Detroit is Broke
This morning I read an article about Detroit and the financial problems it’s going through. Parts of the article seem to blame Wall Street for charging the city high interest rates for financing multimillion dollar loans to the city.
Recently the governor had to appoint a manager to provide adult supervision to the city and its finances. The city’s finances are so broken that they can no longer borrow enough to keep the city running.
This is Detroit, the heart of the automotive industry, and now it requires someone appointed from the state to keep the city alive.
Let’s look at how we got to this crisis; it took quite a bit of effort. Detroit was the heart and soul of the automotive industry for many years. The US automotive industry was the king of the hill until the Japanese and Europeans got involved and started to provide some real competition. The industry didn’t compete effective and it was no longer the king of the hill.
The unions and management kept agreeing to deals that the industry couldn’t sustain. The union driven benefit packages promised to employees added additional cost to every car and prevented real competition. The companies didn’t realize the effects of the agreements soon enough and failed to become and stay competitive. US auto makers suffered and other auto makers thrived. They made a better product at a lower cost.
The free market wins again. Competition in an open marketplace provides consumers the best choices. In this case foreign company’s won and domestic companies list; better products at better process, beat average products at must higher prices.
Business suffered, jobs were lost and people moved away from Detroit. Some moved to other parts of the country to work in the automotive industry, some just moved out of state to avoid the higher taxes. The city of Detroit has been losing its tax base for years, but never trimmed its spending habits. Most governments are fueled by makers. Most governments need the makers to earn money and pay taxes to support the greed of government. Government is always insatiable.
Government wants to be all things to all people. The industry suffered, makers started moving away, those left behind were hurting and government loves people who are hurting. Government is a john in the red light district on a Saturday Night. Government always wants to spend a little bit of money to buy the affection and loyalty of someone who is easily impressed.
Government loves to spend other people’s money to buy the affection of those shallow voters who want something for nothing. Government promises to be all things to all people because all it takes is money, and it’s not even their money it belongs to other people so government feels it’s available to help those that government expect loyalty from.
Makers leave because jobs are scarce and taxes are high. Insatiable governments always cause taxes to get high. As more and more makers leave, all you have left are more and more takers. The people that want all of the free stuff are now faced with no one left to pay for their stuff. Government has to keep spending other people’s money to keep buying the affection and loyalty of the shallow takers. Government must go and borrow more than they can confiscate though taxes from banks. Banks are in business to lend money and earn interest on the loans so the banks are more than willing to loan the money.
Interest rates on risky loans are higher than on dependable loans. The banks make a lot of money from a city with poor management and a habit. The spending goes on, the promises of a rosy future become more and more fanciful, but the spending continues and the borrowing continues.
Until now when it was forced on Detroit there was never any adult supervision. They continued to dig the hole deeper. The path to power and respect for any politician is to make promises of money to be spent to buy the voters loyalty and respect.
Detroit and Greece are farther down the path than other cities and states. We know how Detroit got the where they are today. Illinois and California care clearly on the same path, but they have not made any changes.
It is not possible to spend yourself into prosperity. You will run out of other people’s money sooner rather than later. Class envy does not work.
When you are preaching that the rich must pay their fair share, what is their fair share? When a millionaire pays $20 million in taxes, but that is only 18 percent of their income for the year, why is that not enough?
When you earn enough money to have a tax bill of $20 million it’s not all income. When it was first earned taxes were paid at the income tax rate. At this point it is investment income and should be taxed at lower rate. We want to encourage investments because that leads to jobs, not discourage it by taxing it at a higher rate.
In this scenario where the voters expect the rich to foot the bills for everything that government is promising to the voters the rich are no longer millionaires, they are everyone who earn a pay check and pays taxes. Keep in mind 47 per cent of the population works and earns money but do not pay taxes, and many of this group get a check back without paying anything in.
Detroit is in serious financial trouble; they can’t pay their bills and can no longer borrow. They have not addressed spending when that was obviously the problem for many years. The first time the city had to borrow money to make ends meet should have been when the spending was addressed.
The US government must learn from what’s happening to Detroit, we are on the same path and on the scale of the US government it will be much uglier!