Detroit Was “Impossible”

Monty Pelerin / EconomicNoise.com

Detroit has fallen. The implications of this event are more important than most realize.

Many previously-thought sacred cows were crushed in Detroit’s fall:

• In the most union of states and cities, unions learned that they are not sacrosanct.
• Investors learned that there are no risk-free loans.
• Uncuttable services like police and public parks were cut even before the fiscal demise.
• Obama’s promise to “save Detroit” was as empty as his other promises.

There are lessons for unions, investors, citizens and public payroll parasites. The first lesson is that resources are not unlimited, even when you have taxing authority. A second lesson is that what was unimaginable just a few years ago, happened. A third is that big government is not only inefficient but it destroys.

What was once one of America’s finest cities was turned into a dystopian hellhole. Jobs, people and anything else that could move have been leaving this city for years. Morale, civility and law and order are nearly non-existent.

The Wall Street Journal asked this important question: “… if Detroit isn’t too big to fail, is any city?” Then they speculated on who might be next. There are many candidates on their list, although most are still considered to be “impossible to fail.” The mind of the public has not adjusted to the new reality, still believing “it can’t happen here or there.” Of course it can and it likely will.

It was in Detroit, actually Dearborn, MI, where I learned the meaning of “impossible” almost fifty years ago. As a young financial analyst at Ford Motor Company I made the mistake of defining some event as impossible. A wizened old assistant controller (probably in his fifties) corrected me quite gruffly: “Son, the impossible has a 20% probability!” That was the best information I ever received. It was well in advance of today’s “black swans” and “fat-tails” jargon.

The Detroit failure is now being absorbed. Most consider it unique, a one-off event. We knew that Detroit was in deep trouble and mismanaged (as are other cities). Post-event rationalizations are typical after a shocking event occurs. Detroit has produced its share.

Change is rarely recognized as it occurs. The human mind has an uncanny (and inappropriate) ability to extrapolate the past into the future. An event like Detroit is denied, right up to the point where it occurs. And so are subsequent like events.

The denials of this happening in other cities are heard but bais of these denials are without substance. “It’s never happened before,” or “they can’t afford to let that happen here” are not rational reactions. Such responses reflect a mindset that doesn’t understand what is happening to the country. It reflects either fear to understand or an inability to comprehend the complexity of what is occuring. “This time it’s different” does apply to this situation.

More cities are will follow the bankruptcy route selected by Detroit. Differences between cities are many, but commonalities are what drive the failure process. Most major cities have overspent and overtaxed. They have promised future benefits that are impossible to deliver. Defaults are inevitable. Some will come via renegotiation of commitments. Others will seek the protections of sovereign bankruptcy.

The formula that provides the common road to disaster is simple. It is also standard practice in most major metropolitan areas. Here it is:

• grow government beyond what can be supported by taxes.
• use non-cash liabilities (like pension plans) as tools to gain/remain in office.
• fund additional, “necessary” spending by borrowing until credit markets say “no mas.”
• then look for bailouts from the state or Federal Government

continue article at EconomicNoise.com:

http://www.economicnoise.com/2013/07/22/detroit-was-impossible/