all around. Even Canadian cities are prey to many of the faults and impulses that laid out Detroit and a multiplicity of bankrupt California cities (I can easily identify several of the factors operating in my home town of London ON, and point to our depressing 9.6% unemployment rate as a leading indicator of how things might go in the future). Detroit didn't "just" happen, and looking upthread, I could offer the counterpoint that many people in the US use the "walling off" techniques like preemptive incorporation in order to prevent Detroit style disasters from engulfing them. (preemptive incorporation means setting your district/community up as a municipality of its own, with the powers to tax, set bylaws, offer services etc. before another polity can absorb your community and tax you to provide "their" services etc. US laws are different in that it is much harder to absorb incorporated municipalities into a "greater metro" type area).

http://blogs.the-american-interest.com/wrm/2013/07/23/note-to-paul-krugman-it-took-more-than-markets-to-ruin-detroit/

Note to Paul Krugman: It Took More Than Markets to Ruin Detroit

Paul Krugman wrote yesterday that, despite “political and social dysfunction,” the fact is that “decline happens,” meaning the decline of Detroit is actually “just one of those things that happens now and then in an ever-changing economy.”

That perspective is hard to square with the seemingly never-ending torrent of bad news from Detroit. The FT reported today that the city’s pension liabilities may be much worse than the $3.5 billion stated in its bankruptcy filing. Years of dubious investments and unrealistic expectations may be hiding obligations that would render the $3.5 billion “significantly understated”:

Mr Orr and his advisers claim that about 30 per cent of the investments in the general fund fall into the category of “other”—riskier, less transparent—investments, and include real estate transactions and development deals in Detroit itself that lacked sufficient oversight and vetting from professional investment advisers.

Such projects included funding for unprofitable real estate developments and Tradewinds Airlines, a US cargo airline, which is now defunct and lost all its value two years ago, Mr Orr told the Financial Times. [...]

Bill Nowling, a spokesman for Mr Orr, said that the assumptions on everything starting with expected returns (about 8 per cent for each fund—in a zero interest rate world) “were generous and aggressive. They painted as rosy a picture as they could.”

Does Krugman think that conscious deceit and fraud in the administration of the pension systems on which tens of thousands of people depend are just impersonal free market forces?

City and union officials and investment advisers have already been charged with fraud in the management of Detroit’s pension funds. The news that officials are also guilty of idiotic and irresponsible investment decisions should come as no surprise to emergency manager Kevyn Orr, or even to New York Times pundits.

Krugman is right that Detroit is essentially Ground Zero of the disruptive changes wrought by an economy in transition. But as this story and others like it show, it’s difficult not to conclude that the city is also the victim of rampant fraud and stupidity on the part of an all-Democratic political machine. Officials decided time and again not to fund the promises they made to city pensioners, and feds and regulators just as often declined to do anything about it. If something this egregious and destructive were happening in the private sector, Mr. Krugman would (rightly, in our view) be all over it, demanding that people go to jail and regulations be tightened. He would want to investigate the ties of influence that allowed serious financial wrongdoing to go on for years without serious oversight. He’d name names and pin shame on the wrongdoers and their political allies.

Detroit didn’t just wither in the face of changing economic conditions. It failed to adapt. Motor City is littered with dumb “recovery” ideas like the grandiose and badly named “Renaissance Center” in the dead heart of downtown. Race baiting politics by corrupt hacks who cynically invoked racial stereotypes and stoked hatred to build popular support for criminal rule (a milder, home-grown style of the politics of Robert Mugabe in Zimbabwe) made a bad situation much worse. The soft bigotry of low expectations meant that neither federal nor state prosecutors intervened until very late as the thieves looted the ruins. The civil rights establishment kept its eyes devoutly averted and its lips firmly sealed as a generation of fraudsters ruined the city, wrecked the pension system, turned city administration into a swamp of ineffective and corrupt failure, and denied a generation of schoolchildren any serious educational opportunity.

Is all this really “just one of those things?” Is it the fault of “free markets” that felons and race baiters looted Detroit when they should have been crafting a recovery? Krugman is normally a fan of financial market regulation. Surely a system that allows public union leaders and political hacks to lie to workers about the safety of their pensions cries out for regulation of some kind?

America’s rapidly changing economy is by nature going to leave some people coughing in its dust, but there’s no denying that it was people who cheated on and lied to the citizens of Detroit. Letting crooks off the hook for their role in human suffering has no place in liberalism and does a disservice to those in Detroit hoping that America’s thought leaders are working to remake their city in the image of responsibility and integrity.

Economic change alone did not wreck Detroit, and political malpractice alone did not loot it. But official negligence, a criminal local political class, and inadequate public sector pension regulation combined with economic change to take a great American city down.

Of all these forces, economic change, however disruptive, at least has an upside. Learning to live with and even benefit from economic change while managing the costs is the task that every single city and town in the United States needs to get on with. Fatalistic handwringing is no answer. (And to his credit, we don’t think that is the course of action that Krugman really recommends.)

But we do wish that when politicians behave as badly as crooked people in the private sector, more liberal and left wing intellectuals (to say nothing of the civil rights leadership) would call out the liars, demagogues and thieves who prey so adeptly and so destructively on the poor.
 
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