In the wake of America’s manufacturing decline, Detroit enacted policies that drove out businesses and residents. Rather than reduce the size of government as its population shrank, the city instead sought higher levels of government spending. City leaders acquiesced to unions by increasing employee benefits and ceding control and flexibility over employees.
To pay for it, Detroit continually increased taxes and engaged in prolific borrowing when the tax increases did not close the gap. And yet, despite the growth in government taxes and debt, Detroit’s citizens experienced ever-declining city services, the most troublesome result of which has arguably been the steep rise in crime.
If Congress were to step in to protect any of Detroit’s creditors—be they pensioners or bondholders—it would create an untenable moral hazard. Believing that the federal government would step in to help them, troubled state and local governments across the nation would have no incentive to enact reforms, and unions and workers would have no incentive to accept them.
A comparison of debt and unfunded obligations per capita:
Detroit – $26,655
US – $218,169.