How to rescue Detroit from emergency

EM Kevyn Orr. Detroit News Photo.

Detroit finally has an emergency financial manager. Most people would say there is an emergency, but it has been an emergency for a long time.  Emergency sounds like something that comes along suddenly—a hurricane or tornado.  But Detroit has been in a downward spiral for a number of reasons – much of it due to bad public policy.

In 1940 Detroit was the fourth largest city in the United States, and the 5^th largest in 1950, 1960, and 1970. By 2000 it had slipped to 10^th and was 18^th in the 2010 census. In 1950 it had 1.85 million people.  Today it has barely 700,000 and has lost more than a quarter of its population since 2000.

It has long past been an emergency.

In 2005, Detroit began borrowing to fulfill its pension obligations, borrowing $1.4 billion under then-mayor Kwame Kilpatrick.  Last year it borrowed 9.3 percent of its general fund budget to cover shortfalls.  The state’s review of Detroit’s finances showed it has liabilities approaching $15 billion – in a city with a population one-third the size of Houston.

Why would a City Council and mayor vote for budgets that rely on massive borrowing simply to make payments?  The answer is that it is politically unpalatable to reduce expenditures to match a declining tax base.  It is easier to make promises that can’t be kept – to push the day of reckoning down the road.

The day of reckoning has arrived.  The city cannot keep its street lights on.  Its 2011 homicide rate was almost eight times higher than that of New York City. With a 9 percent rise in homicides in 2012, the total reached 411.  The average police response time is 57 minutes.  Wait times for its buses are so long that Mayor Bing declared a transportation emergency in 2011. Its bus time on time rate is 72 percent. Fire services have been deteriorating.

In 1956 economist Charles Tiebout wrote a famous paper that made the case that people will “vote with their feet.”  Cities that have high taxes and low services will lose population while those that are efficient will attract population.  Just look at the difference in population growth in Oakland County versus Detroit to observe that Tiebout’s hypothesis is correct.

Detroit must become a place where people want to locate.  That will require that it protect property rights.  As Ludwig von Mises wrote, property rights are the key to civilization.  Businesses will not locate in an area where its property is not protected.  This is the first order of any government.

It will also require a reasonable tax burden.

The city cannot attract businesses or new residents without being competitive with other possible locations. The task of the new emergency manager, Kevyn Orr, will be to improve basic services, deal with the City’s debt, and reduce tax burdens all at the same time.  One may question whether he can be successful, but it is clear that the City Council and Mayor Bing cannot. The alternative to an emergency manager is municipal bankruptcy and the demise of a once-great city.