Traveling through suburban Detroit, a sprawling city of 143 square miles whose population has dropped from nearly two million to less than 700,000, you can often imagine you are in rural Tennessee. Rutted, narrow roads bend past groves of cottonwood, oak, and silver maple. Deer and rabbits forage in tall grass. Until you pass a burned-out ruin of a home, not yet removed and now obscured by greenery, it is difficult to imagine these neighborhoods once were filled with homes set 35 feet apart and carpeting the land for mile after mile.
City retirees have voted overwhelmingly to accept pension cuts as part of a bankruptcy deal.
For many, Detroit’s demise is attributable to the unchecked power of labor unions. Private sector unions were inflexible in the face of foreign competition, driving Detroit’s auto industry into irreversible decline. Public sector unions gobbled up every dime of taxpayer revenue they could bully and intimidate politicians into granting, further straining the finances of an already imploding city. Financially unsustainable pension benefits ultimately drove the city into bankruptcy.
A different tale emerges from the left side of the ideological spectrum. Taken from a guest column written for MSNBC.com, here’s a quote from Jordan Marks, executive director of the National Public Pension Coalition, a group largely funded by public-sector unions:
“While public coffers were running dry, Wall Street banks were out to make millions. Mayor Kwame Kilpatrick, who now sits in jail, worked with Wall Street banks that designed an illegal borrowing scheme that evaded state debt limits and piled on unwise interest rate swaps. When interest rates plummeted, Wall Street demanded more than $300 million from Detroit to terminate these swap deals—making a bad situation even worse. These same Wall Street firms stand to make millions if other cities move to privatize their pension plans.”
Some Truth in Both
These two tales of Detroit’s struggles both have elements of truth. Yes, the city’s unions were unwilling to adjust their pensions and benefits until it was too late, but even if they had, the city’s finances would have failed anyway because Detroit lost nearly two-thirds of its tax base.
And although the automotive industry’s unions were unwilling to adjust their pensions and benefits until it was too late, that industry would have shrunk anyway, because very capable foreign competitors gained strength starting back in the 1960s. It is unrealistic to expect, under any circumstances, that Detroit’s auto industry could have maintained the overwhelming global market share it had up to and through the 1950s. Without economic diversification, Detroit was destined to fall hard.
The tale that comes from the left, however, strains credulity even further. First of all, public sector unions don’t represent the “left.” They represent the state. When Jordan Marks writes about banks colluding with corrupt politicians, he is referring to politicians elected and controlled by public sector unions.
Wall Street, Governments Willing Partners
His assertion that “Wall Street banks” exploited Detroit does not reflect reality. Bankers issue bonds—debt—to cities that willingly borrow the funds because their union agenda forces them to spend more than they collect in taxes and fees. Government pension fund managers pour billions of dollars into Wall Street investment firms every year. Bankers and city governments—controlled by government unions—work together to exploit taxpayers and private businesses.
They use the state power of imprisonment to enforce punitive levels of taxation, to pay down debt and unfunded liabilities incurred so they could live beyond their means. Wall Street bankers and municipal government unions work together to build a financial house of cards, and when it collapses they deserve equal blame.
Detroit’s solution for its pension crisis will not please the ideologues. For the libertarian right, the failure to throw everyone into 401K plans must rankle. For the left, the new plan’s built-in “triggers” that adjust benefits when necessary to compensate for possible future shortfalls in investment returns violates their goal of an immutable defined benefit. But it works. And the libertarians’ enthusiasm for individual 401Ks contradicts their entirely valid criticism of overly optimistic investment return projections on the part of pension funds (Detroit’s was 7.9 percent a year).
Ideologically Impure but Workable
When the market tanks, as it periodically does, only a pooled plan with multigenerational, active payees, plus retired participants with adjustable benefits, can maintain solvency through a balance of contributions from active workers and returns from invested assets. A pooled 401K plan is nothing more than an ideologically impure version of individual 401K plans. An adjustable defined benefit plan is nothing more than an ideologically impure version of a fixed defined benefit plan. They can be functionally identical, two tales of the same thing, and they are both practical compromises.
Detroit’s failures, and the city’s response, are easy to describe using hyperbole and polemics. But ultimately there is one destiny, one tale in reality, that will define Detroit’s future.
Cutting through the rhetoric, cities around the nation may look to Detroit for answers, especially regarding the city’s new pension plan, because Detroit has passed through a clarifying crucible of pain and self-evaluation that cities with better weather and more diversified economies have deferred. One big market correction will erase those advantages. The tale of Detroit makes for compelling analysis, from New York to LA.