Can the economic health of the nation’s largest cities tell us anything about the health of the greater economy? Perhaps.

On Tuesday, Moody’s downgraded Chicago’s credit rating to junk level. The downgrade comes in response to the city’s growing pension liabilities, paired with a new Illinois state court ruling that public pensions cannot be cut as a method of repairing the state’s finances. Moody’s wrote, “In our opinion, the Illinois Supreme Court’s May 8 ruling raises the risk that the statute governing Chicago’s Municipal and Laborer pension plans will eventually be overturned.”

CNBC explains the ramifications of Moody’s decision:

The downgrade impacts nearly $9 billion worth of the city’s general obligations and other debt… Downgrades could trigger up to $2.2 billion in accelerated payments on Chicago debt.”

A Bloomberg Business article highlights why many believe Chicago is doing worse than Detroit. Most of them come down to mismanagement of the city’s finances by public officials, who seem unwilling to address the growing economic problems:

 

  • Back in 2014, Chicago had the highest per-capita pension liability, which is currently $20 billion. Detroit is one-quarter the size and had a pension liability of $3.5 billion before declaring bankruptcy.
  • Politicians have failed to act. From 2002-2012, Chicago’s bonded debt rose by 84%, while politicians chose to skip pension payments.
  • Detroit eventually began major economic reforms, but Chicago Mayor Rahm Emanuel disagrees with Moody’s view that Chicago can’t manage its debt by reforming its pension program, which could mean he’s unlikely to attempt economic reform until it’s too late.

Chicago is the third-largest city in the United States, and to the casual observer looks like a healthy, bustling metropolis. It has a huge tourist economy and is home to many Fortune 500 companies. But Chicago’s debt downgrade is a stark example of how an overreaching government can destroy an economy in spite of strong private enterprise.

The United States has $18 trillion in national debt, and it’s steadily growing. Washington politicians of every level have been aware of the problem for years, but continue to kick the can down the road. How long before we see the country follow in the footsteps of the microcosms of Detroit and Chicago?

Peter Schiff is an American investment broker, author and financial commentator. He is CEO and chief global strategist of Euro Pacific Capital Inc., a broker-dealer based in Westport, Connecticut.