America as Detroit
The malignant cancer cells oozing from the petri dish of progressive policy known as the City of Detroit are soon to metastasize throughout the body politic. The disease, which has been described by Mark Steyn as the “malign alliance between a corrupt political class, rapacious public-sector unions, and an ever more swollen army of welfare dependents,” will first lay low other formerly great American cities. Newark, Oakland, Cleveland and Los Angeles initially come to mind. But the same fate awaits nearly every other large municipality ruled for generations by so-called progressive thinkers.
Once U.S. cities have danced to Motown’s latest bankruptcy beat, it will be the rest of America’s turn to confront unfunded liabilities. In the case of Detroit, fully half of what the city owes—$9 billion out of Detroit’s unpayable $18 billion—is the unfunded pension liabilities to retired public employees and those still on the city’s payroll.
But wait. $9 Billion? $18 Billion? Those amounts are mere rounding errors in the context of the U.S. budget deficit and aggregate national debt. Former Obama car czar Steve Rattner opined recently in the New York Times that “the 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them.”
But Detroit’s fiscal problems are not a natural disaster. Indeed, the city’s economic and social problems are what Secretary of Homeland Security Janet Napolitano might have called a “man-caused” disaster. Rattner even obliquely acknowledges that free will was behind Detroit’s disaster. The six words preceding his plea for a second, smaller Detroit bailout (GM was the first) were “[b]ut apart from voting in elections...”
That is the rub. There is, there never has been, and there never will be a free lunch. Yet Americans have been voting themselves money since LBJ’s Great Society. According to the Federal Reserve, the nation’s unfunded liabilities stand  at over $125 trillion, including Medicare ($86.6 trillion), prescription drugs ($21.8 trillion) and Social Security ($16.4 trillion), which amount does not include the $16.8 trillion current U.S. Treasury debt. These entitlement programs were sold to the public as “pay as you go” and were supposed to build surpluses to balance already known future demographic shifts. But leaders in both major parties invaded these programs’ current income (from payroll taxes) to win votes by financing discretionary programs such as farm supports, food stamps, weapon systems, student loans, housing-loan guarantees, green-energy subsidies and literally hundreds of other spending initiatives—all for political constituencies capable either of making contributions or putting political boots on the ground.
Politicians, particularly with the IRS as unpopular as it is today, know that they cannot raise taxes any further, even on that “fellow behind the tree,” as Senator Russell Long famously quipped. Congress also knows that with a Federal Reserve as compliant as Chairman Bernanke’s, there is no current restraint on borrowing. Both parties assume that the Fed simply will print up sufficient digital dollars to purchase any federal IOUs that cannot be sold. For fiscal year 2013, that has been $540 billion, the price tag for nearly all nonmilitary discretionary spending.
But the final reckoning is approaching. When Bernanke merely hinted that the Federal Reserve’s $85 billion per month of debt monetization might be “tapered” back, even by a little, the stock market swooned. Mortgage rates jumped dramatically. This rate increase threatened the so-called “housing recovery,” which is nothing more than a reinflation of the housing bubble originally pumped up by the Federal Reserve’s last attempt to prevent the markets from cleaning out the aggregated malinvestment since former Fed chairman Alan Greenspan rescued the market in 1987. The Fed then spent the better part of two weeks explaining away and backing off from its “taper” talk.
The Fed cannot taper—not today, not ever. Tapering would mean that the economy has reached self-sustaining growth. But the economic recovery, hamstrung by increased regulatory initiatives in finance, healthcare and energy, as well as higher taxes on job creators and increased subsidies to politically favored but unproductive industries (for example, low-rate student loans despite bleak job prospects for many graduates), is the weakest since 1948.
In eight out of the ten recoveries since World War II, employment was 5–7 percent higher by this point after the end of the recession than it had been at its previous peak. By that measure, the U.S. should have 10 million more jobs now than in 2007. In none of those ten recoveries were there fewer jobs than at the previous peak. Today, more than 60 months after the previous peak, there are 3 million fewer jobs. And with the ratio of full time jobs to part time jobs having fallen from nearly 5 to 4.2, the quality of the jobs that have been created is substantially poorer than in past recoveries.
Without free money, Wall Street would crash, the economy would fizzle fast, and economic progressives could lose their hold on power. But backed by substantial parts of the media and unions, the current regime will never let that happen. So be prepared for fewer and lower quality jobs, increasing federal debt, small businesses scaling employees back to part-time to avoid Obamacare mandates, debt monetization and financial repression (including no yield for savers).
In 1960, before the Great Society, Detroit was the wealthiest city per capita in America among cities with more than two hundred thousand residents. In those years, the United States was the world’s largest creditor nation. Today, Detroit is the poorest city per capita in America among cities with more than two hundred thousand residents. Today, the United States is the world’s largest debtor nation.
Welcome to Detroit, America.
Jay Zawatsky is the CEO of havePower, LLC (a natural gas infrastructure developer) and a professor of business, economics, and finance at Montgomery College in Rockville, Maryland.
Flickr/martin gonzalez . CC BY 2.0.