Entering a Depression

by Neil Munro
December 1, 2009

Let’s face it. We’re no longer in an economic recession. The economy here in Michigan is entering a depression.

What we’re embarking on is more comparable to our plight in the 1930s than, for example, to the very deep but short downturn of the early 1980s.

It has been rising property values over the years that have been the basis of so much of our prosperity, personal and governmental. Our cities, villages, townships and especially our schools have depended overwhelmingly on the steadily increasing tax income from the rising values of real estate to support themselves; to police our streets and to educate our children.

But everyone who’s been paying attention already knows those values have slumped badly in the last year or so. We’ve been assuming better times inevitably will return, sooner rather than later. In the memories of most of us, that’s always been the way.

So brace yourself. This time it will be four-plus years, and the overall decline in revenue based on property values will reach 30 percent!

This extended decline is forecast by Oakland County Deputy Executive Robert Daddow, whose responsibilities include being on the lookout for budget trouble. County Executive L. Brooks Patterson has been leading the way in the state by mandating that budgeting for the county itself begin as much as three years in advance of spending.

This early-warning approach is paying off big-time as Daddow’s resultant forecast of this long-term slump in the county government’s revenues helps it cope.

It could be a decade before we get back to the prosperity levels we enjoyed before the downturn began, he warns.

Knowing that, recession isn’t the right word for what looms before us. And those local governments with the most to lose mainly seem unprepared at this point. Do you hear or read of debates at your local city and town halls or school board offices over how to weather this long and unprecedented — since the 1930s — economic storm?

Many school districts most likely will, Daddow expects, “go under,” perhaps with the county-based intermediate districts taking over the local school central-office duties as teaching continues.

Meanwhile, governing responsibilities now borne by local units of government such as the state’s 1,501 townships and villages could end up consolidated under county control. Those smaller units would survive as places on the map, but not as governments. Because of the decline in property values, there won’t be enough tax income left for them to do otherwise.

One way to look at this would be, of course, as a disaster. But the better way is to see it as an opportunity, and as a chance to permanently reduce our governmental elephantiasis of anachronistic and costly localism.

Areas now occupied by those local governments would survive mainly as places on the map, not jurisdictions.

Unfortunately, there would be no such offsetting “upside” to the inevitable and terribly jarring decline in the property taxes collected to support the invaluable services of the county parks, roads, area buses and Oakland Community College. Revenues from property taxes would decline 30 percent for them, too.

Daddow says he expects that it will be 2011 before the steady decline in tax revenue finally leads to serious talks locally about reforming the status of our various villages, townships and so forth.

You’ll recall that in October 2008, Daddow himself warned in this column (“Playing Budget Defense”) that even the state’s “back is against the wall fiscally,” with tax revenues plunging and borrowing impossible.

So there certainly is no looking to Lansing for fiscal assistance.

Nor can the state, in turn, look to the federal government for long-term help. Virtually the entire nation has the same problem.

The national accounting firm PricewaterhouseCoopers has predicted a further decline in today’s real estate values nationally of 10 percent through 2011, though they have fallen alarmingly already. Would-be buyers think prices still are too high, the firm says. And the number of troubled real estate loans continues to grow, much to the dismay of banks that continue to be very reluctant to lend — which seems to include all of them.

PricewaterhouseCoopers also calculates that apartment rents remain about 10 percent too high for the market. In other words, we’re no longer willing, or perhaps able, to pay top dollar.

Most of us never expected to have to live through something like this. We thought the Great Depression of the ’30s had taught the nation how to avoid another.

The good news is that we should come out in much better shape than we went in. Our governmental overhead — that is, how much it costs us to be governed — should be dramatically and permanently lower. We will have been forced to eliminate the excess complexities of local officialdom.

We’ll have more efficient government for less. What’s more American?

Neil Munro is the retired editor of the Oakland Press in Pontiac.