The American Interest
Analysis by Walter Russell Mead & Staff
Are City Bailouts on the Way?

When it comes to Detroit, much of the nation’s attention is focused on the bankruptcy case which is expected to be decided on by a judge early next week. But over at City Journal, Steven Malanga asks the question (h/t Megan McArdle) that is likely to persist as more and more cities go through bankruptcy: can the federal government step in to back these cities up?

The question isn’t an academic one. As the pension crisis has spread, a number of cities are teetering on the brink of insolvency, and many would much rather receive a lifeline from the feds than go through the pain of bankruptcy. Even for those cities that do go bankrupt, there’s no guarantee that their problems will be solved: municipalities like Vallejo and Jefferson County, Alabama have gone through arduous bankruptcy proceedings only to emerge with many of their problems intact. And when this happens unions, pensioners, city officials, and sympathetic press figures will continue to make the case that their problems simply aren’t solvable and that innocent city residents and pensioners shouldn’t be forced to suffer for bad decisions they played no part in.  Yet while we at Via Meadia have been somewhat sympathetic to these arguments, Malanga makes a strong case that this course of action is unwise:

Politicians and unions have been emboldened in resisting reform because they expect that the federal government won’t let big cities or their major pension systems fail. Late last year, Detroit city council member JoAnn Watson invoked the memory of Mayor Coleman Young’s pilgrimage to visit Jimmy Carter after Carter won the presidency. Young “came home with some bacon,” Watson said, and she called on President Obama to deliver similar largesse. Cities are already set to benefit from one federal bailout: the Affordable Care Act, better known as Obama- care. Chicago and Detroit have announced that they will send retirees to seek health insurance on state insurance exchanges, which federal taxpayers will subsidize. Other cities with strained budgets will almost certainly follow suit.

Bailout advocates argue that some American cities have such massive retirement debts that they could never repay them without Washington’s help. Riordan, for instance, has proposed federal guarantees of state and local pension debts in return for reforms that would improve the accountability of retirement systems. But what these nearly insolvent governments really need are voters angry enough—and worried enough—to bring an end to the special interests’ tight grip on the public purse.

From our perspective, it may be the case that bailing out cities is the right move in certain extreme circumstances: the residents of an entire city shouldn’t be abandoned as their city sorts out its problems. But the moral hazard problem Malanga raises is real, and it’s important that politicians in struggling cities don’t simply assume that the possibility of a federal bailout gives them license to make reckless choices. If the Feds do step in to bail out a city, they need to make sure that it comes with serious political changes to go along with the money. To do otherwise would only encourage poor decisions today.

Published on November 30, 2013 10:30 am
  • http://inthisdimension.com/ Alexander Scipio

    The only serious way out of this mess requires recognizing two historical facts. 1. Bigger is worse & smaller is freer, and, 2. Progressivism / Central Planning / Redistrubution ALWAYS impoverishes everyone. As the UK and others are learning, in their increasing devolutionary struggles with Scotland & Wales, deology counts. It is time for Red & Blue to devolve. Blues demand to be cared for – but demographically have given up. Reds demand to be free and are tired of their demographics being used to enable their ideological opponents. History shows that America is too large to be governed effectively as a republic – and the last few decades seem to have proven this. It’s time to split up. Let Blues go their way & Reds go theirs. We already know which will succeed, and it is time for those desiring progress & success to cease participating in a system actively against progress, whose only policies are band aids for the past.

    • rheddles2

      History shows that America is too large to be governed effectively as a republic

      Yes, that was the great concern in 1787. Little Jimmy Madison and Al Hamilton tried to prove otherwise in their op-eds, but the last 225 years have put paid to such foolishness. Not.

      • Tom

        An America east of the Mississippi would be just fine–which is what they were dealing with.

    • Cory Atkin

      We don’t need to go our separate ways. We just need to adopt the notion of true diversity and let everybody have what they want.

      Progressives want high taxes and lots of bennies from the government. Fair enough. Lets give them a 90% flat tax rate and let the government take that money and distribute it as it sees fit.

      Conservatives want low taxes and no bennies from the government. Let’s give them a 10% flat rate and have their money go only to support conservative government (military, justice system etc). Let’s give them a refund on their Social Security and Medicaid taxes collected and let them take responsibility for those things in the free market.

      If you want it, you pay for it. If you don’t want it, you aren’t compelled to pay for it.

      If we were to adopt such a system, the welfare state would go bankrupt very quickly and 90% of liberals would convert to conservatism.

  • Andrew Allison

    ” innocent city residents and pensioners shouldn’t be forced to suffer for bad decisions they played no part in”; innocent non-residents should do so instead????

    • slovokia

      Don’t forget many voters (especially those on the left) seem to think the federal government has a magic ability to produce goods and services out of thin air by printing money or borrowing it.

      • Corlyss

        Well, the feds do have that power. They can print money till the second coming without, apparently, the bond vigilantes thundering down and laying waste to their interest rates. The fact that cities and states can’t do that is a profound reason for letting them stew in their own greedy Lotus-Eating juices until bankruptcy smacks ‘em in the face. It may restore some sense of community when neighborhoods have to mount foot patrols to take care of their own because the police can’t get there. I don’t see bankruptcy as a lose-lose; it’s a much needed reckoning.

  • rheddles2

    If the Feds do step in to bail out a city, they need to make sure that
    it comes with serious political changes to go along with the money.

    The feds dictating political change to cities. That will work out well.

    • Corlyss

      IT has worked out well when money is at stake. I just don’t think a liberal national government will deal roughly with a like-minded city government. It might strip the bark off a conservative-run state, like Obama has done, but it will never touch a leftie sanctuary like most cities now that there’s not a single at-risk big city not run by lying, greedy, Dims.

  • Corlyss

    “many would much rather receive a lifeline from the feds than go through the pain of bankruptcy.”
    As long as the government in DC remains liberal (and that includes Republicans that sound more like Dimmycrats than conservatives), nobody’s going to deal with the moral hazard.

  • Fat_Man

    If the Federal Government which is already drowning in debt bails out the State and City governments, who will bailout the Federal Government?

  • PapayaSF

    I think the fairest thing, and the most perfectly karmic thing, would be to pay for all bailouts of public employee pension funds with a special surtax on the wages of all current public employees. Solidarity!

  • gabrielsyme

    it’s important that politicians in struggling cities don’t simply assume that the possibility of a federal bailout gives them license to make reckless choices

    It’s not so much the current politicians you have to constrain, but the special interests. And the special interests are simply going to vote out the politicians who think that they shouldn’t make reckless choices. Constraining the public sector unions is not really within the purview of the federal government.

  • charlesrwilliams

    “the residents of an entire city shouldn’t be abandoned” Are they children?

  • Boritz

    Three criteria will be applied to determine what happens:
    1. Does it benefit Washington?
    2. Does Washington receive a benefit?
    3. Are there benefits for Washington?

  • Bruno_Behrend

    This solution would require a GOP majority and president, but the bailouts would be worth it with forced spending and debt caps on every municipality requesting a bailout.

    The entire free market movement has missed the boat by being stupidly anti-tax instead of appropriately anti-spending.