Detroit is bankrupt.
It may be the largest city in American history to go bankrupt, but it is not alone. Other cities and states — including Chicago, Philadelphia, New York, Compton, Fresno and Oakland — may be next, according to a new book by Wall Street financial analyst Meredith Whitney, who was one of the first to forecast the 2008 financial meltdown. Now she has turned her attention from the fiscal health of banks to the fiscal health of states and local governments.
“America is moving forward, but there are badly battered states that are holding back the overall growth of the U.S. economy,” writes Whitney in her new book, “Fate of the States: The New Geography of American Prosperity” (Penguin 2013). “I have never been more optimistic about growth inside some parts of the United States; however, I have also never been more pessimistic about other areas that seem doomed by structural unemployment and skyrocketing poverty rates.”
In “Fate of the States” Whitney claims a sea change of prosperity is emerging in some states, with jobs moving from coastal states towards the “central corridor” states in the Midwest and Mountain West. Using recent statistics, she foresees a demographic transformation blossoming in the United States. She claims two America's are emerging: the boom states and the doom states.
Plagued by inept politicians, high taxes, unfunded pensions, overburdened healthcare costs and unsustainable municipal bond debt, Whitney argues that America’s economic power is shifting from the struggling coastal and Sun Belt states to the formerly less prosperous “flyover” states in the nation’s interior and Midwest. She contends that “interior” state like North Dakota, Indiana and Texas have done a lot better than their coastal cousins like California, New York and Florida.
She says the Detroit crisis is far from unique. “Awash in new tax revenues, cities and states borrowed and spent as if the good times would never end. Unfortunately, they did,” writes Whitney, who wrote the book months before Detroit’s collapse in July 2013.
“Smart money,” writes Whitney, “is flocking to states with lower tax burdens and less strained budgets.” She claims Americans are voting with their feet and taking their wallets with them, migrating inland towards job growth, and leaving local and state government high and dry.
Whitney, a banking analyst, won acclaim in 2007 with the prescient warning that Citigroup would come under pressure — a call that gained widespread recognition and catapulted her into the upper ranks of Wall Street analysts.
For investors, what’s next for America? More of the same, Whitney argues. The states that are strong today will continue to get stronger, and the most vulnerable states will continue to get weaker. Knowing where the job creation and economic opportunity will be over the next few decades is crucial for investors.
“The first cracks in the there’s-nothing-to-worry-about façade are now appearing,” she writes, worrying about the $3.7 trillion municipal bond market that funds many local and state governments. “In 2012 the California cities of San Bernardino, Stockton and Mammoth Lakes all filed for bankruptcy protection, and many cities throughout Michigan have been taken over by state-appointed emergency managers. The credit-rating agencies have been telling bond investors to expect more defaults.”
Packed with statistics, the “Fate of the States” is a great primer from one analyst who follows the fiscal struggles of 50 states. But Whitney’s been wrong with some of her calls in the past; so she could get this one wrong too. It won’t be clear if she is correct for years to come. Therefore, readers seek out other opinions.
Whether this long-term demographic shift from the coasts to America’s hinterland occurs is open to debate. But one thing is for sure, Whitney still lives in New York City.