Monday 2013-07-19

UPDATE: Detroit has filed for Chapter 9 bankruptcy, which is legalese for there will be losers.

Detroit has plenty of wealth to extinguish their debt, the question at hand is who will pay how much. Our enlightened modern society will accomplish this by a no-holds-barred political fight to the fiscal death.

Monday 2013-05-13

Detroit's Emergency Manager just released 2013 May 12 Detroit Financial and Operating Plan which informs us that Detroit has hit its debt limit, needs large capital expenditures to replace old equipment, has 2 people on pension for every worker, has roughly 1.233e9 USD in annualized expenditures versus 1.111e9 USD in revenues, and has over 1.5e10 USD in debt, which works out to over 20,000 USD in debt for every man, woman, and child. It is not a cheerful read.

Detroit's downfall seems the result of Big Business, Big Government, and Big Labor corrupting each other slowly until the city failed. Business was the first to start breaking down, then with the race riots government began crumpling next, and with two legs compromised, the city's economic superstructure began a slow-motion collapse. People streamed out of the city, with 60% of population effectively disappearing from 1950's 1.8e6 people to 2010's 7.1e5.

How will Detroit pull out of this multi-decade death spiral? It seems likely the other still-intact parts of the structure will be dismantled, as pensions are "reformed" and government "rationalized". Breaking more social contracts will further harm those who have stayed, although the jaded might snark that the only person who would have chosen to live in Detroit would necessarily be someone who would have profit'd from its decline.

Were Detroit able to attract new workers to its legal economy, this influx would help solve many of its core economic issues. However, there is no best current practices how-to for rebooting an economy, much less boot-strapping net immigration into a city with as poor a reputation as Detroit.

Echoes of these woes can be seen globally. Edward Hugh has repeatedly highlighted the core population problem; most recently covering Portugal in addition to Japan and Spain. When youth leaves a country, either because they found jobs elsewhere or because they were never born, that country has all the fixed support costs of a larger population, and the revenue generating possibilities of a smaller.

Similarly, China is facing a future like Detroit: it has rolled out many large scale development projects, its working-age population is already in decline, and instead of massive pensions and bureaucracy, it has state-owned enterprises and corruption. What will China and the other declining worker-age population countries do?

The optimistic will claim this century as a golden age for governmental economic experimentation. Realists might see it as a protracted global battle for net positive labor and capital flows. Progressives will worry about how to raise enough taxes when people can simply just leave.

We have not yet seen desperate measures, though perhaps Detroit's throes will provide clues about our uncertain futures.