Are Cities The Next Federal Bailout? Why All Public Debt Is Immoral

Megan McArdle asks, “Should We Bail Out Cities.” I am not posting about this to commend her answer (though she is right). I’m posting about it because she felt the need to address the issue.

It’s going to happen.

In the latest City Journal, Steve Malanga writes about an issue that hasn’t yet gotten a lot of attention but is virtually guaranteed to become a serious topic of national debate in the not-so-distant future: Do we bail out cities that have become insolvent?

Let that sink in for a minute. McArdle is very much what I would call (somewhat dismissively, though her analysis makes for valuable reading) an “establishment economist.” She would never be prone to encourage panic or predict economic apocalypse. But here she casually admits that city bankruptcies are going to become a nationwide problem.

What does that mean about our so-called “recovery”?

Basically, our economy is a minefield, with the explosives rigged close enough together to possibly cause a chain of detonations.

Politicians planted the bombs because the process of setting them up purchased votes from enough of the public to make it worth doing for the sake of the power and prestige of the politicians. They gained personally from setting up pensions that would implode.

Malanga quotes a Steve Rattner op-ed from the summer: “The 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them.” Rattner is right, of course; Detroit was largely undone by massive structural changes in the auto industry, which now employs only a small fraction of the people that it used to. And yet, there’s more to the story, isn’t there? Detroit’s biggest problem is the combined burden of its pension funds and retiree health benefits. And the reason that its pensions are in such a state is that they were bizarrely mismanaged by people who apparently didn’t quite get fifth-grade math.

Didn’t get fifth-grade math? No, they saw a way to plunder a future generation and they took it.

It’s true that it would be easier to deal with these problems if Detroit were more like New York and less like, well, Detroit. But it’s also true that if Detroit had been responsible about its pension contributions instead of underfunding the pensions while simultaneously handing out extra benefits above and beyond what the city already couldn’t afford, its retirees would not now be facing dire straits. New Yorkers did not get to vote for the corrupt Detroit politicians who appointed the terrible Detroit pension managers who made all of Detroit’s problems so much worse than they had to be. Why should they have to pick up the check for all those mistakes?

But this is the part where her analysis somewhat breaks down. How does she know that some of the people who set up the ponzi scheme are not now living in New York? We don’t really know how many of the 700,000 who live in Detroit now were voters who had some sort of say in who the politicians were who made the decisions about pensions.

A city isn’t a defined group of individuals; it is a boundary that people can leave or enter. These debts are, by definition, being foisted on people who, in principle, may never have had any more to do with the pensions than those living in New York did.

Yes, I realize that, in practice, there probably some degree of greater responsibility weighing on some of the current population of Detroit. But it isn’t as much as people tend to think.

This is why all public debt, every bit of it, is intrinsically immoral. By definition it enslaves the next generation. The people who want the money and the people who have to pay the money are two different sets of people.

Yes, I said “enslaved.” Sarah Palin was right.