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Fiscal Crises: Coming To A City Near You?

The sad fact of the matter is that Detroit suffers today from international trade and international financial policies of the past two decades that Krugman himself, and indeed many other leading international economists embraced.

Recently Paul Krugman used his influential column in the New York Times (NYT) to draw comparisons between the fiscal crises in Greece and Detroit (USA). In the essay, Krugman highlights the rhetorical parallels between the two crises. He argues that “deficit hawks” are misusing the Greek and now the Detroit crises in their continued efforts to lay the blame for fiscal crises anywhere and everywhere on fiscal profligacy and bloated public sectors. He is of course quite right about the misdiagnoses of these crises and the underlying political economy of the attack on the public sector. (Though note that his emphasis on the “Schumpeterian aspects” of the Detroit and the Greek crisis really misses the point insofar as they involve far more than the failure of policymakers to adapt to inevitable changes in competitive advantage.)

There is much more to be said about the Detroit crisis. The sad fact of the matter is that Detroit suffers today from international trade and international financial policies of the past two decades that Krugman himself, and indeed many other leading international economists embraced. It was not so long ago that leading international economists, Krugman included, advocated strongly for the North American Free Trade Agreement (NAFTA), the WTO, and just about ever other neo-liberal international agreement that came down the pike. At the time the champions of neoliberalism ridiculed anyone who raised virtually any concerns about the agreements. Labor and human rights advocates, environmentalists and child’s rights advocates were branded as well meaning but ignorant, sanctimonious, or simply self-interested.

What seemed to escape the attention of the leading international economists at the time was that by opening up the world to free trade and free financial flows, without at the same time attending to basic labor and human rights and environmental protections, the extraordinary opportunities that the new policy regimes would create for massive corporate tax avoidance and evasion (and hence fiscal crises), and the failure of the US and no doubt other governments to make meaningful provision in advance for the extraordinary adjustment costs that these agreements would entail, they essentially ensured that defaults on the scale of Detroit would be highly likely if not inevitable. Eventually, but too late for Detroit, some of the champions would recant—indeed, Krugman himself came around to advocating for labor standards in trade agreements by 2006; and many economists today realize that unregulated international capital flows not only induce financial instability, but also encourage capital movements that are designed to reduce corporate tax burdens and hence undermine the tax base of municipalities, states, and even national governments.

Blaming Detroit’s leaders today for its failure to adapt and adjust, in the face of capital flight and a diminished tax base, and the blatant failure of the US government to prepare for the de-industrialization and relocation that the neoliberal agreements of the 1990s accelerated—that might make for a nice sound bite, but it lets economists off the hook too easily for the damaging consequences of the policies that they themselves sold to the U.S. public. More difficult, perhaps, but far better to acknowledge that Detroit’s mess is in part the result of radical and mis-guided policies that eminent economists embraced with such vigor not so very long ago. Indeed, much the same radical worldview is embodied in the Trans-Pacific Partnership Agreement and the Trans-Atlantic Trade and Investment Partnership, two new agreements that are presently being negotiated. Both of these agreements are close cousins of NAFTA insofar as they reflect the continued resonance and influence of neo-liberalism on trade and financial matters.

Multilateral trade, investment and other types of integration agreements are a big part of the story of all of these crises–NAFTA in the case of Detroit; the decision to join the Eurozone in the case of Greece. We might also recall that Detroit’s efforts to declare bankruptcy comes on the heels of fiscal crises in other struggling US cities. Scranton, PA led the way by declaring bankruptcy, and Harrisburg Pennsylvania has been nearly there several times (and only seems to have averted that fate by slashing public spending and selling the city’s incinerator). Tax justice advocates have rightly argued that governments themselves have signed on to tax rules and liberalization agreements that enable tax evasion and international asset transfers. These have stripped nations and states of the tax revenues that might close many of the budget gaps and provide finance for critical public services during economic crises.

Crises in Greece, Cyprus, Detroit, Scranton, and Harrisburg have others things in common as well. In these cases (and of course many others in the Eurozone and in the developing world), the burden of adjustment–as always–is borne by the most vulnerable groups in society: pensioners (and especially retired public servants), the infirm, youth, the poor, and the middle class. In Detroit there is the added dimension that the crisis falls not just on the poor that largely populate this deindustrialized city, but also on African Americans who also dominate the city. The destruction of the auto industry and of the retirement and health benefits to the industry’s workers falls disproportionately on African Americans, who had for a time enjoyed a degree of social mobility and economic security in what used to be very good unionized jobs in the auto industry.

One other troubling parallel among all of these crises is the shifting of authority to unelected technocrats charged with enforcing fiscal rectitude during crises. By now, the role of the Troika in the Eurozone is well known. That group (comprising the European Union, IMF, and European Central Bank) has staked out a clear role in dismantling the public sector and enforcing fiscal retrenchment. In the Detroit case the state-appointed “Emergency Manager” Kevyn Orr plays this same role.

The crises in US cities and in the Eurozone have many troubling parallels and deep structural causes. Failure to adapt to change is simply not one of them.

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