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Rand Paul's Detroit Shock Doctrine | The Nation

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Rick Perlstein

Rick Perlstein

Where the past isn’t even past.

Rand Paul's Detroit Shock Doctrine


Detroit. (Courtesy of Wikimedia Commons)

Detroit has now declared bankruptcy. A judge has ruled the act illegal—a decision that may or may not stand. Naturally, New York’s fiscal crisis thirty-eight years ago comes to mind, though in many respects the differences are more important than the similarities: New York was one of the world’s financial and cultural capitals, its private economy largely thriving; as such, the news of government’s bare coffers was shocking, a revelation, something the world at first had a very hard time getting their mind around. While what’s happening to Detroit, no one’s idea of an economic capital, isn’t surprising at all.

But note a striking similarity: reaction of those on the right.

To wit: here comes Senator Rand Paul, saying nothing would be more splendid than to let a major city go bankrupt—because with bankruptcy, you get “new management, better management, and by getting rid of contracts, contracts that give you where [sic] public employees are getting paid twice what private employees are and things come back more to normal.” No matter that so far the White House says only that it’s “monitoring” the situation, though former Obama auto czar Steve Ratner says he hopes Obama will pump federal money into the city. That is what Paul distorted into his claim that “apparently” the president is “making indications that Detroit can be expected to be bailed out.” And that, he says, will happen only “over his dead body.” Because municipal bankruptcy would give Paul the chance to do what right-wingers like him always do, starting with New York in 1975: make excuses for slashing the public sector.

Shock doctrine stuff, in other words. The unwinding of what’s left of the welfare state, by whatever means at your disposal. Same story, then and now. In 1975, its most prominent voice was William Simon, President Ford’s Treasury secretary, who leveraged his work as the butcher of New York to become a major conservative movement leader.

The roots of the Great New York City Fiscal Crisis lay in the recession of 1974–75, which hit the Northeast with a speed and force all out of proportion to the rest of the country. New York had always supported a program of middle-class entitlement unlike anywhere else, a sort of socialism in one city: subsidized housing and daycare centers; free college at the world-class City University of New York; free museum admission; nineteen municipal hospital, many of them world-class; free directory assistance—amenities that seemed only natural for a metropolis transforming itself, in the boom years after World War II, into the greatest city in the world.

It worked, until it didn’t. The city’s manufacturing base declined, and the unemployment rate, under 5 percent in 1970, hovered above 12 percent—shades, but only shades, of Detroit. White middle-class New Yorkers, fearing crime, fled to the suburbs—definite shades of Detroit there. Federal and state aid leveled off; expectations that Richard Nixon’s national health insurance bill would relieve the city of its massive outlays for Medicaid came a cropper when Congress voted it down (conservatives because it was too generous, liberals because it was not generous enough). Bills came due that this newly atrophied level of revenue simply could not cover: by the the end of 1974, the city’s debt was $11 billion, a third of that in short-term notes soon to come due, and over 11 percent of the city’s spending went to interest payments on that debt—to banks, suddenly reconsidering their lending practices in a recession. Other tax shelters started looking more attractive, So did other customers—for instance, some resource-rich Third World nations. So it was that banks started to asking for some of that money back, and started charging more interest to let them rent more.

In December of 1974 Mayor Abraham Beame made a pilgrimage to Washington, DC, to meet with Treasury Secretary Simon. Beame explained the actions he had already taken to correct the city’s fiscal imbalances, freezing most city hiring and merit pay increases; he then argued that, given that America’s greatest international city unfairly had to pay higher interest rates than any municipality in the country, it would be in the national interest for the Treasury Department to loan New York the money it needed by buying municipal paper directly.

The Treasury Secretary flipped.

“Mayor,” he said, “if we did that, the taxpayers would end up financing the campaign promises of every profligate local politician in the country.”

There was something disingenuous in that reaction. Bill Simon had formerly been senior partner in charge of government and municipal bonds at Salomon Brothers—one of the people in charge of lending the money hand over fist during the time when much of this debt was being incurred. In the late 1960s and early 1970s, Simon had even served on a debt advisory committee set up by Beame back when he had been New York’s comptroller under the previous mayor, John Lindsay. If New York had been borrowing beyond its means, William Simon was one of the people personally responsible.

He would later complain that he had been gulled—that the city’s “Byzantine accounts” and “tortuous accounting practices” had been willfully devised to forestall just the kind of fiscal reckoning he now insisted the city so desperately required, and that “even the most sophisticated financiers and the Treasury Department itself were totally unprepared” for such a violation of “the basic legal and ethical pact between the city and its debtors.” And surely, within City Hall, there was plenty of blame to go around—just like in Detroit. But other motives, other assumptions, lay beyond Bill Simon’s recalcitrance as well. These were ideological.

As he wrote in a book modestly entitled A Time for Truth, which spent some twenty weeks on the bestseller list three years later: “The philosophy that had ruled our nation for over forty years had emerged in large measure from that very city which was America’s intellectual headquarters, and inevitably, it was carried to its fullest expression in that city. In the collapse of New York those who choose to understand it could see a terrifying dress rehearsal of the state that lies ahead for this country if it continues to be guided by the same philosophy of government…. Nothing has destroyed New York’s finances but the liberal political formula…. Liberal politics, endlessly glorifying its own ‘humanism,’ has in fact been annihilating the very conditions for human survival.”

He spoke for his class. As a staffer wrote in a memo proposing language for First National City Bank’s president to use in discussion for the mayor, the crisis was an opportunity: “many things”—he cited higher subway fares, cutbacks in the city workforce and budget cuts generally—“can be done even if they are not technically possible.” Technically possible, he meant, if interest groups like the municipal unions, the board of education or municipal hospital administrators were afforded their traditional political deference. Well, they had had been deferred to long enough. Now it was time for the capitalists. “The time,” the staffer insisted, “is now:” investment bankers and the the mayor’s Council of Business and Economic Advisors should “work in concert…to prepare a unified analysis which would clearly demonstrate the absolute inviability of the City if it continued on its present course.” (I got this part of the story from the outstanding historian Kim Phillips-Fein’s contribution to The Nation’s recent special issue on New York.)

How to get it done? Like Paul, with his absurd made-up notion of public employee workers making twice what equivalent public sector workers make, they lie—about what Simon called overpaid, “parasitical” municipal workers, separate from the “productive population,” drawing “appalling” pensions.

For what it was worth, the pension of the average retiring New York City policeman—$9,000—was $3,000 less than in Chicago, $8,000 less than Detroit and less than half that in Los Angeles and San Francisco; city teachers and firemen also earned less than in all those cities, with a considerably higher cost of living. The city had fewer citizens per capita public assistance than Philadelphia, Detroit, Milwaukee, Chicago (an oft-repeated claim that the city spent the most on welfare in the country ignored the fact that expenses covered almost elsewhere by state and county governments were borne by city governments in New York State); among the private corporations that paid their workers out more in pensions than New York City were General Motors and First National City Bank (later known as CitiBank, the financial institution most aggressive in pushing Beame’s austerity budget, whose chairman Walter Wriston, municipal labor leaders never tired of pointing, earned $425,000 a year). Mayor Beame, for his part, never tired of pointing out all the other cities facing similar balance sheet woes—among them Grand Rapids, Michigan, the president’s hometown.

But soon, Simon won the president to his side.

In January of 1975, the city’s comptroller canceled a planned sale of municipal notes; in February, a second sale was canceled. The city’s Urban Development Corporation became the first major government agency to go into default since the 1930s. Two weeks later, on March 6, the city offered another note on the market—and didn’t receive a single underwriting bid. By May, the city’s debt was $12.3 billion, the word had gone forth from the great investment banks that such debt was unmarketable at just about any interest rate, and officials predicted the city would default by June. The mayor made another ill-fated trip to Washington, this time for an audience with the president, Governor Hugh Carey and representatives from Chase Manhattan, First National City Bank and Mortgage Guarantee Trust in tow; a federal loan guarantee, Ford told them, would “merely pospone the city’s coming to grips with its fiscal problems through needed budget slashing.” On May 29 Beame complied, announcing an austerity budget calling for the immediate elimination of 38,000 jobs, over 12 percent of all city employment, a four-day work week, and reductions in CUNY admissions, library and health center closures. He reaped the whirlwind: cops blocking the Brooklyn Bridge, garagemen pledging a pestilence of rats (oh, for the days of labor militancy!)—and no more money forthcoming from banks. On June 10 the state legislature in Albany authorized the Municipal Assistance Corporation, an authority with the power to borrow up to $3 billion in bonds to if city default appeared imminent—with the caveat that they didn’t have to lend money at all if the city did not squeeze its budget according to its specified terms, of which Felix Rohatyn became the most prominent member.

It wasn’t working.

By the middle of October Governor Carey had laid out an austerity plan he said went “to the limits of what we can apply to the city in terms of economies.” And President Ford considered backtracking: he hadn’t entertained the idea of a bailout. But now top advisers proposed he sign a package of loans for the city working its way through Congress. “Hell, no!” a right-wing chief staffer, whose name was Donald Rumsfeld, bellowed. He spoke for the mood of the room.

On October 29, at high noon, the president made a luncheon address at the National Press Club, carried live on all three networks. He outlined Mayor Beame’s argument that “unless the the federal government intervenes, New York City within a short time will no longer be able to pay its bills.” And he responded with the argument of William Simon: it was all New York City’s fault, for giving candy away it could not afford. (Which also, as it happened, was the argument of Ronald Reagan, who once said in a speech, “I include in my prayers every day that the federal government will not bail out New York.”)

And Ford said he wouldn’t stand for it.

“I can tell you, and tell you now, that I am prepared to veto any bill that has as its purpose a federal bailout of New York City to prevent default…. If they can scare the whole country into providing that alternative…it would promise immediate rewards and eventual rescue to every other city that follows the tragic example of our largest city.” He proposed bankruptcy proceedings in federal court instead. “Other cities,” he concluded, “other States, as well as the Federal Government, are not immune to the insidious disease from which New York City is suffering. This sickness is brought on by years and years of higher spending, higher deficits, more inflation, and more borrowing to pay for higher spending, higher deficits, and so on, and so on, and so on. It is a progressive disease, and there is no painless cure…. If we go on spending more than we have, providing more benefits and services than we can pay for, then a day of reckoning will come to Washington and the whole country just as it has to New York.”

ford to city: drop dead ran the headline in the New York Daily News the next morning—the day before Halloween. Newsweek’s cover starred Abe Beame, swaddled like a baby, Gerald Ford spanking him over his knee.

Rand Paul must have been reading Jerry’s speeches. If Detroit is bailed out, he’s said, ““Those who don’t have their house in order, who are teetering on disaster, will continue to make bad decisions…. You don’t set up an implicit promise from the federal government that everybody is getting bailed out…. It’s sort of like too big to fail for banks. If you have too big to fail for cities or for states and they believe they’ll be bailed out they’ll continue to make unwise decisions.

So you have to, in the words of Treasury secretary Andrew Mellon in the 1920s—charming guys, those Republican Treasury secretaries—“purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” Or in Rand Paul–ese, a more polite argot, “You need to make these decisions and the sooner you make them the better. If you wait to make them, it’s even harder on people.”

But apparently, stealing people’s pensions isn’t hard on them at all. And plainly that’s what the likes of Paul have in mind—and coming soon to a city near you. “I mean the statistics in California are staggering,” he says. “I think there’s over 100,000 people there getting over $100,000 a year in retirement. You got police chiefs in medium-sized cities getting $350,000 a year for a salary. It’s become untenable. But the main thing is we cannot send a signal from the federal government that cities and states are going to be too big to fail…. Bankruptcy in Detroit is going to much harder than if ten years ago, they had started downsizing and making their pensions and salaries more commensurate with the private sector.”

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Right. And if Rand Paul thinks the sole source of Detroit’s fiscal troubles is public salaries and pensions—not, say, the flight of the single industry in a single-industry town, or white flight, or the federal abandonment of urban policy tout courtI have an island to sell him.

John Nichols on why banks get bailed out, but Detroit does not.

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