Last week, Detroit became the largest U.S. city to declare bankruptcy. The story of Detroit and its decades long rise and fall from boomtown to bankruptcy should serve as a cautionary tale for all Americans from how we manage our own finances to the reckless mismanagement of state and federal finances by our elected representatives.
In the 1950′s, Detroit was the fourth-largest U.S. city with nearly 1.8 million residents and one of the country’s highest per-capita incomes. Detroit was the world-wide hub of auto manufacturing and a place where many Americans would like to live.
The current situation in Detroit is a stark contrast to the Detroit of decades ago:
- Detroit has about $20 billion in debt and unfunded liabilities
- There are many houses for sale for $500 or less
- There are approximately 78,000 abandoned homes
- 47% of the city’s residents are functionally illiterate
- 40% of the street lights do not work
- About 1/3 of the ambulances in the city are functioning
- 2/3 of the cities parks are closed
- The police respond to most calls in 58 minutes
- Detroit’s murder rate is 11 times the murder rate of New York
One of the problems plaguing Detroit is the spending on city government that does not provide any government services. Just over $11 billion of the estimated $18 to $20 billion in debt is for city pension and health care benefits to the City of Detroit’s retirees. Considering the 15% of the roughly 225,000 of people in Detroit that actually have jobs work for the government, there are less than 200,000 people paying local taxes to support the roughly 70,000 city retirees.
According to the Heritage Foundation, “For decades, Detroit sustained itself through the usual suspects of bad fiscal management: unaffordable borrowing, state grant schemes, raising taxes, and deferring public pension contributions rather than cutting city spending,”. The attitude of those mismanaging Detroit is similar to those managing our state and federal spending today.
Many blame external forces for the fall of Detroit such as the decline of American manufacturing, off-shoring, and downturns in the economy. However, the city of Detroit’s response to those external forces lead to Detroit faring much worse than other rust belt cities. By raising taxes to support more spending when revenue fell, Detroit forced out many workers and businesses reducing the tax base. Rather than try to attract businesses and curb spending, Detroit choose to make it harder for workers and businesses to remain in Detroit.
Decades of reckless spending and unfunded liabilities facilitated the end of Detroit and serves as a warning to the rest of the country. We can no longer pretend that massive spending and unsustainable debt will lead to a prosperous America. Today, politicians in Washington and State Houses across the country argue about raising taxes to support new or expanded programs to “jump start” the economy, fund pet projects, and rappidly expand unfunded liabilities from healthcare to retirements and other entitlements just as the leaders of Detroit did over the last few decades. This needs to stop before America becomes bankrupt.
