Kuttner: It's not just Detroit

We bailed out the auto industry in 2008 and it was a roaring success, saving at least 1 million jobs.  We bailed out New York City in 1975 and it was well worth it. We shouldn't let Detroit go under either.

BTW, while Michigan Governor Rick Snyder is ready to let Detroit go down the tubes and cancel its pension commitments, he can somehow find at least $285 million to buy the Detroit Red Wings a new arena.  Snyder calls it a "catalyst project," and "something that is important to all of us."  As if paying city workers and rebuilding crumbling city infrastructure is not important to all Detroiters?  

This is the economic Bizarro world that conservative politicians live in, where sports socialism and bank payoffs are just dandy, yet they can't find the money to pay (already reduced) pensions as prescribed in the state's constitution.   

We Are All Detroit

By Robert Kuttner

August 11, 2013 | Huffington Post

Do you think the damage from the pending bankruptcy of the city of Detroit will be limited to Detroit? Think again.

Detroit is partly the victim of economic trends far beyond its control, the downsizing and outsourcing of the auto industry and the collapse of the sub-prime bubble, to name just two. And yes, the city has suffered from corrupt and inept local government. But leaving Detroit to a bankruptcy process that favors investment bankers over local pensioners will neither provide a fair outcome nor contain the damage.

In the past two weeks, other Michigan cities and counties, including Saginaw and Battle Creek, have had to postpone bond issues, as the damage from the Detroit bankruptcy spills over. Michigan Governor Rick Snyder, who hoped to whack both public employees and the heavily Democratic city of Detroit by promoting bankruptcy, could end up shooting himself and his state in the foot.

Those who hope to use the pain of cities to undermine public employee pensions are playing with fire. One of the striking government failures of the era since the collapse of 2008 is that the federal government has done so little to help municipalities whose revenues were doubly hit by the subprime collapse and the recession itself. In the absence of aid, we can expect a prolonged era of dwindling services and scapegoated public workers and retirees.

It is a travesty that the federal government and the Michigan state government are not sending Detroit a lifeline. Other cities and states stand to lose both public services and pension benefits as this trend spreads. Chicago, which just suffered three levels of bond-downgrading, looks to be next.

Some background: In 1975, New York City very nearly went bankrupt. It faced a financial crisis and was unable to roll over maturing bonds. When Mayor Abe Beame appealed to Washington for help, President Ford initially refused, prompting the famous headline in the New York Daily News, "Ford to City: Drop Dead."

But that was a different era and in the end, Ford did approve $2.3 billion in federal loans. The New York State government, through a hastily legislated Municipal Assistance Corporation, agreed to refinance the city's debt, subjecting it to a rigorous supervision process. The Big Apple avoided bankruptcy, its economy recovered -- and New York is now home to the wildly profitable financial industry that is destroying Detroit in order to protect bankers.

In contrast to President Ford and New York's then Democratic governor Hugh Carey, Michigan's Republican governor Rick Snyder was happy to collude with Wall Street by embracing a bankruptcy proceeding rigged in favor of investment banks. And President Obama, who successfully sponsored a recapitalizing of the auto industry, is staying far away from Detroit this time.

These policies are short-sighted as well as cruel. If you think about it, many of Detroit's citizens are getting screwed both as debtors and as creditors. With the city having lost tax revenues in the housing collapse and property values at rock bottom, most homeowners with mortgages -- debtors -- can't qualify for refinancing. But many of the same people are also creditors, the city owes them pensions.

In principle, a bankruptcy proceeding is a system for fairly allocating claims when a debtor can't service all of its debts. The Michigan state constitution guarantees that Detroit pensioners will be paid what they are owed. Even Michigan's Republican attorney general, Bill Schuette,agrees that the constitutional protection is binding.

But the most recent changes (2005) in the federal bankruptcy law, lobbied for by Wall Street, put bankers in line ahead of pensioners. As attorney, author and debt expert Ellen Brown explains, this special-interest provision gives credit default swaps held by banks priority over other forms of debt. So banks that speculated in Detroit's debt stand to get paid ahead of ordinary bondholders and pensioners.

As Brown writes:

Derivative claims are considered "secured" because the players must post collateral to play. They get not just priority but "super-priority" in bankruptcy, meaning they go first before all others, a deal pushed through by Wall Street in the Bankruptcy Reform Act of 2005. Meanwhile, the municipal workers, whose pensions are theoretically protected under the Michigan Constitution, are classified as "unsecured" claimants who will get the scraps after the secured creditors put in their claims. The banking casino, it seems, trumps even the state constitution. The banks win and the workers lose once again.

The average pension owed to Detroit municipal workers, incidentally, is just $1,900 a month, and only 4 percent of Detroit's general revenues go to pensions. According to AFSCME President Lee Saunders, Detroit's non-uniformed public workers have already had pensions cut by 40 percent.

As we saw in the Wisconsin assault on collective bargaining for public employees and most recently in the San Francisco area BART strike, all public workers are losing public sympathy because wages, pension and health benefits have declined even faster in the private sector, leaving regular people to conclude that government employees have it too good. In fact, a study by pension expert Alicia Munnell finds that average state and local employee pensions are well below level needed to maintain living standards in retirement. Wall Street must be chortling, as ordinary workers blame civil servants rather than bankers.

But the assault on public workers and pensioners will continue to spread until citizens generally start appreciating that the culprit is not "over paid" public employees but a banker-dominated system that undermines decent living standards for public and private workers alike.

How Chinese and U.S. labor are alike

And as fellow WaPo columnist E.J. Dionne pointed out: 

... the way Gov. Rick Snyder (R) and the Republican Michigan Legislature rushed right-to-work through a lame-duck session was insidious. The anti-union crowd waited until after the election to pass it. Snyder had avoided taking a stand on right-to-work until just last week, when he miraculously discovered that it would be a first-rate economic development measure. The law was included as part of an appropriations bill to make it much harder for voters to challenge it in a referendum.

As we all know, U.S. wages have been stagnant in real terms since the 1970s. And this freeze in workers' wages corresponds suspiciously to the decline in power of labor unions. Meanwhile, U.S. workers' productivity has gone up considerably, along with stock prices and corporate profits, which hit an all-time high under President Obama. This is the very definition of redistribution of wealth, folks -- from the pockets of workers to managers and shareholders.

The Lansing-Beijing connection

By Harold Myerson

December 11, 2012 | Washington Post

China has a problem: rising inequality. The gap between profits and wages is soaring. Although elements of the government have sought to boost workers’ incomes, they have been thwarted by major companies and banks “that don’t want to give more profit to the country and let the government distribute it,” Qi Jingmei, a research fellow for a government think tank, told the Wall Street Journal.

Of course, if China permitted the establishment of unions, wages would rise. But for fundamentally political reasons — independent unions would undermine the Communist Party’s authority — unions are out of the question.

Meanwhile, the United States also has a problem of a rising gap between profits and wages. The stagnation of wages has become an accepted fact across the political spectrum; conservative columnists such as Michael Gerson and David Brooks have acknowledged that workers’ incomes seem to be stuck.

What conservatives haven’t acknowledged, and what even most liberal commentators fail to appreciate, is how central the collapse of collective bargaining is to American workers’ inability to win themselves a raise. Yes, globalizing and mechanizing jobs has cut into the livelihoods of millions of U.S. workers, but that is far from the whole story. Roughly 100 million of the nation’s 143 million employed workers have jobs that can’t be shipped abroad, that aren’t in competition with steel workers in Sao Paulo or iPod assemblers in Shenzhen. Sales clerks, waiters, librarians and carpenters all utilize technology in their jobs, but not to the point that they’ve become dispensable.

Yet while they can’t be dispensed with, neither can they bargain for a raise. Today fewer than 7 percent of private-sector workers are union members. That figure may shrink a little more with new “right to work” laws in Michigan — the propagandistic term for statutes that allow workers to benefit from union contracts without having to pay union dues.

Defenders of right-to-work laws argue that they improve a state’s economy by creating more jobs. But an exhaustive study by economist Lonnie K. Stevans of Hofstra University found that states that have enacted such laws reported no increase in business start-ups or rates of employment.Wages and personal income are lower in those states than in those without such laws, Stevans concluded, though proprietors’ incomes are higher. In short, right-to-work laws simply redistribute income from workers to owners.

Why, then, are such laws being enacted? The gap between U.S. capital income and labor income hasn’t been this great since before the New Deal; why widen it still more? The answer, in Lansing no less than in Beijing, is political. The Republicans who took control of the Michigan statehouse in 2010 understand that Democrats’ foot soldiers come disproportionately from labor. GOP efforts to reduce labor’s clout help Republicans politically far more than they help any Michigan-based businesses or local governments. (The legislation, which Gov. Rick Snyder (R) signed into law Tuesday evening, establishes right-to-work requirements for the public sector, too.)

Those who doubt that the intent of Michigan’s laws is more political than economic should consider the two kinds of unions exempted from its reach: police and firefighter unions. Their contracts are among the costliest that local governments confront: Police and firefighters generally (and rightly) retire earlier than do other public employees, with relatively generous pension benefits. But in Michigan, police and firefighter unions often endorse Republicans. Shrinking their treasuries and political power by subjecting them to right-to-work strictures would only damage Republicans’ electoral prospects (and may well play poorly to voters).

With Snyder’s signature, Michigan becomes the second state in the once-heavily unionized, industrial Midwest to adopt such a statute; hitherto, such laws had largely been confined to states in the South, the Plains and the Mountain West. The United Auto Workers (UAW) was once the colossus of Michigan politics, but the union’s membership has shrunk to 381,000 — roughly one-quarter of its size 35 years ago — a casualty of globalization and the legal and cultural obstacles the UAW has encountered to organizing new members.

Michigan Republicans have seen a chance to weaken the UAW and labor’s power at election time. Doing so further diminishes the number of workers who can bargain for a raise. It’s nice that conservatives are finally acknowledging that workers’ incomes are stagnating. But workers don’t get raises if they can’t bargain collectively, and all the hand-wringing about our rising rates of inequality will be so much empty rhetoric unless we insist — in Lansing and Beijing — on workers’ right to form powerful unions.