Friday, July 19, 2013

Coming to A City Near You -- Detroit's Fall

In the 1960s, Detroit, "Mo-Town", "Motor City" was one of the most prosperous cities in the US.

Then came "social welfare programs" and union corruption and greed.

Today, Detroit filed for bankruptcy, with a $20 billion dollar debt, 18% unemployment, 60% of the population living below the poverty line, and an approximated 50% functional illiteracy rate.

50% illiteracy is a job-growth killer. The illiteracy can be tied directly to unions, specifically teachers' unions. Teachers' unions are notorious for attempting to quash competition in the education market and lobbying against school-choice programs. Then again, school choice programs such as vouchers and rebates are difficult to enact when the city is broke. People are left unable to learn new skills that would attract businesses to a lucrative labor market.

There is little that Detroit offers the labor market. It is not a "right to work" municipality. It is a labor oligopoly that places potential workers at the whims of unions. Better qualified workers are deterred from moving there because the unions will decide what their market value is, rather than their resume and skills. In addition, the city needed money to do things like repair roads and provide water and sewer services. So, they employed Keynesian policies and taxed those who do earn a paycheck more. That deters people from wanting to work there, especially when states such as Arizona have low income tax rates and better weather. Texas offers better with no income taxes. Both are "right to work" states, as is Michigan's southern neighbor, Indiana.

With nearly 2/3 of the population living under the poverty level, the city (and state) enacted "social welfare" programs, attempting to boost the quality of life for lower-income earners. The problem is the city didn't have the money to give them.

They enacted revenue policies that shrank the tax base, then raised the rates on those that would remain. Many among that remaining base moved elsewhere further shrinking the base.

Then we come back to those unions. Municipal workers joined unions and had pension contracts. Those pensions are part of the public debt. Now, due to bankruptcy, those workers who believe they earned those pensions (and budget their expenditures accordingly) are facing potentially a potential 90% drop in their checks. Those who were wise enough to invest some of their own money in IRAs and other securities won't feel the hit as hard as those who falsely believed their pensions were secured.

Detroit failed to diversify. Anybody with a bachelor's level business degree knows that diversification is one key to long-term success. Detroit counted too much on automotive manufacturing. They put all of their eggs into one basket. Now, the US has moved into higher-tech industries that include more service-type workers. The financial and economic policies of the city did little to invite those employment sectors to the city. Higher taxes and poor infrastructure are deterrents, not incentives.

Many pundits and economic analysts will attempt to blame federal free-trade and market policies for Detroit's problems. In reality, those were not to blame. Detroit failed to adapt to the changing market and seek prosperity.

Detroit's downfall is that they chose to remain a single-ring circus that starred a one-trick pony. Any other acts that would have joined and boosted the draw were deterred or chased away.

Detroit is a union city. The UAW, among others, runs that city. You can bet, and the data would be wonderful to view as proof one way or the other, that the city government is so deep in bed with the unions that divorce is impossible. In fact, it is probably so incestuous and entrenched in nepotism and corruption that it is beyond dysfunctional. Try to find any elected city official or appointed bureaucrat who is not directly tied to a union as either a current or former member (or union official, administrator). Those few who may not be are probably the immediate family member of somebody who is. Any remaining after those filters are applied most likely have taken union dues in the form of campaign contributions.

The unions run the city services. They run the government. The unions are Detroit. That is why the GM-UAW bailout that unconstitutionally used federal taxpayer funding was referred to as "bailing out Detroit" during the 2012 elections.

The unions may have made the city unattractive to business developments. However, it is poor budgeting, Keynesian economics, and "social welfare" that bankrupted Detroit. They promised payouts. They planned for infrastructure maintenance that they could not afford. It is left unfinished and unfunded with bills for services rendered still unpaid. They promised government relief efforts in housing, subsistence, education, and health care that they couldn't afford. They projected greater revenues through forcing a small segment to "pay their fair share" (meaning pay for everything), without incorporating the Laffer Curve in their policies.

Look, if you put a 1 cent tax on all fruit, nobody will really notice. If you put a 20 cent tax on each orange, instead, people will start opting for apples, grapes, lemons, limes, or grapefruits. The oranges will rot or be shipped elsewhere to be sold. You won't collect that 20 cents.

Since 2010, several US municipalities filed for bankruptcy. Among them are San Bernadino, Mammoth Lakes and Stockton, California. Those cities are also notorious for socialist programs and using Keynesian economics. Other "progressive" cities in the same boat are Central Falls, RI and Harrisburg, PA.

Other Cities Could Face Detroit's Fate

Texas is one of the most prosperous states in the union today. There are opportunities in diverse areas. Those opportunities range from agriculture to textiles (linked back to Texas's cotton crops) to tech to aerospace (X-Cor for example). Texas took advantage of some states', such as Colorado, decisions to infringe upon Second Amendment protections and limit firearms related businesses. They courted those businesses to move to Texas. Texas also offers opportunities in fuel and energy. The state harvests, refines, and produces fossil fuels such as petroleum and natural gas. The state also looks towards the future in developing "renewable" or "green" energy sources.

The state is doing well. Cities such as Houston and San Antonio are, in contrast, in debt. San Antonio holds one of the highest public debts for a municipality in the country. Most of this is the result of Keynesian policies and fiscal irresponsibility.

Unions are not a huge problems for San Antonio. Texas is a "right to work" state. In and around the city, many businesses are booming. Medical facilities are hiring, for now.

Though the city (like the state) has not really embraced school-choice, the city and suburbs house several successful and challenging charter schools, including two Harmony Charter Schools (which magnet Science - Technology - Engineering - Mathematics gifted students). So, there are good options for education. Higher education is also a big business in San Antonio. Two universities of high merit that serve as examples are the University of Texas - San Antonio (UTSA) and Texas A&M - San Antonio (UTAMSA). There are many others, though, to include the "Alamo" colleges.

So why might San Antonio potentially face Detroit's fate? The city has so much going for it.

Four words form the base of the problem:  "tax", "borrow", "spend" and "handout". The false term the propaganda uses to spin these poor choices is "investment".

While it seems small compared to Detroit's $20 billion debt, San Antonio is $9.5 billion in the hole (up $100 million from 2012). Houston, TX is $13.2 Billion in debt. San Antonio's per capita debt is over $7,000 per resident (including kids). Houston's, despite the higher public debt, is lower at about $6,200 per person. The city faces another $50 million deficit for FY13. That deficit means it is promised to pay out $50 million more than the amount of revenues it will accrue. In short, they are spending more than they are making. This screams of a necessity to balance the budget. That is something they need to do without shrinking their tax base or chasing businesses away by raising tax rates. Spending cuts may be their first order of business. There are a few "investments" they should start with. 

An investment is risking capital, now, for a share in dividends of prosperity in the future. There may or may not be a payout. But that risk is made when there is a reasonable, logical, tangible propensity for a payout. Spending money with little to no chance of that return is consuming it. Consuming it with nothing to show for it is wasting it. Borrowing money to do so is just plain stupid.

San Antonio used taxes, then borrowed money, to waste millions in developing a "light rail system" to add to its public transportation infrastructure. No prospectus or study returned any analysis the would demonstrate any form or return. Running and maintaining the system will cost millions more. In order to break even (much less garner any revenue), the price per ride would have to be well beyond the means of those who would allegedly benefit from the system. They couldn't afford to ride it. So, the city proposed charging a lot less. Trains that run do so with empty seats. Even with every seat full, the costs and overhead are greater than the combined fare receipts. It is not an investment. It is a waste of money that did nothing but increase the public debt. The city cannot afford to complete the project, to top it off. Millions were wasted with more and more falling into the fire behind it.

Not helping San Antonio's rising fiscal problems, Moody's recently gave the city's municipal bonds a negative rating. San Antonio has a AAA rating in one aspect, and an AA2 in another. But Moody's recommends not investing in the city's municipal bonds. 

Citizens were duped into barely passing a referendum to increase the city's sales taxes. The increase was intended to help fund Mayor Castro's "indoctrinate them while they're young" plan called "Pre-K-SA". The plan was to increase the availability of full-time pre-kindergarten child-care programs at public schools in the San Antonio Independent School District. Not all public schools in San Antonio are part of SAISD. Yet, all citizens of the city and tourists will pay more for their purchases made in the city in order to pay for this program.

However, the program won't service all those the paperwork propagated. Many parents will still avoid the Pre-K programs, opting to either keep their kids at home or to use private childcare/daycare facilities. But those increased tax revenues along with other funding will be dumped into these little-used programs. The "teachers" will earn an average of nearly $70k a year (including benefits). All of this will fall down a sinkhole.

Those are but two examples of poor choices. The list continues, if you dig deeper into the various projects. Instead of bolstering ESL programs in local schools, they spend money busing Spanish speaking students to schools that teach most classes in Spanish. 

The city spends money supporting and securing a parade that Julian Castro is supposed to participate in. Instead, his twin brother impersonated him while he went to a campaign fundraiser. Meanwhile, Castro campaigns and promotes many of the same failed socio-economic policies that ruined his ancestral home -- Cuba.

San Antonio serves as a case study. Detroit serves as a giant "danger" sign. The model and policies are not unique. Neither are the problems. The road is one that is currently too often taken. It is full of potholes and leads to a bridge to nowhere that drops off into an abyss of ruin, debauchery and despair. To top it off, nobody can afford to fix it, if they even wanted to. It may be time for many cities to take an alternate route, now, while they still can.

On the other hand, at this rate, the progressive pundits and politicians who boasted government intervention, socialist policies then propagated against GOP Presidential Candidate Mitt Romney's statement "we should have let Detroit go bankrupt" will have plenty of crow to eat.