Detroit: The Shape Of Things To Come

The Market-ticker ^ | July 18, 2013 | Karl Denninger

[SatinDoll]

Listen up folks, after you read the bankruptcy filing for Detroit.

1. Right now, the City cannot meet its basic obligations to its citizens.

2. Right now, the City cannot meet its basic obligations to its creditors.

3. The failure of the City to meet its obligations to its citizens is the primary cause of its inability to meet its obligations to its creditors.

4. The only feasible path to ensuring the City will be able to meet obligations in the future is to have a successful restructuring via the bankruptcy process that recognizes the fundamental importance of ensuring the City meets its basic obligations to its citizens.

I have repeatedly pointed the impossible position that many governmental units, whether they be state, local or Federal, have placed themselves in by creating special classes of "untouchable" promises that were negotiated in bad faith by one or both sides and which are then ensconced with special protections under the law.

The fundamental reality of taxation is that if the economy is growing in your city (town, state, etc) then tax rates can remain the same or decrease and tax revenue goes up. That's because economic activity increases and taxes, as a matter of rate upon an activity, being a constant, results in more revenue.

Now four important axioms:

Economic progress only comes through capital formation.

Capital formation only comes from economic surplus.

Economic surplus is earnings less expenses including taxes.

All other forms of "development" are nothing more than leverage-driven bubbles.

If you increase tax rates then you decrease economic surplus. This inevitably slows economic expansion; it mathematically must.

If you make political promises that can only be met through increased tax rates, now or in the future, you begin the process of slitting your own throat. That outcome is inevitable when you agree to political promises that have escalating expenses over time as pensions, medical benefits, salary "step" increases, bond issues that have a payment schedule longer than the useful life of the asset bought and similar.

There is no way out of this box other than to repudiate those promises. Those who were made them inevitably try (and sometimes succeed) in getting supra-legal protection for their "benefits" but no amount of legal arm-twisting can change arithmetic.

You can raise tax rates on the people to try to cover the promises made but every time you do some percentage of the population that has positive economic surplus -- that is, those who are actual productive members of society -- choose to either quit working in whole or part or they MOVE.

You get less from those who choose to work less.

You get nothing from those who choose not to work at all or to move.

You cannot force someone to produce. You can only entice them to do so.

This problem is not local to Detroit. It is in fact in evidence everywhere from Detroit to Chicago to California to Okaloosa County Florida.

The only solution is to find a way to do more with less. To bring into alignment that which is promised with that which can be delivered. To reduce tax rates while boosting economic activity not through transfers, not through false "enterprise zones" or other various short-term schemes and scams that advantage one business over another but rather through having a general economic environment in which capital formation is rewarded rather than punished. One must foster an environment where spending less than one makes is seen as a virtue instead of a curse and where government departments are encouraged to return unspent funds instead of finding ways to make sure every last allocated nickel is blown on something.

Those things that the people want must be placed in front of them honestly with both cost and benefit clearly delineated. No more "smart boards" for classrooms unless you can show exactly how they reduce the total cost of education and improve outcomes -- both, not "either/or." No more spending the lunchroom chiller money or the re-roofing fund on something other than the sinking fund for that inevitable replacement. No more promising pension payments that anyone with a 3rd grade education knows will balloon to grossly large amounts of money in the "out years" -- when those who passed it will be retired and thus they don't care. No more "enterprise zones" that simply rob one business or the citizens as a whole through higher tax rates so some preferred entity can obtain a lower rate. And no more buying the "best and finest" simply because "our city employees deserve it"; the question is one of whether there is actual need, not a desire to look like Rambo on patrol or have shiny new police cars, but rather if there is need what is the most cost-effective means to meet that need.

Those who made these promises and did these things in the past must be held to account. The policies and promises that were made and cannot reasonably be fulfilled must be rolled back and repudiated.

I know nobody wants to talk about this say much less do it, but it must be done and done now.

Unless, of course, you want to follow the path of Detroit.

[Huskrrrr]

“Obama already fixed this”

Along with the Nation's infrastructure.

[SatinDoll]

During the 1970s, Felix Rohatyn (of Lazard Freres) saved NYC from having to declare bankruptcy.

“Rohatyn became widely known in the 1970s for successfully restructuring New York City’s debt and resolving the city’s fiscal crisis. While running the Municipal Assistance Corporation for the city of New York, Rohatyn continued his deal making at Lazard. Although he capped his take at the firm at 6%, Rohatyn continued to be the preeminent rainmaker at Lazard well into the 1990s, completing such deals as Sony’s acquisition of Columbia.” Quote from Wikipedia.

Note: the Federal Govt. bailed out NYC to the tune of $2.3 Billion.

[wbill]

all the race pimps want us to focus on one black criminal thug that was shot when he was trying to kill a hispanic.

Bread and Circuses.

So long as there's a good distraction, people will never pay attention to the real problem. Until it's too late.

[itsahoot]

It's more like, "you have less revenues? Not our problem, suckas!"

Dreamer, of course it is, they will be sending us the bill soon enough.

[SunkenCiv]

Thanks SatinDoll.