John Ransom

From one moment to the next the city of Detroit doesn’t know where its next bailout is coming from. Chronically unable to pay its bills, the city looks to the state for cash gifts to stave off default. Operating under the terms of a consent agreement hammered out with the state, Detroit faces fiscal uncertainty largely because it has failed to get adequate concessions from public employee unions that are unsustainable. And those concessions that they have wrested from unions, politicians in Detroit have been unwilling to enforce.     

One prominent Detroit attorney, however, is facing the future of the Motor City with a bit more certainty.

He’s calling upon the city to declare bankruptcy.

"Detroit should go bankrupt," says Douglas Bernstein, according to the Detroit News. Bernstein is a partner in the law firm of Plunkett Cooney who specializes in bankruptcies.  "It would be a recognition that they've hit bottom, and it's a chance to go on the upswing. I don't think they're going to be stigmatized as much as people think…. Otherwise, you're going to go down the path and be in one crisis after another. Yes, it's expensive and it should be a last resort. But at some point, you've had enough."

The bankruptcy would be the largest municipal bankruptcy in the history of the US.

While we are not at the point yet for the federal government to declare bankruptcy, you may rest assured that that day is coming, because the same forces that are driving Detroit to bankruptcy are driving the US as well. 



There are fewer people building things and more people demanding things they didn’t build.  

Whatever else one may say about it, if Obama meant to throw Detroit a fiscal lifeline with the auto bailout, it hasn’t worked. It demonstrates the futility and danger of the federal government commanding and controlling the recovery of any industry- or even the county.

It’s just not going to work out for most of us, but only for a favored few.   

After $85 billion in federal bailout funds for the automakers headquartered in Detroit, there are no fiscal answers to what ails the city and the surrounding areas.  

To demonstrate most clearly why the auto bailout should be considered such a tremendous failure, you only have to consult the numbers.

$80 billion is more money than 14 states annually produce in GDP. Detroit has a population of 700,000. On per capital basis, that means the bailout cost about $112,000 per Detroit resident. Delaware has the greatest per capita annual GDP of any state at $70,000 per resident- only Washington, DC- which is NOT a state, Mr. Obama- at $175,000 in per capita GDP beats the Detroit auto bailout.

Yet, still by most measurements, Detroit is imploding. By June of 2013 it is expected that the city will be short $47 million according to the Detroit Free Press.   

And surrounding communities are also suffering. BusinessWeek reports that “five cities and three school districts [in the Detroit area] have emergency managers, including Flint and Pontiac,” in order to manage the fiscal crisis. The law allowing “emergency managers” with broad authority over fiscal matters, including modifying employee contracts, however, was recently repealed after unions campaigned to protect existing contracts.  

So now Detroit will be short of cash by mid-December and the only way to fix the crisis is by voiding public union contracts, not just modifying them as an emergency manager was able to do.

That means bankruptcy.  

“The state's democratic process succeeded in overturning an emergency manager law whose powers threatened the financial gains of public-sector unions and the political prerogatives of elected officials,” writes Daniel Howes, a columnist for the Detroit News. “But democracy is failing in Detroit, as its metastasizing crisis and the feckless response to it amply demonstrates.”

If at a time when automakers are trumpeting record-setting sales, record profits, record bonuses for their employees, how is it possible that the community at-large is not reaping any of the benefit?

Stimulus anyone?

Because while the auto bailout was a bad idea in any event, one should at least expect that the community as a whole should benefit from the application of community funds to a private venture rather than just benefit a small fraction of say…I don’t know… one percent? There is no other morally defensible reason to bailout out the auto industry unless it was going to benefit the community as a whole.

“We refused to let Detroit go bankrupt. We bet on American workers and American ingenuity,” said the president while making his pitch for reelection, “and three years later, that bet is paying off in a big way."

For whomis it paying off, Mr. President?

Because it’s not paying off for Detroit.

And it won’t pay off for the United States of America.   


John Ransom

John Ransom is the Finance Editor for Townhall Finance.