Saturday, June 5, 2010

The Death of Detroit: A Warning for U.S. Cities in Financial Distress

WSJ has a must read article, Black Flight Hits Detroit. Here's a snippet:
This shrinking city needs to hang on to people like Johnette Barham: taxpaying, middle-class professionals who invest in local real estate, work and play downtown, and make their home here.

Ms. Barham just left. And she's not coming back.

In seven years as a homeowner in Detroit, she endured more than 10 burglaries and break-ins at her house and a nearby rental property she owned. Still, she defied friends' pleas to leave as she fortified her home with locks, bars, alarms and a dog.

Then, a week before Christmas, someone torched the house and destroyed almost everything she owned.

In March, police arrested a suspect in connection with the case, someone who turned out to be remarkably easy to find. For Ms. Barham, the arrest came one crime too late. "I was constantly being targeted in a way I couldn't predict, in a way that couldn't be controlled by the police," she says. "I couldn't take it anymore."

Ms. Barham's journey from diehard to defector illustrates the precarious state of Detroit today. The city—which has shed roughly 1 million residents since the 1950s—is now losing the African-American professionals who had stayed steadfastly, almost defiantly, loyal.

Through decades of white flight and economic distress, these diehards have sustained the city's cultural institutions and allowed prime neighborhoods such as Indian Village and Palmer Woods to stave off the blight that infects large swaths of Detroit.

Today, frustrated by plummeting property values and high crime, many diehards have hit their breaking point. Their exodus is consigning borderline neighborhoods to full-blown blight and putting prime residential areas at risk. By some estimates, this year's Census will show a population drop of 150,000 people from the 951,000 people who lived within city limits in 2000. That would be roughly double the population loss in the 1990s, when black, middle-class flight began replacing white flight as the prevailing dynamic.
As the financial crises broadens and starts to hit U.S. cities and states, one thing to keep in mind is that a U.S. city is in a completely different situation than one of the PIIGS countries.

The IMF may try to impose austerity and raise taxes on the Greeks, and they yell and scream---and riot, but not many are going to move to Germany.

In the U.S. when say Los Angeles reaches its breaking point, it has very little room to raise taxes, raise taxes too much and tax-paying residents will leave. They will pack up and head down the highway to low tax cities and states, wherever they may be.

Only the non-tax paying slackers and criminals will remain.

Detroit is an example when slackers and criminals are all that remain in a city.

When the crunch comes for the cities and they can't borrow anymore money, they better think twice about raising taxes, if they want any kind of city in the long-term. Cutting bloated budgets and default are their only real options, otherwise they should start thinking Detroit.

For whatever reason, despite enormous propaganda from across the news media, and I am talking blogs to MSM, the belief is that the Fed has pumped huge sums of money into the system since the financial crisis started, they have not done so. They have re-directed money from the main street to the elite bankers, but they haven't printed any new money.

Take a look yourself, the Fed data shows there is no growth in money supply (M2).

This lack of money printing means a crash of the entire economic structure that grew up based on continuous Fed money printing. This inflation based economic structure includes the tax system. The tax system for almost all cities and states was designed to siphon money off inflation growth (It's less painful than straightforward taxes.. Taxes on profits and real estate sales always are). With no inflation, the tax systems are not generating anywhere near the money needed to support built-in spending. Thus the cities and states crisis.

The only way out for cities and states  to increase revenue is to be more obvious about taxes that aren't inflation based, that is, taxes that will be really noticed and really hurt. Thus, politically impossible. A life saver for cities and states, though ultimately destructive for everyone, would be Federal Reserve money printing that would become inflationary. Only Ben Bernanke knows if this a likely option.

Which means for city and states: debt defaults and spending cutbacks. Otherwise, Detroit won't be the only  city left with only roaming bands of criminals.


  1. Didn't the Fed "print money" when it bought the $1T in mortgage securities that are now on it's balance sheet? After all, they bought most of these securities with newly created "money" that didn't exist until the moment of purchase.

    M2, I believe, reflects among other things whether or not banks are "printing money", which occurs at the moment a new fractional reserve loan is made.

    Correct me if I'm wrong. Thanks for all your other good articles.

  2. The politicians running Detroit all these years have utterly failed to ask the consummate question of our time, "What could possibly go wrong?"

  3. "In the U.S. when say Los Angeles reaches its breaking point, it has very little room to raise taxes, raise taxes too much and tax-paying residents will leave. They will pack up and head down the highway to low tax cities and states, wherever they may be."

    This is why the federal VAT will have a "local Aid" earmark.
    People won't do anything and the unions will be in paradise.

  4. @NYDave

    The One trillion in reserves you refer to are being held by the banks as excess reserves with the Federal Reserve. If the Fed wasn't paying interest on those reserves, it is highly likely some or all would be currently in the system.

    There are other ways the Fed could force those reserves to be used. Thus, it is still the Fed's game as to size of the money supply.