Slate's Yglesias: More Cities Should Go Bankrupt

Tuesday, 23 Jul 2013 07:54 AM

By Michael Kling

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Bring on the municipal bankruptcies, says Slate business and economics correspondent Matthew Yglesias.

Detroit made news last week by being the largest municipal to file for bankruptcy in U.S. history.

Yet corporations go bankrupt all the time, notes Yglesias, and individuals do it often, too.

Editor's Note:
 
The Truth About the Economy — Government Documents Lead to Eerie Conclusion

So why shouldn't more towns and cities?

In corporate American, bankruptcy is seen as valid strategic move.

"If the appropriate legal framework were in place, it's also a move that could be advantageous for cities like Providence, R.I., and Baltimore, as well as smaller Michigan municipalities rocked by the same large economic trends as Detroit," Yglesias argues.

Corporations, including American Airlines and Hostess, maker of Twinkies, have used bankruptcy to save themselves or their products from extinction and become stronger.

Individuals use personal bankruptcies to start over. By allowing people to take risks, bankruptcy protection is a source of economic strength, he maintains.

"Without access to bankruptcy, both firms and individuals would be endlessly crippled by the mistakes of the past."

However, few municipalities file for bankruptcy. The municipal bankruptcy process is more difficult, and courts often reject their petitions.

That should change, Yglesias argues. Getting rid of debt would free cities from past management mistakes.

Sure, Detroit's Chapter 9 bankruptcy filing was hardly cause for celebration. But the real cause for mourning was the decades of population and economic demise that caused the bankruptcy, not the bankruptcy itself. Bankruptcy protection will give Detroit a chance for the future, he predicts.

Easier bankruptcies would make borrowing more difficult for cities, but that's actually good, according to Yglesias. Ill-advised stadiums and convention centers could be contained, as lenders take a harder look at spending projects.

Letting bankruptcy judges impose tax increases and asset sales as part of bankruptcy settlements would help ensure that bankruptcies are driven by inability to pay instead of lack of political will.

"But it's silly to let the mistakes of the past prevent a city from having a future, and naive to think that cheap debt is an unmitigated blessing in the municipal context," he writes. "Corporate America would be much worse off without relatively easy access to reorganization through bankruptcy, and America's cities and towns should have much the same."

Detroit's bankruptcy could set a legal precedent for financially strapped cities with huge pension obligations, according to The Huffington Post.

"If the bankruptcy results in a significant reduction of pensions as a matter of federal law, other government units are going to look at this and say, 'maybe we do the same thing,'" said Peter Henning, a constitutional law professor at Wayne State University law school in Detroit, according to The Post.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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