Yesterday, Dave Bing, NBA legend and very successful businessman announced he's not seeking a second term as mayor of Detroit. The Bing news is not necessarily shocking but points to what has become, in the eyes of many, a hopeless situation. The state has taken over the city and the guy combing the books says it looks dismal.

Migration Series Jacob Lawrence

At this point it would seem some kind of bankruptcy is in the offing. But problems don't go away with such a decision. And while there will be debates over where money comes from and who pays for a bailout, the bigger tougher question is how this once great city truly recovers.

The story of Detroit must be followed closely because of its economic and moral implications. The economic part is not just what's happening at this very moment but policies and ideas that brought the former Paris of the West to the point of state takeover. The city is spending money it doesn't have and now must figure out how to live within its means even as it now must also find ways to pay its massive deficit.

$326.6 million unrestricted deficit
+$60.0 million added at end of fiscal year (June 30)
$386.0 million

In a town where citizens feel services are poor to non-existent, officials will actually have to do even less. This adds to the serious death spiral of pessimism and defiance. It's estimated that $247 million in property taxes and fees went uncollected in 2012 from more than 150,000 (47%) of owners, mostly out of defiance. There were at least 77 blocks were only a single homeowner paid their property taxes. They say "why" taxes go to pay for service that stopped a long time ago.

Then there's word city officials severely inflated property tax rates. In fact, one report says officials are leveling taxes at 10 times the selling price of properties by discarding 94% of sales made last year.
Talk about highway robbery. But this is what happens when lavish promises are made while a city, state, or country bites the hand that feeds it. Government "revenue" is mostly the function of taxes. When politicians promise money they have to know where that money is coming from. Unlike the cyclicality of the economy those promises are never adjusted lower- there is never a recession in government promises.

Almost all municipalities now facing difficulties are in trouble from promises made to government workers and are hiking taxes in order to pay them. Coupled with promises to those with lower incomes, it means higher taxes on successful people and businesses have to be levied. But higher taxes ultimately means lower return - it's the law of diminishing returns personified by less output, and flight of (talented) people and capital, while less talented people keep coming in.

In one hundred years Detroit went from a magical city playing an amazing role in industrialization of America but also assimilation of races (in the beginning painful), and beacon of hope. The Progressive movement played an early role there in trying to mitigate business and in the beginning unions and other pressure did lead to better wages for all - making the city a magnet. But, the pendulum swung too far resulting in wages that were too high, promises too rich and habitual spending that continues to be the unshakable addiction.

There might be state and federal money to help Detroit but in my mind there's only one real solution.

Time to Grab Bootstraps and Embrace Capitalism

Detroit is one of the homes of progressivism in America which helped to make wages better but at some point began to push businesses out of the city. High taxes and tough unions made competition so difficult industry in the city suffered. In the meantime, a certain lifestyle became the norm for both citizens and government officials. Money was spent, promises were made and the seeds of the current economic malaise were sown.

There was a flight of businesses and people, the former often to other states, the latter to the suburbs.

The city must find ways to bring back business, population, and education.

Luring Them Back

Only people fleeing third world nations are going to be lured away from their homes to live in welfare states. Americans, even after four years of being told to limit dreams to the Middle Class status that amounts to living paycheck to paycheck, want more. Even as we are told our earnings and our children are part of the public domain we still seek better lives. For most that means better jobs and better opportunities for our children. This is only going to happen if the private sector thrives.

Government run or dominated economies have always failed and always will no matter how appealing it may seem on paper or in flowery speeches.

Government has to be crowded out by the private sector, easier said than done since it mostly happens the opposite way.

Currently eight of the top ten employers in Detroit are government, education and healthcare. Private businesses are only 10% of employers, and there is simply no way the city can ever get back on its feet with a model that relies on high taxes to create jobs as people flee the city. Those leaving are brilliant and innovative. Those staying behind are needy and have been coddled so much with so many programs their ability to stand erect without government aid has almost vanished.

The city would do better to lower taxes instead of raising them as (soon -to- be-former) Mayor Bing wanted.

Luring Business

Already Dan Gilbert, founder of Quicken Loans, has shown smart, deep-pocketed business people are willing to make investments in Detroit. His purchases in an effort to jump-start a mini Silicon Valley have included the old Federal Reserve Building, Chase Tower and First National Bank. In total his investments include:

> 9 buildings
> 3 parking structures
> 1 lot

Others are following his lead but even that must be pushed with encouragement. Otherwise a citywide recovery where there is an oasis or two wouldn't be much better. Of course importing businesses and smart people is only a part of the equation - there has to be homegrown talent, too.

Homegrown talent means better education and no more excuses. I spoke with a Detroit based professor who informed me that 47% of the population was functionally illiterate. A liberal, the professor gave me the stat as a reason for more government aid in the form of welfare spending. In my mind that would sink the people of Detroit farther down the abyss of despair. But it underscores the sense of urgency and points to how failed economic policy goes to the roots of society.

The good news is graduation rate is above 50%, having hit 65% last year but the dropout rate is still 20% and there is still a lot of hopelessness.

The cure to Detroit is a combination of things, almost all painful. People born into despair will bristle at the idea they must pay such a price for good times had by folks that have passed on or moved on. It's the only way to get this done. Tough austerity that can only work if articulated with a plan that citizens buy into. A plan that somehow gets people to pay their taxes because they understand a metamorphosis will take time and money and sacrifice.

The same people that have been told since birth things are owed to them rather than expected of them will have to be sold on putting skin in the game on the notion there is no other way to be great again.

They have to know they can be Paris of the West again but the foundation starts in a deep dark hole.

Today's Session

Equity futures have been under pressure most of the morning and it looks like we'll start the session lower. Of course that's been a green light for buyers that have put a twist on the notion of buying dips. It used to be buying the dip over a few days or weeks, even months. There will be that dip that keeps on dipping for a real pullback, yet I'm not sure what triggers such a move. Right now the US economy is gradually improving, albeit not at the pace it could or should, and expectations are still low enough to have modest growth and Fed money printing.

But there is angst beneath the veneer of the market, make no mistake. Case in point Deere (DE), which posted results this morning that blew away consensus and were the best in company history, yet the initial reaction from the stock market was an immediate $10.00 dive. It speaks to the fact everyone is looking for THE pullback - the real dip. Management offered cautious guidance based on the same stuff everyone's been worried or cautioned about for years.

Income was the highest ever from an increase in the global farm economy:

US & Canada +9%
OUS +9%

Agriculture was on fire, up 12% offsetting a continued slump in construction, -6%. Guidance was cautious but South America, powered by Brazil, is seen up as much as 20%. The most important line in guidance was:

Company will "capitalize on the world's increasing need for food, shelter and infrastructure in the years ahead."

This brings up a serious dilemma. Taking profits after huge moves to avoid the next pullback, even if you have great faith based on the work that same stocks will be much higher down the road. It's easier said than done to say we'll hold when the time between now and "down the road" could see a lot of gains evaporate or fade significantly. Deere is a stock I would hold, but if I were up 20% or more write calls against or even take off the table, but making sure to reenter after 30 days.

Comments

I was born, raised, and lived in or near Detroit for most of my early life. I lived in Chicago for about 15 years, but moved back in 1994. So my interest in Detroit has been important and a major part of my life. I heard Dave Bing announce that he will not run for re-election for Mayor, but may seek another political position; the Chief supervisor of Wayne County of which Detroit is a major part. There may be a purpose to this change in position. Kevyn Orr, who was brought in to repair the financial damage done to the city, can be genuinely helped by Dave Bing running the County. Those two can be a miracle remedy to the problems facing the city and State. Give it some thought. Peter Stoyanoff on 5/15/2013 11:30:22 AM

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