Detroit is bankrupt, is Scranton next?

Detroit was the first major city to go under. It was not a surprise. There is no shock. It was like watching a terminal cancer patient—both painful and sad. The once vibrant city sowed the seeds of its demise more than 50 years ago when its political power (in this case, the Democrats) became unchecked in their stranglehold over what was once among the richest cities in America.

Detroit today is but a shell of its former self. With an area the size of Boston filled with vacant property, and a colossal debt load of over $15 billion—yes, with a “b,” and for a city—there is simply no way to save it. Detroit has been the beneficiary of every grant, loan, and program concocted by the government at all levels, and all of these have failed to reverse the decline.

How can it be that the Utopian dream and uncontested political monopoly of over a half-century of Democratic mayors should go so horribly wrong? How is it that having none but black mayors since 1974 could not help the black community in jobs, test scores, drug use, and welfare levels?

A 50-year experiment
For years you have heard how, “If our own people were in charge” they would understand the problems better and provide real solutions. Yeah, how’d that work out? How did implementing President Lyndon Johnson’s Models Cities program, the first great experiment in centralized urban planning in America, hurt the poor rather than help them? The unfortunate answer is found in the notion of a “negative feedback loop.”

You see, bad policies cause good people to move away. Those who pay the taxes go Galt (as in the character John Galt, of Atlas Shrugged) and high-tail it out of there en masse, leaving behind those who pay no taxes. They value their lives, their property, and their future, and instead, vote with their feet.

Unfortunately, it is the politicians who set the tone for a community, and people decide if they want to dance to what tunes they’re playing. In Detroit’s case, the music they’re playing has bombed and people are running—not walking—for the exits. Believe me, it’s pretty hard to get people to leave their hometowns, but if politicians follow socialist programs long enough this is the eventual fate: BANKRUPTCY.

Equally unfortunate is that these dynamics are not unique to the Motor City. No, they’re happening all across the country at an alarming rate because the chickens are coming home to roost from decades of bad financial policies. The majority of failed cities and states across the country were granted a reprieve these last four years. That is, as long as interest rates stayed low. These artificially low rates could keep the debt loads at bay, at least for a short period. My point is if it wasn’t for the Federal Reserve’s manipulation of the rates, these problems would have surfaced four years ago instead of now. We just postponed the inevitable. The municipalities and towns were able to keep their interest payments low, even though they were taking on more debt, similar to your refinancing your home and continuing to spend. Instead of taking the time to get their fiscal houses in order, the majority of cities and towns kept following the same dead-end path and compounded the problems so that their debt loads were even higher than they had been before the downturn. They kept playing the same old bad song, so to speak, expecting the public to stick around for more. Of course, these cities and towns had the ability to make drastic, corrective changes to save themselves from drowning, but they intentionally chose not to do so.

Scranton’s precarious position
Regrettably, Scranton is in the same predicament as Detroit, with a declining population, high crime rates, gigantic unfunded liabilities, and most importantly the lack of political will to face these problems head-on and with integrity. The city is looking at an $18 million deficit (three orders of magnitude less than Detroit’s) with the possibility of a tax hike in excess of 100% in 2014. Read that again: a tax hike in excess of 100%. The Electric City is encumbered by millions of dollars worth of unfunded liabilities that increase with each passing day and now it’s time to blame someone. Grab a beer (or maybe a double scotch is more apropos), sit back, and watch the games begin as officials try every trick in the book to wiggle out of this mess of their own making. This mess was not created by a few years of mismanagement, and more closely resembles the gradual deterioration of a person with a pack-a-day cigarette habit over a lifetime. Bad macroeconomic policies, like smoking, catch up with you eventually. Watch as more and more people decide that they need to get out of the way of this sinking Titanic before they get sucked down with the ship. Man the lifeboats! This is no drill. I can’t tell you when this pig is going down, but it is beyond terminal. I pray that you are smart enough to heed my warning.

So who is to blame? I’m sorry to tell you this, but you are. Yes, you. You, who voted to have your cake and eat it too. You, who live in Scranton, or should I say, in denial (not just a river in Egypt <wink>). You, who felt that the political policies you either directly supported—or supported by not voting—must now reap what you have sown. It’s harsh, I know. I battle with denial myself all the time, but when faced with hard choices I always ask myself what is best in the long run. In Scranton’s case, the decisions have always been in favor of what’s best in the short term. “Play now, pay later” is not a good philosophy to follow if you hope to have any future. Any future at all.

You see, politicians can’t tell you that things will be hard or painful without some immediate benefit. Saving for retirement and saving Scranton are very much the same thing, deferred benefit for long term gain is what we should all be working toward. Recent data shows we are collectively, as a country, doing a very poor job preparing for the future. This sort of short term planning is not only pervasive, it’s increasing.

Saving Scranton
So what can be done to save Scranton? Is there a way to raise the dead, so to speak? The solution is not another cosmetic fix; it is not a new sports stadium or special interest giveaway. The solution is for the government to get out of the way and allow people to be free. Yes, that’s right, F-R-E-E. Slash payrolls, slash salaries, cut back on services to the point where you can pay your bills, and begin a period of limited government involvement. Let me repeat that last part, LIMITED GOVERNMENT INVOLVEMENT.

If Scranton were a prospective spouse, would you choose a future mate who is up to their eyeballs in debt, financially unstable, controlling, and dictatorial like the city is today—or is the mate of more modest means, who can pay their bills, gives you your space and views you as an equal more appealing? Well, you can see why my hopes for Scranton are rather tempered. Those who are running things don’t want to change, and are not prepared to take the steps necessary to save this marriage between citizens and citizenry. Divorce is the only logical solution.

The situation with Scranton is life or death. In terms of necessary changes, we are not talking about just dipping your toe in the water—it’s go-all-in time. In order for things to change for the better, the steps that have to be taken, unfortunately, are both drastic and painful: think Detox 101.

Imagine you had a grown child that was just starting out in her career. Ask yourself whether you would advise her to lay down roots in Scranton or to move away? Now, if you can’t state with conviction, “Stay in Scranton,” what makes you think other people will find it appealing enough to stay or even move there? Within the answer to this question lies the truth about Scranton’s future.

Sure, this drawn out death of the city can go on for a few more years, but the rise in interest rates will be the final blow. Scranton cannot survive a higher interest rate world—it simply cannot. Its direct debts are too big and its weak pensions will not be able to generate the returns needed to meet promised payments.

Sorry to lay this on you, Scranton, but unless you are prepared to do a complete teardown and rebuild RIGHT NOW, you will allow the market to force it upon you, instead. One option you have some control over, the other you do not. Let’s hope Scranton chooses wisely.

P.S. My long term prediction: it is only a matter of time before some state or city tries to impose an exit tax on future earnings of those trying to flee for greener pastures. Wait and see.

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