Detroit Bankrupt: Obama Needs to Let It Happen — For All Of Our Sake

The visible apotheosis of the 2008-2010 recession’s consequences, the city of Detroit is still wallowing in dismal economic conditions. It was rated by Forbes Magazine as 2013’s most miserable city in America, a designation that is cemented by a 16% unemployment rate and a government that filed for bankruptcy, despite months under the jurisdiction of a governor-appointed emergency manager, Kevyn Orr, who attempted to forestall this result.

Mr. Orr and the city considered myriad approaches to staving off bankruptcy, mainly those that would increase revenue, including the possibility of auctioning off some of the Detroit Institute of Art’s collection. No viable solution, however, was ever enacted. And after decades of a government operating on an unsustainable economic model, Detroit is out of money. Unfortunately for the many hard-working people of the city who will be affected by their government’s bankruptcy, the city needs to set its course so that it can reinvigorate its economy. The federal government cannot responsibly, and ought not, bail the city out.

Detroit is the largest city in U.S. history to file for Chapter 9 bankruptcy and has earned subsequent national attention for the ramifications that its financial conditions will impose on its citizens, and potentially others across the nation. The White House has noted that “the president and members of the president’s senior team continue to closely monitor the situation.”

Although President Obama has not made any indication that he intends on intervening, the auto czar that he appointed in 2009 to administer the $80 billion in auto-industry federal bailout funds, Mr. Steven Rattner, said he “think[s] this is a place where government’s going to have to step in.”

To do so would be a colossal mistake, both for the city’s long-term health and for the national precedent it would establish.

Detroit’s government has brought about its own fiscal demise. In his assessment of the city’s operations, Mr. Orr cited “budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption” as undeniable trends. A bankruptcy process is a rare opportunity to effect the vast changes necessary to overhaul this dysfunctional system.

Senator Rand Paul (R-Ky.), who has warned that the president would need to administer a bailout “over [his] dead body,” argues that Detroit must wholeheartedly seize this opportunity, regardless of the pain it will cause in the short term. He explains: “Bankruptcy lets you be forgiven of your debt. And you do so by getting new management, better management, and by getting rid of unwieldy contracts… That’s the way cities and businesses can recover.”

Detroit will be better served in the long run if it confronts the roots of its economic perils today instead of mollifying its symptoms with federal funds.

A Detroit federal bailout would also establish a dangerous and unsustainable national precedent. The same unsettling “too big to fail” sentiment that marked 2008’s bank bailouts would be extended to American cities.

The federal government cannot reasonably discern which cities are too big to fail. The federal government is responsible to the entire nation, and would therefore be ethically compelled to bail out every city or town in a like situation to Detroit's. Already more than $16 trillion in debt, including a budgetary deficit of $509.83 billion for the current fiscal year, the federal government cannot afford to walk down this path.

While the principle of a city being bailed out by the federal government is disconcerting in and of itself, the practice of such a circumstance would be irresponsible and injurious. President Obama and his administration are right to monitor the situation, and ought to offer guidance or assistance to the government and people of Detroit if need be. Yet they cannot interfere with the natural consequences of mismanagement in a capitalist nation, otherwise the mismanagement will never be fixed and the city will not be able to reinvent itself with a sustainable, healthy economic model.