By Marc Jampole
Kudos to Ross Eisenbrey of the Economic Policy Institute for rejecting the notion that overly generous pensions led to Detroit’s bankruptcy.
Instead of pensions, Eisenbrey cites several reasons for Detroit’s financial problems:
- A depleted revenue stream as wealthy people moved to nearby municipalities, taking advantage of the city as an economic driver while destroying the city’s tax base.
- Bad financial deals with banks, including interest rate swaps, which are contracts in which two parties agree to exchange interest rate cash flows, based on a specified amount from a fixed rate to a floating rate, from a floating to a fixed, or from one floating rate to another floating rate. Each side is betting that a certain set of economic conditions will prevail, so that they come out ahead on the swap. As Eisenbrey details, these swaps were profitable for Wall Street banks and exposed Detroit to financial risks that ended up costing the city $600 million in additional interest.
- Corporate subsidies and tax loopholes for businesses that did not create enough jobs to justify these gifts to private sector companies.
Unmentioned by Eisenbrey is the fact that all three of these forces represent the same theme: rich folk squeezing a city dry of its wealth and then leaving it to flounder. Wealthy suburbanites benefited from living near Detroit without paying taxes to the city. Wealthy banks essentially benefited from selling Detroit’s politicians a bill of goods. Wealthy company owners lowered their operating costs without giving back enough in new jobs.
As Eisenbrey advocates, the burden of solving Detroit’s financial problems should not fall on the Motor City’s middle class and working class people who have worked long years for pensions that they negotiated and upon which they depend to survive. Funny isn’t it: while it’s not okay to break the financing contract with the banks, politicians think nothing of breaking the contracts they signed years ago with the city's workers. Eisenbrey wants Detroit to say “enough is enough” to the banks and walk away from the onerous interest rate swaps and other financing gimmicks. The banks have made enough money on the Motor City already.
Eisenbrey also wants to end the loopholes and special deals to corporations and have the state of Michigan chip in more money to pay Detroit’s bills. I would add a special regional tax based on income (or as in France, on wealth) that the state would collect for the city from Bloomfield Hills, Grosse Point, Birmingham, Franklin and the other nearby and distant Detroit suburbs.
In his very perceptive article, Eisenbrey also suggests that Detroit’s emergency manager Kevyn Orr, Michigan Governor Rick Snyder and other civic leaders are mischaracterizing Detroit’s problems by focusing on the $18 billion in long-term debt the city owes. It’s another example of right-wing politicians defining the issue in terms that benefit their constituencies. Let’s set aside the possibility that $18 billion may be a grossly overstated estimate. Eisenbrey correctly reasons that municipalities cannot liquidate the way private companies can, so the size of the debt is not the issue. All that matters is the cash flow—how much money Detroit needs to pay its bills each month. Right now Detroit faces a $198 million cash flow shortage.
Cash flow is easy for municipalities to deal with, at least in theory—raise taxes or lower costs. The city has already cut costs not only to the bone, but to the marrow. Now it’s time to raise taxes, but on a regional level. Too long wealthy suburbanites have sucked Detroit dry. It’s now time for them to give something back.
But that’s not going to happen. More likely is that Detroit will become a model for the latest way for the rich to continue their 30+ year war on the rest of us: declare a city in financial trouble and use that excuse to gut pensions and worker’s salaries, thus putting even more downward pressure on the wages of private sector workers and insuring the continuation of the low-tax regime that has a financial chokehold on most families.