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Detroit’s Bankruptcy: The Harvest from the Excess of the New Deal

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I’ve long touted the benefits of the streaming Netflix service…all those online movies and documentaries.  One you will want to add to your list is “Detroipia” a clear eyed look at the decline and fall of one of America’s formerly great cities.

I’ve been sifting through all the editorials written about the recent bankrupcty filing, and so far the only one who has come close to pinpointing the blame is Charles Krauthammer’s July 26th syndicated column (Detroit was doomed by basics of economics).

I’m not anywhere near the pundit that Krauthammer is, but I would like to expand on his diagnosis.  Which would take us back to 1935 and the passage of the Wagner Act, which tilted the balance of power away from corporate ownership and management to unionized labor.

This unleashed a massive social experiment…and the laboratory was the city of Detroit.  You might say that the experiment was a success…right up to the point that the patient died.

The underlying premise of this adventure in economics was to suspend the supply and demand curve for labor, and put in its place a command and control model that allocated a price for labor that was several multiples of what the clearing price of labor was worth.

Put more simply, the army of unskilled labor that enrolled in the Auto unions was being compensated well into six figure incomes, when all benefits and post retirement payouts where included.  The idea was to find out if all the increased costs of labor could be tacked on to the cost of American autos and passed on to the consumer.

But there was no compulsion for the consumer to pay the bloated prices for inferior cars.  The only compulsion was to pay a grossly oversized benefit to the members of the union.

When the Japanese, German, and Korean automakers decided to carve out a portion of our domestic market, they did so by building plants in the south where right to work legislation ensured that labor would be priced at market rates.

In our family, our two cars were assembled in Kentucky and Alabama…from Foreign badged cars.  It never occurred to us that we were under any obligation to be a party to the ludicrous economics of Detroit.

Worse…once the municipal workers in Detroit had the example of the power and gains from the autoworkers union, they extracted similar benefits from the city…and we know that governments have no spine when it comes to dealing with Unions.  They simply pass on the increased cost to the besieged taxpayers.

Once it was clear that taxes would continue to rise, while basic protections such as police and fire services would diminish, the owners voted with their feet.  First by abandoning Detroit, and eventually the entire upper Midwest rust belt area suffering under the same constraints.

The good news is that this should be a wake-up call for all government entities that cannot simply print money to meet their obligations.

The cramdown that emerges will shrink benefits to current and retired workers, and force haircuts on the bond holders.

This will hurt…then again…the best way to get a mule’s attention is to smack it upside its head with a 2 by 4.  Works every time.

 

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