Dean Baker on Detroit bankruptcy
You’ve no doubt heard that the city of Detroit has filed for bankruptcy. Except that’s wrong: The petition was filed by Detroit’s emergency manager Kevyn Orr—who was not elected, but appointed by the state’s Republican governor—exercising powers that the people of Detroit overwhelmingly rejected in a 2012 referendum.
That’s just the start of the misunderstandings swirling around Detroit, portrayed in the press as a city groaning under $18 billion of debt—a new study from Demos (11/20/13) says even that number is “inaccurate” and “irrelevant”—in which bankruptcy is the best way to get “back on track.” To many observers, it looks like city workers will be left very far from “on track,” whatever that means.
Economist Dean Baker, co-director of the Center for Economic and Policy Research, told CounterSpin’s Janine Jackson that we shouldn’t believe the hype we’re hearing about the causes of Detroit’s problems, and we should pay extremely close attention to what’s being sold as the solution.
CounterSpin: Let’s begin with the source of Detroit’s undeniable current economic problems. You and others say it isn’t that there hasn’t been incompetent and corrupt behavior by city managers, but not only is that the wrong primary cause to blame, the city itself is the wrong place to look for the primary causes of the current situation.
Dean Baker: There are two things that I think are really key to understanding the situation in Detroit. The first is kind of the obvious one: Its main industry was the auto industry, that was the lifeblood of Detroit, and that’s been on a decades-long downward path which has been to a large extent the result of national policy—first, the effort to open up other countries as sources of locating parts of the auto sector. So we’ve had General Motors, Ford, Chrysler all ship substantial portions of their operations overseas to take advantage of low-cost labor and lax environmental regulations.
The other is the high-dollar policy we’ve been running the last 15 years or so that makes manufacturing in the US much less profitable. Of course, the recession we could throw in, too; they didn’t cause the recession, obviously, and that certainly has been a very big hit to the city’s economy.
The other part of the story is that there’s very little by way of revenue-sharing from the rest of the state to the city of Detroit. The basic story here is that we know there are problems in Detroit, and every city, for that matter, and it’s very easy in Michigan to step over the city line and say, OK, not my problem.
There’s certainly a big racial component in that, too. The city is overwhelmingly African-American; a lot of whites took advantage of the opportunity and said, you know, I don’t want to see my tax dollars going to support African-Americans. I’m not going to say that was the majority sentiment, but, needless to say, it was part of the story.
The result was that you were left with a city that was really deprived of resources and on a very serious downward track, independent of the problems, which are undeniable, in the city government—the corruption, the waste that was there. But you would have had problems even if you’d had sterling managers running the city.
CS: And Detroit also, like many places, of course, has not been impervious to the various bubbles. And that brings us to pensions, because that had some role in the amount that the state and local government contributed to pensions. A lot of what we hear is the problem with Detroit is that the public sector pensions are underfunded; what’s going on there?
DB: The pensions are actually a relatively small portion of the liability; city managers came up with a [total] figure of $18 billion, and the pension liabilities are somewhere on the order of $1.5 billion. The pensions actually were reasonably well-funded, at a funding rate of somewhere around 75 percent, and 80 percent is usually what actuaries consider acceptable [Detroit News, 12/4/13].
Now, they did make some bad investments, and this gets to Wall Street again; they invested in some things that were probably riskier than a pension fund should have invested in, and it looks like they took losses on those. But, basically, the pensions were reasonably well-funded, which is another reason why workers have good cause to be upset. Not only were these promises made by the city government and enshrined in the state constitution, but for the most part, the money was actually there. So for them to be forced to take big losses on their pensions—that seems, I would think, a pretty hard pill for them to swallow.
CS: Why are pensions the first thing, it seems, on the block as Detroit looks at bankruptcy?
DB: I think it’s kind of who’s the easiest kid to pick on. I think we’re sort of in a political world now where it’s easiest to turn to public sector workers and say, we’re going to kick you in the face. They’ve gotten a lot of support on this from the political establishment; there’s a lot of people saying, look how generous these pensions are. They’re often misrepresented; the average pension in Detroit is less than $19,000 a year, so that doesn’t look like living high on the hog to me. [With] other city and state governments, I should point out, often the pension is in place of Social Security, so whatever people get by way of their pensions, that’s their whole retirement income; they don’t get Social Security on top of that.
So you have a lot of effort to trump up the generosity of the pensions. The other thing that they’ve taken advantage of in the media and the business community is they’ve hyped up the idea that private sectors don’t have pensions—which unfortunately for the most part is true—and they try to pit private sector workers against public sector workers. So you have schoolteachers, firefighters with pensions of $20,000– $30,000 a year, and they turn to the private sector workers and say, see, that’s not fair. It’s kind of a perverse dynamic where you have people on Wall Street walking away with millions, and we’re supposed to be upset about public sector workers getting a pension of $18-, $20-, $25,000.
Workers paid for these pensions; they contributed out of their own paychecks, and insofar as the employers made contributions, that’s in lieu of pay increases. There’s a lot of research, and to my knowledge all of it shows that public sector workers receive less, if you adjust for age and experience, than private sector workers. So this came out of their pay, either directly or indirectly, in the form of a smaller paycheck. The notion that somehow they’re getting a gift from anyone is just nonsense; this is part of their pay. It’s like they put in their work and got 80 percent of their pay, and now we’re saying we don’t feel like paying the other 20 percent.
CS: So let’s not put too fine a point on it; the plan in Detroit is to possibly not give teachers, firefighters, sanitation workers the full pensions that they didn’t just “hope for” or “count on” but paid into, and that’s because the alternative would be…what?
DB: Well, you’re going to need more money coming in from somewhere; I certainly believe the city probably can’t pay much more. It really has to come from the state government; the state government actually has a guarantee of pensions. And, of course, cities are a creation of the state. You know, I’m not a lawyer here, but it does seem strange to me that you could have a state government guarantee a pension and then have one of its creations—you know, if the state government creates the Department of Transportation, the Department of Transportation—go, well, I’m not the state of Michigan, I’m just going to cut your pension.
CS: And let me ask you finally: If people are thinking, well, I don’t live in Detroit; it sounds like a peculiar situation—you’re thinking, no, you actually ought to look out for this coming soon to a town near you.
DB: There’s been a real effort to go after pensions across the country. A lot of right-wing organizations have been funding research to say these pensions are enormous, they’re not payable, to really hype the problem. Illinois just voted to cut their public sector pensions; Mayor Rahm Emanuel in Chicago has basically said he wants to do the same there. And the important thing to keep in mind is neither of those—particularly Chicago—is nowhere near bankruptcy, they have relatively healthy economies, so you don’t even begin to have the case you have in Detroit.