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Paul's plan for Motown faces serious potholes

Kentucky Sen. Rand Paul tried to boost his presidential credentials and improve Republican outreach to minority communities with a speech last Friday in Detroit, where he detailed his proposal for “Economic Freedom Zones” that he said would turn around Motown and other troubled localities.

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For Paul, the speech at the Detroit Economic Club presented an opportunity for him to showcase the supposed broad appeal of his libertarian brand of conservatism heading into the 2016 presidential race.

His proposal marries free-market principles with improved outreach to communities (in this case, the urban working class and African-Americans) in a way Republicans discussed for the better part of the last year, after President Barack Obama’s re-election.

"The magic of Motown is here in the city, it's not in some central planner's notebook. What Detroit needs to thrive is not Washington's domineering hand, but freedom from big government's mastery," Paul said. "To thrive, Detroit needs less government and more freedom, less red tape, less punitive taxes, more money left in Detroit."

There's just one problem: Will Paul's plan work? There’s already evidence that casts doubt on Paul’s prescription as a cure for what ails Detroit.

Detroit has already designated 16 “Renaissance Zones” that are exempt from most city and state taxes, “and none of that stuff has made a really powerful difference in the city,” according to Lyke Thompson, the director of the Center for Urban Studies at Detroit’s Wayne State University.

Free-marketers also have problems with the Kentucky senator’s proposal.

"I think it's fundamentally unfair to provide this favor to the city of Detroit," said Mike LaFaive, director of the Morey Fiscal Policy Initiative at Michigan's free-market Mackinac Center.

What's the matter with Detroit?

Detroit filed for bankruptcy this summer after an emergency city manager appointed by Republican Gov. Rick Snyder determined the city could not meet its $18-20 billion in debt without restructuring those liabilities. The filing was the biggest municipal bankruptcy in history.

Detroit's core problem is shared by a number of state and local governments: it can no longer make good on its generous pension obligations. Those obligations ballooned over time due to city leaders' refusal to extract concessions from workers. Unions also generally refused to compromise on benefits, even as those benefits grew more unsustainable.

Motown's cash crunch was further exacerbated as the city's tax base crumbled. Detroiters — often white residents — fled the city for safer and more spacious suburbs after the 1960s riots and the racially divisive, two-decade tenure of Mayor Coleman Young. Jobs also shifted to the suburbs, particularly auto jobs — a lifeblood for middle-class workers in the area. The auto industry's struggles over time to adapt to foreign competition and declining market share hardly helped matters.

As the city's population declined, blight grew. Growing crime, poor policing and vacant lots drove down property values in Detroit, one of the largest U.S. cities by land area.

“I think you have to distinguish between the multiple crises that exist in Detroit,” said Thompson, the Wayne State professor. “One crisis that we have is the crisis with the city. But that's different and distinct from the economic crisis, which is based on deep patterns of disinvestment and massive foreclosure. And those are distinct things and require distinct solutions.”

What now?

Detroit has become a punching bag for Republicans, who regard the city as a prime example of liberal fiscal policy and union overreach. The city's struggles are far more complex, though, and aren't easily shoehorned into one ideological viewpoint or another.

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Still, Detroit's primary task in bankruptcy proceedings will involve restructuring its pension obligations. This most likely means that thousands of public workers and retirees — often, middle-class workers who had planned their retirements around their generous pensions — will have to accept far less, sometimes pennies on the dollar, compared with what they had been promised.

This is hardly a partisan issue. Michigan's Republican Attorney General Bill Schuette sued on behalf of pensioners to challenge the bankruptcy filing. (Michigan's state constitution includes protections for pensioners.) A federal judge allowed the bankruptcy to proceed, though, ruling that pensions are no more entitled to protection than any other liability under federal bankruptcy law, which governs Detroit's filing.

This is where talk of a federal government bailout — which has been scant— enters. Some Democrats argue that the federal government should step forward to protect retiree benefits rather than force workers to accept cuts.

A Rand with a plan

Paul's plan would grant special tax breaks to any city, county or municipality that is in bankruptcy or at risk for bankruptcy, or has exceptionally high unemployment or poverty rates.

Qualifying localities would see income, payroll, capital gains and corporate tax rates slashed to single-digits, or lower. Foreign investors would gain easier access to visas, and the government would allow tax credits for students to attend private schools. The government would suspend some environmental regulations to encourage development, and suspend enforcement of labor requirements requiring that federal construction projects pay "prevailing" (often union-pegged) wages.

But will Paul’s plan work?

The freshman Kentucky senator, like many other Republicans, vehemently opposes the notion of a federal government bailout of Detroit.

Paul's alternative is a free-market oriented stimulus for Detroit and similarly troubled localities. The concept isn't new: President George W. Bush granted similar benefits to Gulf States affected by Hurricane Katrina.

But Paul’s plan offers little detail as to how the libertarian would tackle the problems currently plaguing Motown, virtually a precondition to improving the city's bond rating and attracting the kind of private investment the senator has described. (A memo posted by Paul's office says that pensions deemed insolvent should be "restructured or renegotiated," hardly a detailed prescription to handle Detroit’s chief problem.)

"It's a very technical problem, trying to figure out pension plans. But basically, I think that most pension plans that have been set up by cities — and many private businesses — are fraudulent," Paul told NBC News in an interview last week at the Capitol, adding no greater detail as to how he'd handle reconciling those plans.

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Moreover, there’s little from the experience of Renaissance Zones to suggest that a plan like Paul’s would quickly turn around Detroit.

“Tax-cutting based approaches have not been substantially effective in Detroit, period,” said Thompson. “They have brought marginal and limited investment, but they have not turned the place around.”

"There is some success to the Renaissance Zones," Paul also told NBC News. "But they were never dramatic enough or big enough."

The professor suggested that investments in infrastructure and better policing, along with improved housing and demolition of blighted properties, would provide a better foundation for Detroit’s rebirth.

Even free-market proponents are skeptical of Paul's plan, calling it a "tremendous moral hazard" to essentially reward troubled cities like Detroit for decades of mismanagement.

"I think it would be unfair to every other zone in the United States that was fiscally responsible," said LaFaive. "There's also the academic evidence that enterprise zones, on net balance, are not a sound economic development tool."