"Our new products and the strategic realignment we announced last week position us well for long-term success, as we focus our energy and resources on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value the most." Steve Ballmer
"Google had a great quarter with over $14.0 billion in revenue - up 19% year over year." Larry Page
"We refuse to let Detroit go bankrupt." Barack Obama 2012
Yesterday, Detroit and Chicago were downgraded by Moody's in part to pension liabilities, the inability to raise revenue and the inability to contain costs. Later in the evening, Detroit became the largest city to file municipal bankruptcy. One of the big problems for these cities, in addition to lavish pensions and other retirement promises made during boom times, is a deterioration of values. Along with this comes social unrest that makes life more dangerous for citizens and more expensive for city administrators.
We need peace in the streets in order to make an economy hum. In fact, surging crime when Ronald Reagan came into office made the economy he inherited worse than the one President Obama was handed. Toss in runaway inflation, sky-high interest rates and other factors, and it was simply a tougher hand. In the four years leading up to 1981, murder soared 33% while more or less remaining unchanged into 2009. But, crime overall was and continues to freefall mostly because of tough policing and wider gun ownership.
I bring this up because tomorrow there will be protests in 100 cities. I don't begrudge the protest; I only hope they remain peaceful. Yet, beyond tomorrow, one must wonder just how long America can remain calm or placated in an economy where real wages continue to recede, government assistance rockets and hope fades. Angst is sweeping the nation and could eventually morph into something ugly. Freefalling crime was a major plus for the administration, and they must make sure to keep a lid on it. Of course rhetoric and sweet talk aren't nearly as affective as job creation.
Perhaps the final nail in the coffin of Detroit was runaway crime that drove the city's most productive citizens and their huge checks into the suburbs.
Now the city must work out this bankruptcy situation without a bailout from taxpayers. While shocking and sad, this isn't "man bites dog," as we saw it coming. In May I penned two pieces on Detroit mostly as a cautionary tale for the rest of the nation. Here they are:
Charles Payne Announces the Morning Report as Follows
Migration from Paris
At this point it would seem some kind of bankruptcy is in the offing. But problems don't go away with such a decision. And while there will be debates over where money comes from and who pays for a bailout, the bigger tougher question is how this once great city truly recovers.
The story of Detroit must be followed closely because of its economic and moral implications. The economic part is not just what's happening at this very moment but policies and ideas that brought the former Paris of the West to the point of state takeover. The city is spending money it doesn't have and now must figure out how to live within its means even as it now must also find ways to pay its massive deficit.
In a town where citizens feel services are poor to non-existent, officials will actually have to do even less. This adds to the serious death spiral of pessimism and defiance. It's estimated that $247 million in property taxes and fees went uncollected in 2012 from more than 150,000 (47%) of owners, mostly out of defiance. There were at least 77 blocks were only a single homeowner paid their property taxes. They say "why" taxes go to pay for service that stopped a long time ago.
Then there's word city officials severely inflated property tax rates. In fact, one report says officials are leveling taxes at 10 times the selling price of properties by discarding 94% of sales made last year.
Talk about highway robbery. But this is what happens when lavish promises are made while a city, state, or country bites the hand that feeds it. Government "revenue" is mostly the function of taxes. When politicians promise money they have to know where that money is coming from. Unlike the cyclicality of the economy those promises are never adjusted lower- there is never a recession in government promises.
Almost all municipalities now facing difficulties are in trouble from promises made to government workers and are hiking taxes in order to pay them. Coupled with promises to those with lower incomes, it means higher taxes on successful people and businesses have to be levied. But higher taxes ultimately means lower return - it's the law of diminishing returns personified by less output, and flight of (talented) people and capital, while less talented people keep coming in.
In one hundred years Detroit went from a magical city playing an amazing role in industrialization of America but also assimilation of races (in the beginning painful), and beacon of hope. The Progressive movement played an early role there in trying to mitigate business and in the beginning unions and other pressure did lead to better wages for all - making the city a magnet. But, the pendulum swung too far resulting in wages that were too high, promises too rich and habitual spending that continues to be the unshakable addiction.
There might be state and federal money to help Detroit but in my mind there's only one real solution.
Time to Grab Bootstraps and Embrace Capitalism
Detroit is one of the homes of progressivism in America which helped to make wages better but at some point began to push businesses out of the city. High taxes and tough unions made competition so difficult industry in the city suffered. In the meantime, a certain lifestyle became the norm for both citizens and government officials. Money was spent, promises were made and the seeds of the current economic malaise were sown.
There was a flight of businesses and people, the former often to other states, the latter to the suburbs.
The city must find ways to bring back business, population, and education.
Luring Them Back
Only people fleeing third world nations are going to be lured away from their homes to live in welfare states. Americans, even after four years of being told to limit dreams to the Middle Class status that amounts to living paycheck to paycheck, want more. Even as we are told our earnings and our children are part of the public domain we still seek better lives. For most that means better jobs and better opportunities for our children. This is only going to happen if the private sector thrives.
Government run or dominated economies have always failed and always will no matter how appealing it may seem on paper or in flowery speeches.
Government has to be crowded out by the private sector, easier said than done since it mostly happens the opposite way.
Currently eight of the top ten employers in Detroit are government, education and healthcare. Private businesses are only 10% of employers, and there is simply no way the city can ever get back on its feet with a model that relies on high taxes to create jobs as people flee the city. Those leaving are brilliant and innovative. Those staying behind are needy and have been coddled so much with so many programs their ability to stand erect without government aid has almost vanished.
The city would do better to lower taxes instead of raising them as (soon -to- be-former) Mayor Bing wanted.
Already Dan Gilbert, founder of Quicken Loans, has shown smart, deep-pocketed business people are willing to make investments in Detroit. His purchases in an effort to jump-start a mini Silicon Valley have included the old Federal Reserve Building, Chase Tower and First National Bank. In total his investments include:
> 9 buildings
> 3 parking structures
> 1 lot
Others are following his lead but even that must be pushed with encouragement. Otherwise a citywide recovery where there is an oasis or two wouldn't be much better. Of course importing businesses and smart people is only a part of the equation - there has to be homegrown talent, too.
Homegrown talent means better education and no more excuses. I spoke with a Detroit based professor who informed me that 47% of the population was functionally illiterate. A liberal, the professor gave me the stat as a reason for more government aid in the form of welfare spending. In my mind that would sink the people of Detroit farther down the abyss of despair. But it underscores the sense of urgency and points to how failed economic policy goes to the roots of society.
The good news is graduation rate is above 50%, having hit 65% last year but the dropout rate is still 20% and there is still a lot of hopelessness.
The cure to Detroit is a combination of things, almost all painful. People born into despair will bristle at the idea they must pay such a price for good times had by folks that have passed on or moved on. It's the only way to get this done. Tough austerity that can only work if articulated with a plan that citizens buy into. A plan that somehow gets people to pay their taxes because they understand a metamorphosis will take time and money and sacrifice.
The same people that have been told since birth things are owed to them rather than expected of them will have to be sold on putting skin in the game on the notion there is no other way to be great again.
They have to know they can be Paris of the West again but the foundation starts in a deep dark hole.
Charles Payne Announces the Morning Report as Follows
Mickey D on Strike
This past Saturday the panel on Cavuto on Business debated a recent walkout by workers at a McDonald's restaurant in Milwaukee. It was one of our typical heated segments with strong views expressed in rapid fire. Some panelists empathized with the workers, or at least their rights to demand an immediate one hundred percent increase in wages; others felt it was irresponsible for several reasons.
Doubling wages means fewer workers, higher prices for customers, and less profit for shareholders. Essentially those are the goals of the puppet master behind the walkout.
These kinds of debates, which we'll see more of as there is a push from the left for a dramatic hike in the federal minimum wage, always miss the true human angle - the true human tragedy.
During our dustup, I mentioned the city of Detroit as a glaring example of how the progressive agenda can destroy industry, family and even a grand city once called Paris of the West. Amazingly the idea of wages that exceed the boundaries of the free market is always promoted as fair, or caring, or smart. In the end it is none of those things. This ideology skews reality while mitigating the obligations of would-be workers. It encourages minimum effort to learn to sacrifice to be a greater asset to the employer and community.
To be frank, it's a lie that destroys futures.
Those McDonald's workers in Milwaukee were carrying nice signs obviously designed and made for them by others. Behind the scenes union officials have been pushing organized labor at the largest businesses in America from McDonald's to Wal-Mart. Part of that push means wage demands that are unrealistic for reasons already mentioned that would reward mediocrity. We are told, and evidence backs up the notion, the more education we attain the more money we'll earn. The narrative these days, however, is we must reward those that haven't made the effort, that somehow those with the least amount of education should be rewarded with large increases in wages.
For me it gets back to the most dreaded aspect of liberal thinking - making poverty just comfortable enough for those snared by it to not make the right kind of effort to escape.
The avalanche of programs from food stamps, tax credits and local programs has put recipients in a position of actually having to take a haircut to go to work and early possible raises in salary actually result in lower net income. That's the drawback for those that want to work and for those people that don't want to work - they really don't have to so millions have checked out. The pride, rigors and foundations built from going to work at any job aren't developed by these people otherwise portrayed as victims of capitalism rather than victims of policies designed to hijack capitalism.
When someone is overpaid for their skill set they rarely bring up those skills. To reward McDonald's workers with a 100% wage increase would remove the urge to find better employment and remove the need to sharpen skills that would have been needed to attain a better job. This is how it happens. In Detroit wages were too high, the entitlement culture from city officials to city residents ran amok to the point of implosion. Now the city must brace for true austerity if it is ever going to shed the shackles of deficits.
I've seen this on household and neighborhood levels in my lifetime. It's politically incorrect to demand more from disadvantaged people. Over the years we've watered down school tests, implemented employment quotas and had hundreds of jobs programs. What has never been done is going to people and saying: "You must bring it up!" Businesses deal with demands from powerful politicians and organized labor and rich special interest groups, yet we don't demand sacrifice or extra effort from those getting all the attention, money and sympathy.
Those workers at that Milwaukee McDonald's would be cursed if their wages doubled. They would become complacent and future expectations for what their limited job skills would demand would lead to heartache and frustration if they ever decided to leave Mickey D's in the first place. Those pulling the strings honestly don't care about people becoming lifelong welfare recipients or fast food employees as long as they can chip away at the capitalistic structure of America.
I worked at McDonald's between high school graduation and entering the Air Force. It was a nice place to work and had programs for those eager enough to give extra effort. In fact, I met a young Black manager from another store who was in a program that would eventually help him purchase his own franchise. The program demanded a lot from him including a grueling work schedule and continued education. Imagine that, a program with real demands and real rewards.
The cycle of poverty will never be broken with government programs, higher taxes for the rich and businesses, or artificially high wages. It can only be broken by individuals that demand more of themselves. It can only be broken by people that reject trinkets like free cell phones and the narrative their lot on life is determined by others that don't like them. The cycle of poverty can only be broken by people that reject the notion of victimization, embrace the idea life isn't fair but can be altered.
The chains of poverty can only be broken when people know they are being played by special interest groups and politicians and reject their Faustian deals.
The beautiful thing about America is the chains of poverty can be broken.