This is a time of high political drama in the Motor City as Detroiters debate whether a state takeover of its books is necessary to avert bankruptcy. But in the larger scheme of things, this is a minor issue. A takeover won't cure the root cause of Detroit's fiscal mess: a dysfunctional government that has killed growth and made the city a living hell. Fixing that will require radical solutions, such as the one that brilliant New York University economist Paul Romer is recommending for Third World countries in a similar trap: charter cities.
An Ernst & Young audit earlier this month found that, absent drastic action, Detroit will run out of cash by April. This is no surprise to anyone familiar with the city's perennial budgetary shenanigans.
Detroit's current mayor, Dave Bing, a well-meaning but politically clueless former basketball star, came to office in 2009 (after his predecessor was carted off to jail) promising to eliminate Detroit's $300 million-plus accumulated deficit. But the deficit has grown, and Detroit is drowning in debt because Bing maxed out the city's credit card, pushing Detroit's credit rating into junk territory. The city has used up all its borrowed cash and, come spring, it will be flat broke, since it can't borrow more.
To avoid this, Bing and the city council have proposed competing plans to lay off workers, impose salary cuts, raise taxes, sell city assets, cut back on city services such as trash pickup, and privatize some departments. This will buy Detroit a few more months but arguably deepen the city's malaise. For example, raising taxes while cutting services will accelerate the exodus of businesses and residents from the city, further eroding Detroit's tax base. But all of this is irrelevant: The city's unions are implacably opposed to both plans, making a takeover by a state-appointed emergency financial manager inevitable.
A Michigan law passed last year gives the manager sweeping powers to void union contracts, fire workers, sell assets, and consolidate departments. But the manager's mandate is to make Detroit's government less costly, not truly functional. He or she cannot root out entrenched political corruption; cut taxes (the highest in the state); eliminate red tape; loosen the chokehold of the public unions that could once again saddle the city with unsustainable legacy costs; fight crime or improve schools. These are classic Third World problems that have produced classic Third World results: an unlivable and economically depressed city.
Detroit has lost 1.3 million people since the 1950s. About 50 percent of the remaining 700,000 are functionally illiterate and don't have the skills to hold jobs; Detroit's current unemployment rate is 22.5 percent. Large tracts of Detroit's 140 square miles—an area bigger than Manhattan—are littered with empty homes as Detroiters unable to sell them or pay their mortgages abandon them to avoid hefty property taxes.
Detroit's hidebound political class is too dysfunctional and its special interest groups too fierce to enact workable reforms—which is why Detroit needs to consider Romer's ideas.
Romer's charter cities concept involves creating what he calls "reform zones." The idea is to let a government with a track record of success run parts of a country in conjunction with the local government—but with a high-degree of independence from it—on the theory that the key drivers of progress are rational rules and functional institutions. For example, Hong Kong delivered First World living standards while mainland Chinese remained mired in poverty because Hong Kong was a British protectorate, benefiting from a Western rule of law that implemented low taxes, minimal regulations, and legal protections for property rights and contracts. Likewise, other Third World countries could give long-term leases to foreign governments to establish special reform zones in sparsely populated areas.
Romer calls his concept "charter cities" because a city charter would spell out exactly what rules and regulations the outside government would implement. All businesses and individuals would be able to live in or leave the city at will, but they couldn't easily change the charter and rig the rules toward some special-interest group. However, because the success of the city would depend on attracting people, it would have every incentive to put in place good rules and enforce them efficiently.
Although Romer has not considered applying his idea within America, Detroit might be an excellent candidate. Bing has been talking about downsizing Detroit by withdrawing services from thinly inhabited areas. If his plan moves forward, vast tracts of the city could become completely uninhabited. Rather than turning them into farmland, as some propose, it might be better to turn them over to, say, Houston, whose government has successfully revived its city, especially since Detroit has the assets to thrive—a great freeway system, a sparkling riverfront, a world-class port, and lovely housing stock.
There are a zillion obstacles that would have to be overcome for something this radical (the subject of a future column). The chief one is how exactly Detroit would persuade a city like Houston to become its executive. A percentage of future tax revenue? Simple good will?
But given that the city is about to lose much of its sovereignty to its own state anyway, now is the time to put this innovative idea on the table. Maybe it will go somewhere and maybe it won't. Either way, it will drive home the point that Detroit is an extraordinary mess that requires extraordinary solutions.
Reason Foundation Senior Analyst Shikha Dalmia is a columnist at The Daily, where this column originally appeared.