Should We Bail Out Cities?

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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In the latest City Journal, Steve Malanga writes about an issue that hasn't yet gotten a lot of attention but is virtually guaranteed to become a serious topic of national debate in the not-so-distant future: Do we bail out cities that have become insolvent?

Malanga quotes a Steve Rattner op-ed from the summer: "The 700,000 remaining residents of the Motor City are no more responsible for Detroit's problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them." Rattner is right, of course; Detroit was largely undone by massive structural changes in the auto industry, which now employs only a small fraction of the people that it used to. And yet, there's more to the story, isn't there? Detroit's biggest problem is the combined burden of its pension funds and retiree health benefits. And the reason that its pensions are in such a state is that they were bizarrely mismanaged by people who apparently didn't quite get fifth-grade math.

It's true that it would be easier to deal with these problems if Detroit were more like New York and less like, well, Detroit. But it's also true that if Detroit had been responsible about its pension contributions instead of underfunding the pensions while simultaneously handing out extra benefits above and beyond what the city already couldn't afford, its retirees would not now be facing dire straits. New Yorkers did not get to vote for the corrupt Detroit politicians who appointed the terrible Detroit pension managers who made all of Detroit's problems so much worse than they had to be. Why should they have to pick up the check for all those mistakes?

This is going to be a hot issue going forward, because there are a lot of cities in trouble, and there are probably a lot of city employees who won't get paid what they were expecting. There will be pressure to shift those costs to the federal taxpayer, often with some version of this argument: The city was beset by some circumstance beyond its control, an industry that withered or a public works project that got out of control. We have to step in because it's not the fault of the workers or the citizens -- just the inscrutable machinations of a cruel and relentless fate.

Rattner is right that this is the political equivalent of Hurricane Sandy, but not in the way that he thinks. In fact, Hurricane Sandy's victims were created by the decision, decades ago, to built substantial permanent homes on beachfront property -- property that was previously underdeveloped because beaches tend to be periodically scoured by storms that destroy the homes you build there. And Detroit's victims were created by the decision, decades ago, to erect lavish pension schemes that were built on sand rather than bedrock.

Those victims should not be abandoned -- no American should be allowed to starve in retirement. But the federal government should not step in to guarantee those false promises, any more than it should attempt to re-create the vulnerable housing developments that were washed away by the storm.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net