Federal Aid to Detroit: In Reality, More Than $2 Billion; But to What End?

Federal Aid to Detroit: In Reality, More Than $2 Billion; But to What End?
August 2, 2013

Clifford Thies

Clifford F. Thies is the Eldon R. Lindsay Professor of Economics and Finance at Shenandoah... (read full bio)

Bloomberg piece asserts that federal aid to Detroit amounts to only $108 million; and, in contrast, federal aid to Colombia is much higher, $323 million. These numbers are now circulating about the internet as facts.

First, before we go any further, aid to Colombia should be ended. Regardless of the purpose of the aid, Colombia is today an emerging economy. It, along with Costa Rica, Panama and Peru, constitute the second wave of Latin American Republics to adopt democratic government and market-oriented economics, and enjoy the prosperity that follows these reforms. As for the purpose of the aid, three-fourths of it is to attempt to interdict sources of narcotics destined for the U.S. market. Were we to change our approach to the problem of drug abuse, from prohibition to regulation and taxation, we would end the threat of narco-terrorism in the hemisphere.

Now, with regard to aid to Detroit, the $108 million is merely the tip of the iceberg. This is the amount of money sent from the federal government directly to the city government. The biggest portion of this transfer is what is called a “community block grant” to the city of $33 million. Many other, relatively small transfers constitute the remainder, and include such things as “community policing” and mass transit grants. Most of these other programs do little more than fund the latest concoction of Washington, D.C., and is unavailable to the needs of Detroit as determined by the local government of the place. Indeed, many of these other programs require matching funds and, so, divert local money from local priorities.

What isn’t counted in the figure of $108 million is the much larger amounts of money funneled to the city by the federal government, either sent through the state government or sent directly to residents of the city. Among these funds are Title 1 assistance to public school districts with disproportionate numbers of children from poor families, and federal entitlement programs including Medicare and Medicaid, Social Security, Unemployment Insurance, EBT (Food Stamps), the Earned Income Tax Credit, housing subsidies (e.g., Section 8), heating subsidies, and Pell Grants.

For some quick and dirty estimates, Title 1 assistance to Detroit is about $1,000 per school child (this is the so-called “basic grant” and doesn’t include the amount that public school apparatchiks skim off the top), of which there are about 200,000. So, that about $200 million.

About 2 million Michiganders are currently enrolled in Medicaid, a health insurance program directed to the dependent poor and certain qualifying families with low income. Many of these people are in nursing homes, the average annual cost of which is $70,000 per person. Many others are disabled and members of households in which other family members serve as caretakers. The average cost of children covered under Medicaid is $3,000; adults $4,000; elderly $15,000; and disabled $17,000. Cities like Detroit, with disproportionate numbers of poor people, especially benefit from this program. About 70 percent of this money comes from Washington, and about 30 percent from state governments. Assuming 20 percent of the state’s Medicaid enrollees are in Detroit (roughly in line with the percent of poor people in the state that reside in the city), and assuming that the cost to the federal government averages $3,000 per enrollees, gives a figure of $600 million.

A slightly smaller number of Michiganders participate in the federal government’s supplemental nutrition programs (the largest one being EBT or SNAP, formerly known as food stamps) (about 1.8 million). The average monthly benefit in these programs is $133. Again assuming 20 percent of the state’s food stamp participants reside in Detroit, gives a figure of $575 million.

About 800,000 Michiganders participate in the earned income tax credit program. This program gives “rebatable tax refunds” to low-income households that are eligible mostly by reason of having minor dependents. By “rebatable tax refunds” is meant cash assistance, as the taxes being rebated are paid by other households. The average benefit of this program in Michigan is $2,200. Again assuming 20 percent of the state’s EITC participants reside in Detroit, delivers a figure of $350 million.

Social Security is a combination pension, life and disability insurance, and income redistribution plan. For most people, they get back what they put in, or maybe less, taking into account certain actuarial calculations. But, for many people, they get back a lot more because of the program’s egalitarian benefit schedule. At the risk of understating the benefit to communities with disproportionate numbers of poor people, I will only count Social Security’s SSI program, which dispenses benefits to low-income qualifying persons regardless of their contribution history. Wayne County, Michigan, has 82,000 recipients of SSI, who receive total payments of $50 million.

Medicare is also a combination plan, in that the health insurance it provides is paid by individuals while they are working, in proportion to their earnings and now “unearned income” up to a limit, with the same benefit provided to everyone who is eligible. That is, the program is egalitarian and shifts income from higher income persons to lower. Using Social Security’s SSI program to conservatively estimate the number of people benefiting from the redistribution that is involved, together with an average cost to the federal government of $11,000 per enrollee, gives a figure of $90 million.

The Pell Grant program helps qualifying members of low-income households to attend college. Unlike the federal student loan program, these grants do not have to be repaid (hence, they are “grants”). A properly-administered student loan program can enable promising students and apprentices to obtain education or vocational training, without cost to the taxpayers. Fail safes such as loan forgiveness for military service can deal with the risk involved with debt. But, as I said, grants are not repaid and, so, represent transfers from taxpayers. Michigan had 87,000 recipients of Pell Grants, costing the federal taxpayer $180 million. Assuming a fifth of these are residents of Detroit gives a figure of $36 million.

The total of these federal benefits to Detroit comes to more than $2 billion, as is detailed in the following list:

  • Federal aid directly to city: $108 million
  • Title 1 aid to public schools (sent to the city via the state): $200 million
  • Medicaid (federal portion): $600 million
  • Supplemental Nutrition Assistance: $575 million
  • EITC: $350 million
  • Pell Grants: $36 million
  • Social Security (based only on SSI recipients): $50 million
  • Medicare (based only on SSI recipients): 90 million
  • Housing vouchers, heating assistance, extended unemployment benefits, etc.: Not Included
    • Total: $2 billion plus

Now we come to the real issue. Did Detroit benefit from this redistribution of income? In the short run, yes, these programs give props to the poor of the city, enabling those without any means to at least survive, and enabling others with low wage and/or part-time work to supplement their meager earnings. But, in the long run, can any community thrive amid such dependency. And, in the long run, what chance does an individual – a child or a young person – have, in the almost complete absence of positive role models in his neighborhood and with the collapse of the local economy?

Detroit is not some foreign country. It is part of our country. And, it is where we are all going unless we reject the culture of dependency and revive the culture of self-responsibility.

Clifford Thies

Clifford F. Thies is the Eldon R. Lindsay Professor of Economics and Finance at Shenandoah... (read full bio)