Monday, December 9, 2013

Detroit: Pensions, Potholes and Promises

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

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