Detroit Can Rise From the Ashes of Financial Neglect
It is hard to imagine now, but Detroit was once known to some as the Paris of the West. At its peak, it was one of America's largest cities, boasting a population of 2 million, spectacular architecture, a host of mansion-dwelling industrialists and a world-class art collection currently valued at over 4.6 billion dollars. Yet after decades of decline, the city that gave birth to Motown Records and Henry Ford's Model T filed for bankruptcy last July; it was the largest municipal bankruptcy case in American history.
The simplest explanation for Detroit's decline in both population—the city has lost about 1.3 million residents since the 1950s—and revenue is the American auto industry's inability to respond effectively to German and Japanese competition during the post-World War II era. The collapse of General Motors, Ford and Chrysler effectively broke the backbone of Detroit's economy. Motown has lost 90 percent of its manufacturing jobs, and nothing has replaced them.
Detroit has also had more than its fair share of social problems over the years—race riots, corrupt labor unions and the highest violent crime rate of any major American city. But at the heart of the city's record setting 18.5 billion dollar debt is its government, which owes at least 9 billion in unfunded healthcare and pension liabilities.
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Since at least 1985, the City Council raided the city's pension fund—even as the auto industry continued to struggle and the city lost residents—writing extra "bonus" checks to city employees and retirees instead of reinvesting the earnings. The pension fund lost at least 2 billion dollars this way, which not only prevented reinvestment but also launched the city down the road to insolvency.
As the Detroit Free Press explained last year in its feature article How Detroit Went Broke:
Instead [of making politically and economically tough decisions], amid a huge exodus of residents, plummeting tax revenues and skyrocketing home abandonment, Detroit's leaders engaged in a billion-dollar borrowing binge, created new taxes and failed to cut expenses when they needed to. Simultaneously, they gifted workers and retirees with generous bonuses. And under pressure from unions and, sometimes, arbitrators, they failed to cut health care benefits — saddling the city with staggering costs that today threaten the safety and quality of life of people who live here.
When the US economy began to contract, sales at places like Starbucks and Neiman Marcus dropped, while the revenue of companies like McDonalds and Wal-Mart rose. This suggests that most Americans understand that when you are taking in less money, you have to spend less. Detroit's mayors and city councils failed to make these tough choices. Over the past five years alone, they have spent 100 million dollars more than they have collected in tax revenue. They failed to cut the city work force, cut health benefits and reinvest the surplus of the pension fund. And now the city is bankrupt, without enough cash to provide basic services to its residents.
In a way, Detroit's problems are a distillation of the worst of America. Decades of single party political rule, the most despicable examples of crony capitalism, mayors convicted of multiple felonies and unaddressed racial tensions have all contributed to the city's downfall. Even more tragically, most of the residents seem to have given up. Those with money have moved away—either to the suburbs or to other parts of the country—and those who have remained appear to have little hope of improving their lives.
So what must happen in Detroit for it to begin to grow again? First, the city must rid itself of single-party political rule. While it is clear that political leaders in Detroit have utterly failed in their duty to manage the city's finances, it is equally true that the voters of Detroit must demand more from their elected officials. At the end of the day, we have the leaders we elect and tolerate, but for Detroit residents to improve their government, they must be offered a choice.
Second, the city can no longer be dependent on a single industry to drive its economic engine. Last year, Michigan became the twenty-fourth right-to-work state, which was an important step to attracting new industry. But while unemployment has fallen, most fiscal policy advisors believe it will take at least a decade before the impact of the legislative shift can be felt.
The bankruptcy problem—which endangers the most basic services Americans take for granted—may also take years to resolve in court. Meanwhile, 78,000 buildings remain abandoned, while fewer than 10 percent of violent crimes are solved. Detroit's road back from ruin is going to be a long one. With dedicated leaders, engaged citizens and effective coordination with the state government, Detroit can certainly rise again.
