Detroit’s recent filing for Chapter 9 bankruptcy protection would protect the city from its creditors while allowing it to restructure its debts. The proceedings that follow will, in many respects, set precedents for the swell of municipal bankruptcies that are likely to follow. Some of these precedents will be set through the courts, but federal policymakers have the power to set the most important precedent of all: that bailouts are not an option.
Contrary to popular belief, recent and looming municipal bankruptcy filings were not caused by the recent “great recession.” Rather, they represent the inevitable demise of big-government, liberal policies promoted by self-interested politicians and the coercive public employee unions that support them. A federal bailout of Detroit would reward the very actions that led to the city’s demise and simply enable future fiscal mismanagement. Moreover, bailouts would also encourage other fiscally troubled state and local governments to continue their reckless ways.[1]
Detroit’s Decline
Since the 1960s, Detroit’s population has declined by 60 percent, with 25 percent of that decline occurring over the past decade alone. As Detroit’s population has fled the city, so too has its tax base. The average income of Detroit residents is only $15,261.[2]
Detroit serves as a poster child for economic decline. Its policies and politics over the past half-century should serve as a “do not” guide for policymakers across the country. America’s manufacturing decline hit Detroit particularly hard, but rather than respond by trying to diversify the city’s output and attract new businesses, the city enacted policies that drove out businesses and residents.
Rather than reduce the size of government as its population shrank, Detroit sought higher levels of government spending. City leaders, following in the footsteps of the automakers, acquiesced to the unions by increasing employee benefits, especially future pensions and retiree health care. Leaders also ceded control and flexibility over employees to unions in their labor contracts, making it much more difficult to cut costs or restructure the workforce when and as needed.[3]
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