Fox News is floating the idea that Detroit's filing for bankruptcy could lead to other cities following suit, a claim that economist Jared Bernstein calls “analytically incorrect.”
On July 18, the city of Detroit filed for Chapter 9 bankruptcy protection, officially becoming the largest city in the United States to do so. According to USA Today, “The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities.”
On the July 19 edition of Fox & Friends, Fox Business host Stuart Varney warned that Detroit's actions could cause a string of cities throughout the U.S. to also seek bankruptcy protection. Varney claimed, “This is a very big deal. Other cities might choose to go the Detroit route, because federal bankruptcy allows an escape route from these unpayable pension obligations.”
Reacting to Varney's theory, co-host Gretchen Carlson stated:
This is the microcosm of the macrocosm in America. This is not just going to be Detroit, maybe Detroit is one of the worst, but this is going to be happening to big cities. You can't continue to do this. You can't continue to fund money that you don't have.
The speculation that Detroit's actions may set in motion other bankruptcy filings continued throughout the day. On America's Newsroom, frequent Fox Business guest Ed Butowsky continued sounding the alarm for municipal default, stating:
I mean this is going to happen all of the country, all over this United States if people don't start taking the proper measures.
Fox's narrative of a “domino effect” taking place in cities across the country ignores a number of economic facts. In an interview with Media Matters, economist Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, claimed Fox's suggestion that other cities will follow Detroit's lead amounts to nothing more than “scare mongering” :
There will be no domino effect. There is a lot of scare mongering around that issue. That doesn't mean that every pension fund is in tip top shape, but the fact is that states and cities have been taking action to bring their costs in line and reduce their unfunded liabilities. In fact, between 2009 and 2011, 43 states have reduced the costs of their pension plans, including their unfunded liabilities, typically by modifying their obligations. Between 1970 and 2012, there were five city or county governments that defaulted. Okay, this is a rare event and for anyone to extrapolate from Detroit, which has faced extremely unique and tough economic challenges, to the rest of the country is analytically incorrect.
Bernstein noted that Detroit's bankruptcy filing is unique, claiming “it's wrong to extrapolate” from the city's situation. Indeed, much of the reporting on the matter explains the series of unfortunate circumstances -- from declining tax revenue to high crime and bad governance -- that led the city into generations of decline.
Bernstein also stressed that other municipalities throughout the U.S. have in fact improved the standing of their liabilities. He explained that Fox's suggestion that other cities will follow Detroit's lead “assumes that municipalities have just sat there and not done anything about their pension liabilities. In fact, the majority of them have taken actions to bring their costs in line with their liabilities. The recovering economy is also helping them as the returns on their pension funds go back into normal territory.”
Other economists agree that the financial outlook of most cities and municipalities around the country is entirely manageable. In February 2011, economist Dean Baker of the Center for Economic and Policy Research published an in-depth study, "The Origins and Severity of the Public Pension Crisis":
The shortfalls facing most state and local pension funds have been seriously misrepresented in public debates. The major cause of these shortfalls has not been inadequate contributions by state governments, but rather the plunge in the stock market following the collapse of the housing bubble.... Furthermore, when expressed relative to the size of their economies, most states are facing shortfalls that appear easily manageable.
With financial markets at or near all-time highs, most municipalities that faced a solvency crisis just a few years ago are once again stable. The fact that the City of Detroit remained mired in decline after the successful auto bailout and a general boom in financial markets indicates just how exceptional a case it is.
According to the National League of Cities, cities are financially better off than they were during the recession, and “Detroit should not be seen as emblematic of cities or as a harbinger of what's to come.”
Bernstein urged that instead of adopting the Fox narrative on the city's crisis, we should “think about how we can help Detroit, not create false alarms.”