Paul Krugman wrote yesterday that, despite “political and social dysfunction,” the fact is that “decline happens,” meaning the decline of Detroit is actually “just one of those things that happens now and then in an ever-changing economy.”That perspective is hard to square with the seemingly never-ending torrent of bad news from Detroit. The FT reported today that the city’s pension liabilities may be much worse than the $3.5 billion stated in its bankruptcy filing. Years of dubious investments and unrealistic expectations may be hiding obligations that would render the $3.5 billion “significantly understated”:
Mr Orr and his advisers claim that about 30 per cent of the investments in the general fund fall into the category of “other”—riskier, less transparent—investments, and include real estate transactions and development deals in Detroit itself that lacked sufficient oversight and vetting from professional investment advisers.Such projects included funding for unprofitable real estate developments and Tradewinds Airlines, a US cargo airline, which is now defunct and lost all its value two years ago, Mr Orr told the Financial Times. […]Bill Nowling, a spokesman for Mr Orr, said that the assumptions on everything starting with expected returns (about 8 per cent for each fund—in a zero interest rate world) “were generous and aggressive. They painted as rosy a picture as they could.”
Does Krugman think that conscious deceit and fraud in the administration of the pension systems on which tens of thousands of people depend are just impersonal free market forces?City and union officials and investment advisers have already been charged with fraud in the management of Detroit’s pension funds. The news that officials are also guilty of idiotic and irresponsible investment decisions should come as no surprise to emergency manager Kevyn Orr, or even to New York Times pundits.Krugman is right that Detroit is essentially Ground Zero of the disruptive changes wrought by an economy in transition. But as this story and others like it show, it’s difficult not to conclude that the city is also the victim of rampant fraud and stupidity on the part of an all-Democratic political machine. Officials decided time and again not to fund the promises they made to city pensioners, and feds and regulators just as often declined to do anything about it. If something this egregious and destructive were happening in the private sector, Mr. Krugman would (rightly, in our view) be all over it, demanding that people go to jail and regulations be tightened. He would want to investigate the ties of influence that allowed serious financial wrongdoing to go on for years without serious oversight. He’d name names and pin shame on the wrongdoers and their political allies.Detroit didn’t just wither in the face of changing economic conditions. It failed to adapt. Motor City is littered with dumb “recovery” ideas like the grandiose and badly named “Renaissance Center” in the dead heart of downtown. Race baiting politics by corrupt hacks who cynically invoked racial stereotypes and stoked hatred to build popular support for criminal rule (a milder, home-grown style of the politics of Robert Mugabe in Zimbabwe) made a bad situation much worse. The soft bigotry of low expectations meant that neither federal nor state prosecutors intervened until very late as the thieves looted the ruins. The civil rights establishment kept its eyes devoutly averted and its lips firmly sealed as a generation of fraudsters ruined the city, wrecked the pension system, turned city administration into a swamp of ineffective and corrupt failure, and denied a generation of schoolchildren any serious educational opportunity.Is all this really “just one of those things?” Is it the fault of “free markets” that felons and race baiters looted Detroit when they should have been crafting a recovery? Krugman is normally a fan of financial market regulation. Surely a system that allows public union leaders and political hacks to lie to workers about the safety of their pensions cries out for regulation of some kind?America’s rapidly changing economy is by nature going to leave some people coughing in its dust, but there’s no denying that it was people who cheated on and lied to the citizens of Detroit. Letting crooks off the hook for their role in human suffering has no place in liberalism and does a disservice to those in Detroit hoping that America’s thought leaders are working to remake their city in the image of responsibility and integrity.Economic change alone did not wreck Detroit, and political malpractice alone did not loot it. But official negligence, a criminal local political class, and inadequate public sector pension regulation combined with economic change to take a great American city down.Of all these forces, economic change, however disruptive, at least has an upside. Learning to live with and even benefit from economic change while managing the costs is the task that every single city and town in the United States needs to get on with. Fatalistic handwringing is no answer. (And to his credit, we don’t think that is the course of action that Krugman really recommends.)But we do wish that when politicians behave as badly as crooked people in the private sector, more liberal and left wing intellectuals (to say nothing of the civil rights leadership) would call out the liars, demagogues and thieves who prey so adeptly and so destructively on the poor.