By Walter Borden
MANY US cities like Detroit face pension and general service funding shortfalls. Yet for over 5 years the corporate sector has recorded historic profits as a share of GDP. In none of these years however, did they choose to undertake the simple, incremental steps that would have met pension reserve requirements. Even the debt ratings, presented as legitimate third party analysis in support of more pain for retirees and the working poor, are in fact made by firms owned and beholden to Wall Street titans, and as such are dubious. For example, some downgrades appear suspiciously right after a heavyweight firm has taken a position which would gain on a downgrade. Other cities in the US may soon follow as targets for the Model-Detroit. How to help main street?
Firstly, municipalities investing in lean, low-carbon economies outperform in terms of job growth and thus have broader tax bases than those that have allowed the areas within their borders to stagnate and decay. One element of this solution can be found in cities where sprawl has been more closely constrained and efforts undertaken to locate vibrant city centers where daily marketing and living are proximal via public transport, walking, or bicycling. A city comparable to Detroit in many ways, but one that chose to focus on a vitalized urban core is Pittsburgh, which in fact which ranks high in social mobility.
Importantly, pensioners and the working poor cannot afford to move to other cites and regions with more economic growth nor afford skill upgrades. Economists call this search friction or frictional unemployment.
A second important initiative that would benefit Detroit pensioners avoid “bail-ins”, where a portion of their pension money is taken to repay a special class of Wall Street firms, would be a public bank, that is, one owned by the citizens of Detroit. Such a bank could loan needed funds during this bankruptcy and provide support in the face of other stressors. If done in time, such a bank benefit from the still-historically low interest rate picture to grow its loan portfolios and capital.
Many cities suffer from higher costs and lower tax revenues from the bursting of the housing bubble, where banks were bailed out on the hypothesis that they were critical to the very fabric of our system. Are cities not an essential component of this system? What then of our cities, where 60% of our citizens reside and 70% of its wealth generated? Local grocers and merchants will of course lose even more business as pensioners cut their spending. These multiplier effects will negatively impact more than just cities. This is systemic risk equally as severe as that of massive banks failing. We can bail-out banks and such logic applies to our US urban centers.
Appointing Janet Yellen as the Chairwoman of the Federal Reserve Bank would constitute a third important step in rebalancing our policy making focus towards main street and away from its fixation on Wall Street. Yellen’s deep experience at the Fed, impeccable credentials, and (critically) lack of ties to Wall Street make her the right expert at the right time and place.
Some analysts observers position Detroit’s troubles as proof that the pubic sector and unions have claimed too much wealth for their retirement plans and pensions. Nary a mention of how even as US companies have seen record profits over the last half a decade; yet, all the while have continued to underfund their pensions. Presumably they expect the federally run insurance fund called the Pension Benefit Guaranty Corp. (PBGC) to step in. PBGC provides partial insurance of the private sector defined-benefit pension obligations. No such entity exists for public pensioners living on $19,000/year. Nor is much mention made of the fact that Cities could use record low rates to borrow the cash to make the plans whole, rather like how Corporate operators use debt markets to avoid paying taxes as Apple has done. Many of those averring about the pension crisis see it as a corollary of the mythical debt crisis. A crisis which never materialized, was never predicted by most analysts, and was likely a red herring used by partisans to curtail Social Security and Medicare without having to say so.
Why does this matter for the future? If the US continues to remain on the wrong side of the Great Gatsby Curve, we may well see conserved resources put into localized energy sources such as solar stations, rather than used to sustain and build a clean economy infrastructure. This possibility would disrupt the lives of a great many Americans.
Many more problems arise with austerian arguments for gutting pensions in Detroit (and many other cities). One is that austerians so often get the numbers wrong. For example, Dean Baker caught the Washington Post editorial page claiming $3.8 trillion in unfunded state and local pension liabilities. As Paul Krugman wrote, “Say it in your best Dr. Evil voice: THREE POINT EIGHT TRILLION DOLLARS.” Except the study the Washington Post cites very carefully states that it’s $3.8 trillion in total liabilities, not unfunded ones; unfunded liabilities are only $1 trillion.
Still, a lot of money. But compare it corporate profits on the S&P alone on path to exceed $1Trillion this year. All in an economy with ~$16.62 Trillion in GDP. In the context of other cities, the reality is: “The Bond Buyer reported Friday that Detroit’s pensions funds have long been considered relatively well funded, at around 91%, largely because of a $1.5-billion pension certificate borrowing in 2005 and 2006.” as the Detroit Free Press reported.
Will this siphoning of public resource for the enrichment of a handful of bankers stop at Detroit? Acute income equality has eroded tax bases for many rust-belt communities. Affluent suburbs and cities adjacent to them, Evanston, Illinois for example, still enjoy the benefits of the large municipalities, their sports teams, cultural institutions, public transport infrastructure and so forth. Would property values in Evanston be as high without the lure of Chicago Bulls and Bears games or the world-class exhibits of its Art Institute and Museum, or its access to a (recently restored) Lake Michigan?
Worryingly, the pessimal case for Chicago being put through the Wall Street austerity-for-them template seems robust. Chicago continues to see downgrades of its debt from the very bankers whose offices taxpayers subsidize. This subsidy is based on the allowance bankers use to leverage a city’s large tax-base to cheaply build office buildings for themselves via corporate welfare and taxpayer handouts in the form of Tax Free Municipal bonds. Yet their gratitude is thin. While President Gerald Ford bailed out New York with $2.3 billion in federal loans, few politicians in 2013 seem prepared to challenge their financial backers. So the gleaming renaissance for New York that Ford’s bail out helped generate, has provided a specilaized class of bankers with office buildings paid for largely with taxpayer subsidy. Empty talk reveals scant concern for people living on $1900 a month that have already seen their pensions cut by 40% on average.
Many of Detroit’s citizens will loose twice as they are both debtors and creditors. With the city having lost tax revenues in the housing collapse and property values at stubbornly long nadirs, most homeowners with mortgages — debtors — can’t qualify for refinancing. But, many of theses same people are also creditors. Their city owes them the pensions they earned. Michigan’s Republican attorney general, Bill Schuette, agrees that Michigan’s constitutional protection for pensions is binding even now.
Yet in 2005 the basic principal of bankruptcy proceedings — the arbitrated allocation of claims by an official or commission when a debtor can’t service all of its debts — was reconfigured by Wall Street, and its politicians to give a certain class of bankers “superpriority” over pensioners and other bondholders, such as local banks. These 2005 changes in the federal bankruptcy law put certain bankers in line ahead of pensioners and community banks. As attorney and public banking expert Ellen Brown has extensively documented, this provision gives credit default swaps held by banks priority over other debt instruments. So, banks that speculated in Detroit’s debt stand to get paid ahead of so-called ordinary bondholders and of course pensioners.
As Brown writes:
Derivative claims are considered “secured” because the players must post collateral to play. They get not just priority but “super-priority” in bankruptcy, meaning they go first before all others, a deal pushed through by Wall Street in the Bankruptcy Reform Act of 2005. Meanwhile, the municipal workers, whose pensions are theoretically protected under the Michigan Constitution, are classified as “unsecured” claimants who will get the scraps after the secured creditors put in their claims. The banking casino, it seems, trumps even the state constitution. The banks win and the workers lose once again.
As hard as it is to understand how such vocal champions of self-reliance have no problem relying other people’s earnings/taxpayer funds to build office towers for themselves, it is very common. Worse yet, Way-Too-Big-Too-Fail banks actively manipulate the cost of commodities and game interest rates in these same cities whose tax base they plunder, ensuring each day that costs go up for our fellow citizens. Would these funds not be better deployed securing pensions for those who worked and played by the rules and in support of our public schools?
What are possible solutions? The public banking initiative and clean economy builds are a good start. The wealthiest zip codes in the US are almost all in states that lead in clean economy infrastructure and policy making. Even cities in some states traditionally hostile to the clean economy like the sprawl of Atlanta lead their regions in clean energy uptake as well as have access to rail and well developed networks of public transport relative to their region. Birmingham, Alabama of its Jefferson County, was surpassed by Detroit for the distinction of the largest municipal bankruptcy in US history. Its water and sewer system continues to decay after JP Morgan’s financial engineering completely failed. Its civic leaders have wisely re-focused on building a vital urban core. And its local businesses are making clean water a priority.
One thing is certain, at some point the casino capitalists may simply drain and weaken the American labor economy such that it has no more to give. Consider that income inequality — median wages are 4% less than when this most recent jobless recovery began — has been shown to correlate highly with political divisiveness.
Lastly, might it be that renewable energy projects will also experience more uptake if incomes continue their stagnation — i.e. is there a relation between between the Great Gatsby Curve and the so-called Jevons Paradox/rebound effect? It is often argued, yet never shown, that energy conservation efforts are ineffective as the spare, cheaper energy, is simply used somewhere else. Some call this the Prius effect. Yet, researchers have not found any evidence of people driving more often or farther simply because they can. Yet, if the US continues to degrade into a labor pool fetching little more than $10.00 an hour on average, to an economy where even nominal inflation rates ensure that real incomes decline on a decennial basis; it may well be that the majority of citizens have no choice but to convert to solar, and/or use electricity sparingly. Given such low incomes and challenges in paying for healthcare and education, innovation could suffer mightily. This could portend a diminished future for all. Looking to China for an economic future is not the answer, which is already seeing life expectancies drop by ~5.5 years due to its rampant smog and water pollution. Is this what we want for the US economy? Or would we better serve future generations with expansionary policies focused on reducing unemployment with low-carbon infrastructure and banking that puts main street’s interest first?