Monday, July 22, 2013

To No One's Surprise Detroit Declares Bankruptcy

This past Thursday (July 18, 2013) the city of Detroit, to no one’s surprise, filed for bankruptcy.  With over $18 billion worth of debts the city appears to have had no choice.

However, some bond holders and the city’s two municipal pension funds appear to be prepared to fight to prevent Detroit’s request for bankruptcy being approved.  Ironically, it was the refusal of these bondholders and pension funds to agree to the city’s haircut proposal in which the bondholders and pension funds would have been required to accept cents on the dollar for their holdings, which, according to city officials, forced it to seek bankruptcy protection.

Detroit’s bankruptcy filing is the largest municipal bankruptcy filing in history.  However, not only is the bankruptcy no surprise but it also could have been avoided as warning signs of serious fiscal problems for the city have been popping up as the city has been declining during recent decades.
While there are many factors contributing to Detroit’s decline a major, if not the major factor, is modern liberal welfare state with its emphasis on ever expanding government and its tendency to undertake every project that presents itself regardless of cost.

A March2011 Wall Street Journal article on the 2010 Census figures for Detroit.  The paper reported that the city’s population had declined by 25% between 2000 and 2010.  The 2010 population came in at 713,777.
The article quoted Mayor Bing as saying:

If we could go out and identify another 40,000 people that were missed, and it brings us over the threshold of 750,000, that would make a difference from what we can get from the federal and state government

The fact is that state and federal funding was probably at the root of many of Detroit’s problems. 
To the politicians and bureaucrats these federal and state funds were free money that they did not have to try to extract from the taxpayers.  Unfortunately, these federal and state funds were problems in two ways:

  •           First such funds usually come with strings in that they are frequently in the form of seed money to be used to start programs which the city will have to fund in the future or were for programs which the city had to share the cost with the higher level of government.

  • ·         Second, taxpaying residents tend to be less concerned with the cost of such programs since they aren’t paying for them directly with their local tax dollars.  Of course, the special interests that benefit directly from the programs love them.

If local government leaders were forced to rely on the tax paying residents of the city they would tend to be more frugal with their spending as increased spending would result in increased taxes.  

Increased taxes tend to get people upset and provide an incentive to either get out and vote the current leaders out or move and avoid the higher taxes.

For years, leaders in Detroit (and many other cities as well – Detroit is just the first big city to hit the wall of reality) have ignored costs and fiscal realities by choosing to rely on financial gimmicks to keep spending.

Borrowing, aid from the State of Michigan and the Federal government, raising taxes and deferring spending for like the maintenance of infrastructure and adequately funding pensions have all been used to enable leaders to charge ahead without regard for cost.  

With few  effective checks on their spending and, as managers lacking any equity interest in the city beyond their pensions which they are theoretically contractually entitled to receive, those who have been running Detroit have been able to ignore fiscal realities and continue business as usual.

The usual reaction of managers is to concentrate on today’s problems and ignore the long term effects of their current actions.  After all, if the predicted financial consequences aren’t expected to occur for another thirty or forty years, then they don’t have to worry as they will be retired and gone before any days of reckoning occur.

Well, the day of reckoning appears to have arrived and, just as in Greece and other failing social welfare states in Europe, many innocent victims are going to pay the price for the decades of fiscal irresponsibility of politicians and bureaucrats who have safely retired someplace else.

Thursday, July 18, 2013

Uncoupling Food Stamps from Farm Bill

Last Thursday (July 11, 2013) the House of Representatives voted 216-208 to remove Food Stamp program funding from Farm Bill that the Senate had previously passed and sent to the House.

This is a historic first and, if Republicans (all of the 216 votes for the proposal were from Republicans while the 208 included 12 Republicans with the remainder being Democrats) can get both houses to pass the House version of the bill and the President to sign it this will be a major step in reigning in both programs.

While the odds of passage of the bill are slim, the debate itself will be a start at weakening these two pieces of bad progressive legislation.

Farm Price Supports Have a Long History

A revolution in agricultural production accompanied the Industrial Revolution.  Like the Industrial Revolution in which technology and innovation moved to make industrial workers more efficient, so too did the Agricultural Revolution make farming more efficient and less labor intensive.  

The result of these advances in agricultural output was to increase agricultural output while reducing the number of people needed in agriculture.  At the time of the American Revolution when we became an independent nation, over 90% of the population was directly involved in farming.  Today less than 10% of the population is directly involved in raising or growing food.

The transition from a predominantly rural agricultural society to an urban industrial society is never easy or painless and this transition in the United States was no exception.  

Many farmers sought to preserve their traditional life and occupation by turning to politics.  Beginning in the late 19th and early 20th centuries the Federal and state governments began enacting legislation aimed at helping to preserve the traditional family farm through various regulations and subsidy programs.

Bundled Corn Stalks on New York Farm following harvest in 1930s (photo copyright 1936, 2013 by Estate of Charles Nugent Sr.)

By the 1930s, Franklin Roosevelt's New Deal was very active in creating agricultural cartels, enacting tariffs and quotas on agricultural imports as well as taking more direct action toward reducing the supply of agricultural output by placing quotas on how much each farmer could produce and paying farmers to keep part of their cropland out of production.

Eventually the government began determining what price farmers needed from the sale of various produce in order to continue as profitable operations.  The government then entered the market and, using tax dollars, purchased and stored large amounts of produce before it reached the market.  This, of course, reduced the supply of that produce causing the market price to increase to what was deemed necessary to keep farmers in business.

During the Great Depression of the 1930s Franklin Roosevelt's New Deal Administration began  to experiment with limited distribution of wheat and other commodities to the unemployed and poor. The program was gradually expanded but, while helping the poor was a political selling point, the program was focused and driven by the political need to help maintain farm incomes.

In 1939 an experimental food stamp program was initiated in which unemployed and poor could purchase orange stamps from the government at face value and, in turn, receive blue stamps equal to half the value of orange stamps purchased.  The stamps could then be used to purchase food.

This program was popular with both retailers, who saw larger sales, and farmers.  The program ended in 1943.

Following World War II new food stamp programs were initiated and expanded over the years.  As before the primary goal was to raise farm incomes.

President Ronald Reagan, during his term in the 1980s tried to kill the food stamp program.  This was not only a period of prosperity and growth with low unemployment as a result of his domestic programs, but also a period of rising farm income due to increase world demand for U.S. agricultural output.

In addition to being a popular conservative Republican president, Reagan had a Republican majority in the Senate and strong support in the House.  He had a very good chance of eliminating the Food Stamp Program and probably would have except for the fact that the opposition to eliminating food stamps was led by the conservative Republican Senate Majority Leader, Senator Robert Dole from the farm state of Kansas.

Leading a coalition of farm state conservatives and urban liberals, Senator Dole was able to thwart President Reagan's attempt to eliminate the food stamp program.  

Dole realized that farmers alone no longer had the numbers to maintain the political clout that had given them their victories in the past.  

The family farm had long since been replaced by giant corporate agribusiness and so called hobby farms - farms owned by wealthy urban dwellers as rural retreats.  Though they didn't needed and couldn't justify the subsidies and other financial support from the Federal Government, these two groups were still the beneficiaries of millions of dollars of Federal aid.

Food stamps not only helped to keep prices of farm produce high but, more importantly, provided urban political support for the continuation of farm programs.  By keeping both food stamps and the various farm support programs in one Farm Bill the two programs had the support both needed to survive.  

As separate pieces of legislation the future of both farm subsidies and food stamps the odds of both of these programs continuing could be in doubt.