2011 May 14 Saturday
Michigan Financially Takes Over Basketcase Cities
The state of Michigan has basically passed a law to handle severe cases of local democracy failure. Republican governor of Michigan Rick Snyder and his Democratic treasurer Andy Dillon (a corporate turn-around expert according to Businessweek) have gotten a law enacted that allows the governor to take over financial basket case local governments and appoint basically a financial dictator for each town.
The law gives those managers—often former politicians or civil servants—broad and controversial powers, including the authority to void union contracts and remove elected officials. It has also given other outsiders, namely private consultants and restructuring experts, an opportunity to do to distressed places what they've done to distressed companies. "Ninety percent of the law is an early warning system," says Representative Al Pscholka, who sponsored it. "The fundamental point is that if the municipality had made the hard choices there would be no need for an emergency manager."
The tacit assumption here is that some electorates will not choose competent elected officials who will live within the (often very modest) means of their taxpayers. Competent management has to be imposed on them. This assumption is a rejection of the idea that democracy is a universal balm. Of course bankrupt, decayed, and corrupt cities, captured by their public employee unions, already provide strong enough evidence that democracy is no panacea.
The management of Detroit's school system by emergency management is now so well established that appointed emergency managers get replaced by new appointed emergency managers when their terms expire. In some cases local governments basically ask for emergency financial management. Flint Michigan's mayor Dayne Walling has asked for state review of the city's finances, a move that could lead to appointment of an emergency financial manager. Walling wants the power to break union contracts.
State-appointed accountant Joseph Harris now runs Benton Harbor Michigan.
The city is now run by Joseph Harris, an accountant and auditor from miles away, one of a small cadre of "emergency managers" dispatched like firefighters by the state to put out financial blazes in Michigan's most troubled cities..
Of course, if government profligacy to the edge of financial disaster is reason to appoint restructuring financial managers with near dictatorial power then the United States of America should be put under the rule of an appointed emergency manager with a strong background in corporate restructurings. The problem: Who would be competent enough to appoint an emergency manager? The Joint Chiefs of Staff?
The 2010s will bring us many more government financial crises including large sovereign government financial crises. The US government will most likely respond to its own worsening crisis by eventually inflating the currency. But state governments, lacking their own currencies, need to develop laws based on the Michigan model.
The good news for Michigan is that the state has finally hit bottom, and now there's only one way to go. The last decade has been a total disaster for Michigan - the state is the only one to suffer an absolute loss in population, and over 400,000 jobs disappeared from 2006-2010. The unemployment rate was the highest in the country for those years. Detroit is the absolute bottom of the barrel - the last mayor, Kwame Kilpatrick, went to jail, as did one member of the city council, Monica Conyers, wife of Congressman John Conyers. The council has 79 full-time employees (the Grand Rapids council has one part-timer) - and they want to expand, even though the city has lost more than half of its population. The new mayor, Dave Bing, seems to be trying to do a good job, but the problems are overwhelming.
The one thing that may save Michigan is that the state has a viable two-party system. After eight years of disaster under Democratic Governor Jennifer "Tinkerbelle" Granholm, voters elected Snyder and an overwhelmingly Republican legislature last year. Snyder is a former Gateway executive who has never held political office before. His number one focus is job creation. I don't know how well he'll be able to pull this off, but he can't do any worse than his predecessor. Granholm,by the way, departed the state immediately after leaving office for Berkeley, California. Everyone in Michigan hopes she never comes back.
The downside of this kind of autocracy is that it can lead to corruption. Other states shouldn't pass such laws unless they need them. I would guess that states that are significantly more white than Michigan's 65% will find such laws unnecessary.
'the state has finally hit bottom'
There is no 'bottom' to hit. Or if you want to be an optimist, Haiti is the bottom. Basically, when you're as well off as we are, things can always get worse for a really long time!
Likely, just a jump from the frying pan to another frying pan.
What happened in the last couple of decades that made government and society malfunction so severely?
"The worst is not, so long as we can say, this is the worst!"
- William Shakespeare, "King Lear"
The Black Death,
The bottom will come some time after oil production starts declining. My crystal ball can not yet show me how bad it'll get. Depends on substitutes and their costs and how fast the decline happens.
The biggest cause is limits to growth. Our expectations are still growing too fast as compared to our real economic prospects. So we over-commit to stuff we can't afford. Happens with individuals, governments, banks. I recommend Tyler Cowen's Kindle book (which you can read with a PC app if you do not have a Kindle) for $4: The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better. Also, all my resource limitation writing. Also, Chris Martenson's The Crash Course: The Unsustainable Future Of Our Economy, Energy, And Environment.
I agree that we are facing limits to growth, but the political system seems to be utterly broken.
The baby in the bathwater is Rosemary's.
One other point: these financial dictator laws may well be designed first and foremost to make sure that bondholders don't get screwed (and by extension that someone else, perhaps taxpayers, does). If a town is truly bankrupt, you won't be able to sort out the mess without screwing someone. Massive muni bond defaults are one scenario (I think Meredith Whitney predicted such an outcome) and this law may be intended to forestall that outcome.
Would the top 2% of U.S. wealth holders be more adversely affected than the bottom 98% by a muni-default?
- I can't quickly locate data on this.
(BTW, I met one of Whitney's acquaintances in a local pub a month ago - he was not totally sure of a muni-default.)
Not sure about the fallout. I think the top 2% probably hold a lot of stocks, so the first-order impact might be more on things like pension funds, sovereign wealth funds, and the top 10% (people saving for retirement) moreso than the top 2%. But I think the main thing they fear is second-order effects, for example the possible bankruptcy of some large institution that has written default insurance on these bonds (AIG redux) or a spike in interest rates as savers adjust their ideas about the relative safety of such bonds. Anyway, it looks to me like Whitney's call is off and that the muni bond can will be kicked down the road far enough that inflation will bail out the debtors, after a fashion. I might add that on further thought, I see no reason (beyond possible pragmatic ones) why bondholders should have a higher priority than any other entity with a contractual agreement with these cities. I think I'll change my view on the law from 'situationally appropriate' to 'bad idea, tool of oligarchs'...
All the debts building up are increasing the incentives for inflation, especially federal debts and federal guarantees of financial institutions. High inflation seems unavoidable.
Something that the dysfunctional Michigan cities have in common is that their populations are majority black (Benton Harbor 92.4%). It would not surprise me if they all have rates of functional illiteracy on the order of Detroit's.
How can a city have an economic revival when its citizens can't read the mixing instructions on a container of floor cleaner, let alone a manual for a piece of high-tech machinery?
Forcing people to get their houses in order as cities is important, but this needs to be pushed down to individuals.