Hamtramck, MI as the Moral Compass of America

Monty Pelerin
Government at all levels has a built-in propensity to bury or defer problems. Politicians would rather declare a problem solved than actually solve it. Why? Because they are in the business of playing Santa Claus. They never want to be in the role of The Grinch, although that is precisely what is required to solve our current fiscal mess.

The city of Hamtramck, a suburb of Detroit, recognizes their problem and wants to solve it. That in itself is unique. What is not, is that they are hopelessly beyond their ability to pay operating expenses as a result of too many employees, too many services, too high payroll costs driven by unions and the pension promises that can never be met.

Any entity, government or business, that finds itself in such a situation has two problems:

  1. A deficit problem caused by spending being too high relative to revenues
  2. A liquidity problem caused by not having enough cash or cash flow to pay the bills as they come due.
These are two entirely different problems, even though they often occur together. The second problem can be solved via borrowing, assuming markets will still provide funds to the entity. The first can only be solved by changing the relationship between revenues and expenditures.

The classic government response to these problems is to address the second one via more loans (or in the case of the federal government via quantitative easing). That takes the pressure off, at least temporarily, but solves nothing. It is the preferred political solution because it appears as though the problem goes away with the new influx of funds. It also means that the tough decisions that must be made to remedy the deficit are deferred into the future, a perfect can-kicking arrangement.

This "solution" has been used time and again at every level of government. Eventually the money runs out again and the crisis reappears. Borrowing, if possible, is done to avoid the tough decisions. Eventually no more borrowing is possible. That is the end of the game and municipalities, states and the federal government have about had this clock run out on them.

The Hamtramck problem is a microcosm of government from the Federal government to state governments down to the smallest municipalities. Spending is out of line with revenues. The problem is structural and must be addressed by reducing spending or increasing taxes or some combination of both.

The city manager of Hamtramck, Bill Cooper, understands the problem and the solution. However, he understands the real problem, not the political one. He recognizes that the city has gone beyond the point of being able to service its debt or support its current spending levels. Furthermore, he recognizes that no solution is possible within the political framework.

As a result, he recommended the city file for bankruptcy protection and renegotiate contracts, staffing et al. Apparently, someone forgot to copy him on the memo as to how this game is played. He is acting in a responsible manner to solve the problem and save the taxpayers of Hamtramck and the state of Michigan additional pain.

The state of Michigan, however, will have none of it. They insist that the city borrow more money at subsidized rates guaranteed by the state. That solution does nothing but defer the problem and worsen the the burden on taxpayers. Mr. Cooper, to his credit, had the courage to provide the proper solution. According to Dow Jones, the state of Michigan has forbidden him to declare bankruptcy while trying to entice the city to borrow more money:

Bill Cooper, the city's manager, said that Hamtramck is currently evaluating the options the state gave it, but he is "not very optimistic these options will work for us" because "we don't need to take on any more debt."

"We have a survival deadline here," Cooper said, noting that, if things continue on the current course, Hamtramck could run out of money by Jan. 31 and be unable to make payroll or pay bills.

Cooper said the state's options essentially require Hamtramck to borrow more money, and much hinges on the city's ability to win its lawsuit against Detroit.

"It pushes the problem down the road," he said.

Comparable fraudulent "solutions" are being perpetrated on taxpayers all over the country. Too many governments are "dead men walking," but unwilling to fall down. As a result, taxpayers are forced to support unsustainable levels of spending and payroll. No problem is solved this way. Indeed, the stop-gap measure makes it possible to ignore the problem even longer, exactly what is wanted by the politicians.

Imagine taking financial advice from the state of Michigan, that paragon of fiscal rectitude.  Even better, given the condition of the state of Michigan, where would they get funds lend to Hamtramck? Are they planning this same strategy for Detroit, Flint, etc.? 

Hats off to Hamtramck and Mr. Cooper. The faster this political chicanery ends, the less costly it will be for the citizens of Michigan. Whatever can be said regarding the political fraud in Michigan pales in comparison to what can be said about other parts of the country, especially the nation's capital. 

Monty Pelerin at www.economicnoise.com
Government at all levels has a built-in propensity to bury or defer problems. Politicians would rather declare a problem solved than actually solve it. Why? Because they are in the business of playing Santa Claus. They never want to be in the role of The Grinch, although that is precisely what is required to solve our current fiscal mess.

The city of Hamtramck, a suburb of Detroit, recognizes their problem and wants to solve it. That in itself is unique. What is not, is that they are hopelessly beyond their ability to pay operating expenses as a result of too many employees, too many services, too high payroll costs driven by unions and the pension promises that can never be met.

Any entity, government or business, that finds itself in such a situation has two problems:

  1. A deficit problem caused by spending being too high relative to revenues
  2. A liquidity problem caused by not having enough cash or cash flow to pay the bills as they come due.
These are two entirely different problems, even though they often occur together. The second problem can be solved via borrowing, assuming markets will still provide funds to the entity. The first can only be solved by changing the relationship between revenues and expenditures.

The classic government response to these problems is to address the second one via more loans (or in the case of the federal government via quantitative easing). That takes the pressure off, at least temporarily, but solves nothing. It is the preferred political solution because it appears as though the problem goes away with the new influx of funds. It also means that the tough decisions that must be made to remedy the deficit are deferred into the future, a perfect can-kicking arrangement.

This "solution" has been used time and again at every level of government. Eventually the money runs out again and the crisis reappears. Borrowing, if possible, is done to avoid the tough decisions. Eventually no more borrowing is possible. That is the end of the game and municipalities, states and the federal government have about had this clock run out on them.

The Hamtramck problem is a microcosm of government from the Federal government to state governments down to the smallest municipalities. Spending is out of line with revenues. The problem is structural and must be addressed by reducing spending or increasing taxes or some combination of both.

The city manager of Hamtramck, Bill Cooper, understands the problem and the solution. However, he understands the real problem, not the political one. He recognizes that the city has gone beyond the point of being able to service its debt or support its current spending levels. Furthermore, he recognizes that no solution is possible within the political framework.

As a result, he recommended the city file for bankruptcy protection and renegotiate contracts, staffing et al. Apparently, someone forgot to copy him on the memo as to how this game is played. He is acting in a responsible manner to solve the problem and save the taxpayers of Hamtramck and the state of Michigan additional pain.

The state of Michigan, however, will have none of it. They insist that the city borrow more money at subsidized rates guaranteed by the state. That solution does nothing but defer the problem and worsen the the burden on taxpayers. Mr. Cooper, to his credit, had the courage to provide the proper solution. According to Dow Jones, the state of Michigan has forbidden him to declare bankruptcy while trying to entice the city to borrow more money:

Bill Cooper, the city's manager, said that Hamtramck is currently evaluating the options the state gave it, but he is "not very optimistic these options will work for us" because "we don't need to take on any more debt."

"We have a survival deadline here," Cooper said, noting that, if things continue on the current course, Hamtramck could run out of money by Jan. 31 and be unable to make payroll or pay bills.

Cooper said the state's options essentially require Hamtramck to borrow more money, and much hinges on the city's ability to win its lawsuit against Detroit.

"It pushes the problem down the road," he said.

Comparable fraudulent "solutions" are being perpetrated on taxpayers all over the country. Too many governments are "dead men walking," but unwilling to fall down. As a result, taxpayers are forced to support unsustainable levels of spending and payroll. No problem is solved this way. Indeed, the stop-gap measure makes it possible to ignore the problem even longer, exactly what is wanted by the politicians.

Imagine taking financial advice from the state of Michigan, that paragon of fiscal rectitude.  Even better, given the condition of the state of Michigan, where would they get funds lend to Hamtramck? Are they planning this same strategy for Detroit, Flint, etc.? 

Hats off to Hamtramck and Mr. Cooper. The faster this political chicanery ends, the less costly it will be for the citizens of Michigan. Whatever can be said regarding the political fraud in Michigan pales in comparison to what can be said about other parts of the country, especially the nation's capital. 

Monty Pelerin at www.economicnoise.com