Detroit, Facing Bankruptcy, Refuses to Pay $2.5B in Debts
June 17th, 2013
Detroit, Michigan used to be a symbol of American industrial might. Once home to a substantial portion of the nation’s auto industry, Motor City has slipped into economic free fall after decades of government intervention into the economy. Public sector union bosses have long pushed for unsustainable labor contracts for city workers, many of whom are planning to retire on pensions paid for by the city. However, those pensioners are now facing the prospect of only receiving ten cents on every dollar of their promised pay, as the un-elected city manager, appointed by the state government, just announced that Detroit will be defaulting on $2.5 billion worth of debts in an effort to stave off what could be one of the largest city bankruptcies in US history.
Despite this bold movie, allegedly aimed at keeping police and firefighters employed while the city faces a mounting $17 billion in debt, there’s still a serious chance that Detroit will have to file for bankruptcy anyway. With its population fleeing to other states in search of jobs, one of America’s former industrial giants is left in shambles. Detroit’s situation proves that when politicians refuse to cut the budget, the budget will eventually cut itself.
When Government Refuses to Pay
When politicians promise away the public treasury, taxpayers are typically looted to cover their claims. However, when politicians fund promises through debt schemes and municipal bonds, the recipient sometimes gets the short end of the stick when budget shortfalls make payments impossible. Detroit city workers were promised pensions in exchange for their work, and the city is only offering them ten cents on the dollar by comparison. Countless services were performed for negotiated fees which will no longer be paid.
Whenever budget cuts are suggested, the party that introduces the idea typically faces excoriation over a perceived interest in “screwing over” whichever group traditionally receives the funding in question. However, if excessive-spending apologists were truly concerned about the plights of teachers, police officers, and other city workers, they would want the city to maintain a sustainable budget. After all, when it doesn’t, no one gets paid.
Budget Cuts Have Become Politically Impossible
Detroit is in many ways the most visible victim of a nationwide political problem — no one wants to cut government spending. Governments at all levels are floating unprecedented deficits, and, in some cases, legislatures continue to spend more and more. Officials in Detroit kept kicking the can down the road in hopes that the reckoning would come after their terms in office. Now, the time has come to pay the piper, and no more tricks will hide the truth. These debts won’t be paid back, and the city’s promises can’t be kept.
The nation at large could learn an important lesson from Detroit’s experience. The public treasury is not unlimited. Government is not Superman, the Tooth Fairy, or Harry Potter, and it can’t do and be everything for everyone. When city officials dole out contracts to their friends and promise exorbitant pay and benefits for every city employee, public funds eventually dry up. Let’s hope this situation leads to more political will for cuts at all levels of government, before more dominoes begin to fall.
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