Appearing last night on Chris Hayes, AFSCME President Lee Saunders made the (I think pretty much hopeless) case that Detroit’s bankruptcy filing is illegal, and argued (I think correctly) that city workers should be paid what they were promised in pensions. But he also endorsed a federal bailout, arguably the least likely (and worst possible) outcome:
We’ve got to deal with this, Chris. I believe not only as it affects Detroit but the national government. This administration has a responsibility to deal with the problems and impact on urban centers across this country. The engines — the engines of states who are experiencing financial difficulty. I’m not saying we’ve got to bail everything out, but if we can rescue cities and countries in Europe, if we can bail out Wall Street — which we did — if we can rescue the auto industry, which was the right thing to do, then i think we’ve got to think about creative measures in which we can help urban centers across the country experiencing financial difficulty.
As repugnant as a bailout is, conservatives should think carefully about the consequences of what happens next. I think there’s a very good case to start rooting for the unions here. Yes, they were much of the problem in Detroit — not necessarily because pensions are excessively large, but because of chronic overstaffing, featherbedding, and the early-retirement deals they negotiated.
But some good can come out of this. The best hope is either that the unions win or that after they lose, the bankruptcy court shaves the city’s bondholders clean and then forces the sale of the city’s artwork and other assets in order to pay promised pensions to the maximum extent possible. This isn’t only justice for the workers involved — who as Hayes points out merely worked and banked on the unrealistic promises they were made. It’s also forward-looking if you care about the deleterious effects of big government.
Such an outcome would dramatically set back the cause of borrowing by municipalities and counties all across America. Bondholders would demand higher interest rates, forcing governments to be far less stupid than Detroit was with the promises made to retirees and their unions. High interest rates would simply prevent them from operating the way Detroit did.
We’ll see a hastening of the end of business as usual. States (and where applicable, cities) will be forced to adopt reforms resembling the ones Scott Walker put in place in Wisconsin, simply because governments will otherwise be overwhelmed by borrowing costs. We’ll see government workforces moved to modern defined-contribution pension plans (the ones everyone in the private sector has). We’ll see cities forced to make decisions based on sound fiscal principles, because they simply can’t afford to make unrealistic promises to citizens or employees or to borrow for new boondoggles.
The worse the bondholders are treated in this case, the greater the reduction in local government excess.