Even Majority Rule Can’t Dictate Economic Reality

(photo credit)

By Jeff Rutherford

Fourteen months ago, Detroit filed the biggest municipal bankruptcy ($18B) in U.S. history.  Other big government bankruptcies in the billions of dollars are:  Jefferson County Alabama (Nov 2011, $4B), Orange County California (Dec 1994, $2B), Stockton California (June 2012, $1B).

This week an article appeared in National Review, The Corrupt Bargain, summarizing the Detroit bankruptcy saga.  Here are some excerpts:

“Detroit has long been run by criminals. Former mayor Kwame Kilpatrick, currently known as prisoner No. 44678-039 in the federal lockup at El Reno, Okla., ran an outright criminal enterprise out of City Hall, and was subsequently convicted on charges ranging from racketeering and extortion to bribery and fraud. [In Oct 2013 he was sentenced to 28 years for 24 federal felony counts.]  He managed to make sewage even dirtier than it is, taking at least $1 million in kickbacks for contracts in the city’s water department. He also signed off on an odd and probably illegal deal to borrow money to make up for the city’s habitual underfunding of its pension system, thereby creating a cascading series of problems that remain with the city and have complicated its attempt to restructure its affairs in bankruptcy.

This sorry tale features almost everything there is to hate about governance in these United States: rapacious public-sector unions, a feckless city council that apparently had no idea what it was signing off on, Wall Street banks looking to benefit from political maneuvering, promises of casino revenue, and lawyers — lots of lawyers.”

“Detroit, like many U.S. cities and states, uses its pension system as a tool for political patronage, but it does it on the cheap. It made extravagant promises about retirement benefits, and put aside very little to make good on those promises.”

Correspondent Kevin D. Williamson’s blunt article goes into further detail about the rat’s nest that the bankruptcy case has now become, then he sums it up:

“So we have: a city council too short-sighted and beef-witted to understand what it was doing, a mayor who was an outright criminal, union bosses who never asked where the money was going to come from and union members who simply cashed the checks and never held their leaders to account, banks and financial firms that were happy to bet that they’d be comfortably seated when the music stopped, and lawyers and a court system happy to ignore the fact that the bankruptcy deals being worked out in Detroit are exactly as corrupt and destructive as the policies that put the city into bankruptcy in the first place. And a pox on the people of Detroit, too: They keep voting for this, over and over.”

Reminds me of some of the stories about government financial disasters in Europe, the worst being Greece.  Nobody involved in these debacles ever seems to realize – even after they collapse – that it’s their immoral cycle of using big government to promise big entitlements to buy votes to support even bigger government that is the root cause.  It is a flawed model for society, because corruption always undermines the utopian fantasy.

I suppose the dominant public opinion in America’s current political environment is that:

• the current and future pension recipients (the unionized and non-unionized government employees of Detroit, who are also voters) should be kept financially whole,
• the holders of the water/sewer project and pension guarantee bonds should take the pennies-on-the-dollar haircut, and
• the future generations of new Detroit taxpayers (if any) should be kept fully on the hook.

I can recite the argument from the Detroit pension recipients because we have the same debate happening in Colorado.  Here’s how it goes:  “Those politicians – the mayor and the city councilmen – promised us these benefits, and Michigan state law says that’s a legal contract which must be honored.  It’s not our fault they were corrupt and mismanaged it.  They made campaign promises, and we voted for them.  Once they’re in office, they’re obligated to deliver on those promises.  That’s democracy – we voted for what we want, and government must now honor what the majority voted for.”

I loudly disagree.

The Detroit voters who are beneficiaries of pensions and other underfunded/overpromised benefits must share the blame and bear some of the bankruptcy consequences.  If the voters get off scot-free for their decades of failure to care about what is financially feasible for city government to do, then the lesson will go unlearned by Detroit and by all the other big irresponsible municipalities headed for insolvency.

The impossible expectations of a delusional majority of Detroit voters can’t magically make financial fantasies possible.  If the majority of lemmings vote to walk off a cliff, that doesn’t make it a wise act.

Municipal bankruptcy consequences should be borne by ALL the accountable parties – including the delusional voters – or else we’re now literally subsidizing ignorance and insanity, and can expect more of the same until America collapses.

(graphic credit)

References:

http://www.nationalreview.com/article/386875/corrupt-bargain-kevin-d-williamson

http://www.forbes.com/sites/mikepatton/2013/07/22/detroit-files-for-bankruptcy-protection-the-facts-the-figures-and-the-fallout/

http://www.bloomberg.com/news/2013-07-19/five-things-to-know-about-detroit-s-bankruptcy.html

http://www.pbs.org/newshour/updates/municipalities-declared-bankruptcy/