The Equity Factor

Lindsey Graham Fails to Stop Nonexistent Detroit Bailout

U.S. Sen. Lindsay Graham in June. Credit: Chuck Hagel

Lindsay Graham’s bid to ban bailouts for cities is on the back burner. The South Carolina senator’s amendment to prevent the federal government from bailing out Detroit, or any other American municipality, was defeated in a 14-16 vote yesterday.

Thing is, no one in Congress or at the White House has advocated for bailing out Detroit. Michigan Gov. Rick Snyder hasn’t asked for a bailout. Mayor Dave Bing hasn’t requested a bailout. Detroit Emergency Manager Kevyn Orr has not called for a bailout. “The City of Detroit has not asked for a bailout,” Michigan Sen. Carl Levin said in a statement, just to quell any haters.

Only armchair economists on Twitter and Republican senators have mentioned the mere idea of bailing out the Motor City.

“There’s no good reason why Detroit or any other American city ought to receive a taxpayer-funded bailout from Washington,” Texas Sen. John Cornyn said. Cornyn said he hopes the “Obama administration resists any temptation to meddle in the [bankruptcy] process.” But, again, no one has asked for a bailout.

Lindsay Graham and others — elected officials! — reacted to unsubstantiated clamor on the Internet and their own craven comments. Essentially, Graham’s crusade to stop something that was never going to happen in the first place failed. Another day in Washington.

But what is the fundamental difference between bailing out Detroit (or Chicago, or Stockton, Calif.) and, say, the auto industry or Wall Street? Not much. “You could argue that the bailouts to firms or the auto companies were a back-door way of helping local economies,” Tracy Gordon, a Brookings Institution fellow in the economic studies program and an expert on local finances, told me. But Graham isn’t in his pulpit barking ad infinitum about potential future bailouts to corporations.

And besides, Graham’s amendment could have created a host of other problems. Michigan Sen. Debbie Stabenow called it “partisan politics at its worst.” The effects could be felt across different sectors, “potentially denying road funding, public safety resources and economic development money to local governments facing financial hardship,” according to the Detroit Free Press.

Detroit isn’t going to get a bailout, but I do understand people’s fears about the repercussions should President Obama wake up tomorrow and say, “You know what Joe, let’s do this.” It could open the door for municipalities teetering on the brink. It might make swallowing a city’s pride and filing for Chapter 9 a little easier.

“The concern is that if you just make money available for free, then everybody is going to be lining up for it,” Gordon said. “That’s the moral hazard.”

Graham has Washington and the media echo chamber worked up about some lousy amendment to prevent a bailout that was never going to happen in the first place. It’s been a long week in Detroit. Graham only made it worse.

The Equity Factor is made possible with the support of the Surdna Foundation.

Tags: economic development, policy, equity factor, politics, detroit, politics & policy, bankruptcy, kevyn orr, rick snyder, david bing