Detroit's socialist nightmare is America's future

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Thursday, October 29, 2009
From Porter Stansberry in the S&A Digest:

One of the most important things to remember about socialism – or coercion of any kind – is it fails eventually because human beings have an innate desire for liberty and a strong need for personal property rights. In fact, the origins of government lie in the need of agricultural communities to protect themselves from violence and theft. So it is particularly ironic that in more recent times, it is government itself that has more frequently played the role of bandit. When you start taxing people at extreme rates to pay for socialist "benefits," when you start telling them which schools their children must attend, when you start giving jobs away to people based on race instead of ability... you quash human freedom, which bogs down productivity... and if continued for long enough, leads to social collapse.

I find it perplexing that only 20 years after the collapse of the Berlin Wall, the West continues to implement laws that mimic all of the failed policies of our former "communist" foes. In fact, our current president won the election by promising to "spread the wealth around." But... truth be told... we don't have to look to Eastern Europe or the Soviet Union to find a society destroyed by coercion, socialism, and the overreaching power of the State. We could just look at Detroit...

In 1961, the last Republican mayor of Detroit lost his re-election bid to a young, intelligent Democrat, with the overwhelming support of newly organized black voters. His name was Jerome Cavanagh. The incumbent was widely considered to be corrupt (and later served 10 years in prison for tax evasion). Cavanagh, a white man, pandered to poor underclass black voters. He marched with Martin Luther King down the streets of Detroit in 1963. (Of course, marching with King was the right thing to do... It's just Cavanagh's motives were political not moral.) He instated aggressive affirmative action policies at City Hall. And most critically, he greatly expanded the role of the government in Detroit, taking advantage of President Lyndon Johnson's "Model Cities Program" – the first great experiment in centralized urban planning.

Mayor Cavanagh was the only elected official to serve on Johnson's task force. And Detroit received widespread acclaim for its leadership in the program, which attempted to turn a nine-square-mile section of the city (with 134,000 inhabitants) into a "model city." More than $400 million was spent trying to turn inner cities into shining new monuments to government planning. In short, the feds and Democratic city mayors were soon telling people where to live, what to build, and what businesses to open or close. In return, the people received cash, training, education, and health care.

The Model Cities program was a disaster for Detroit. But it did accomplish its real goal: The creation of a state-supported, Democratic political power base. The program also resulted in much higher taxes – which were easy to pitch to poor voters who didn't have to pay them. Cavanagh pushed a new income tax through the state legislature and a "commuter tax" on city workers.

Unfortunately, as with all socialist programs, lots of folks simply don't like being told what to do. Lots of folks don't like being plundered by the government. They don't like losing their jobs because of their race.

In Detroit, they didn't like paying new, large taxes to fund a largely black and Democratic political hegemony. And so, in 1966, more than 22,000 middle- and upper-class residents moved out of the city.

But what about the poor? As my friend Doug Casey likes to say, in the War on Poverty, the poor lost the most. In July 1967, police attempted to break up a late-night party in the middle of the new "Model City." The scene turned into the worst race riot of the 1960s. The violence killed more than 40 people and left more than 5,000 people homeless. One of the first stores to be looted was the black-owned pharmacy. The largest black-owned clothing store in the city was also burned to the ground. Cavanagh did nothing to stop the riots, fearing a large police presence would make matters worse. Five days later, Johnson sent in two divisions of paratroopers to put down the insurrection. Over the next 18 months, an additional 140,000 upper- and middle-class residents – almost all of them white – left the city.

And so, you might rightfully ask... after five years of centralized planning, higher taxes, and a fleeing population, what did the government decide to do with its grand experiment, its "Model City"? You'll never guess....

Seeing it had accomplished nothing but failure, the government endeavored to do still more. The Model City program was expanded and enlarged by 1974's Community Development Block Grant Program. Here again, politicians would decide which groups (and even individuals) would receive state funds for various "renewal" schemes. Later, Big Business was brought into the fold. In exchange for various concessions, the Big Three automakers "gave" $488 million to the city for use in still more redevelopment schemes in the mid-1990s.

What happened? Even with all of their power and all of the money, centralized planners couldn't succeed with any of their plans. Nearly all of the upper and middle class left Detroit. The poor fled, too. The Model City area lost 63% of its population and 45% of its housing units from the inception of the program through 1990.

Even today, the crisis continues. At a recent auction of nearly 9,000 seized homes and lots, less than one-fifth of the available properties sold, even with bidding starting at $500. You literally can't give away most of the "Model City" areas today. The properties put up for sale last week represented an area the size of New York's Central Park. Total vacant land in Detroit now occupies an area the size of Boston – Detroit properties in foreclosure have more than tripled since 2007.

Every single mayor of Detroit since 1961 has been a Democrat. Every single mayor of Detroit since 1974 has been black. Detroit has been a major recipient of every major social program since the early 1960s and has received hundreds of billions of dollars in government grants, loans, and programs. We now have a black, Democrat president, who is promising to do to America as a whole what his political mentors have done to Detroit.

Those of you with a Democratic political affiliation may think what I've written above is biased or false. You may think what you like. But there is no way to argue that what the government has done to Detroit is anything but a horrendous crime. You may think what I've written above is merely a political analysis. Perhaps so, but politicians drive macroeconomic policy. And macroeconomic policy determines key financial metrics, like the trade-weighted value of a currency and key interest rates.

The likelihood America will become a giant Detroit is growing – rapidly. Politicians now control the banking sector, most of the manufacturing sector (including autos), a large amount of media, and are threatening to take over health care and the production of electricity (via cap and trade rules). These are the biggest threats to wealth in the history of our country. And these threats are causing the world's most accomplished and wealthy investors to actively short sell the United States – something that is unprecedented in my experience.