Detroit’s Bankruptcy

As we learned today at the Federal Reserve, Detroit went bankrupt for a lot of reasons. Obvious reasons that Martin went into specific detail about included population loss, plummeting tax revenues, legacy costs, and race riots. However the overarching theme of his presentation was that poor leadership led to Detroit’s bankruptcy. According to the Detroit Free Press, “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.” Detroit’s leaders were lackadaisical in how they carried out operations, they tried to cater to everyone’s needs without investing in infrastructure as well as being precise in calculating the detrimental effects of the deals they were making with various organizations. Detroit’s leaders also had multiple times throughout the late 90’s and early 2000’s where they could’ve avoided excess borrowing or responded productively to the mass population exodus. Since the 1950’s, there has only been one ten year period in Detroit where revenues exceeded debts and also population has decreased 65% from 1950’s levels. At any point Detroit leaders could have made changes, such as cut back on excessive borrowing, yet repeatedly they did not. They never responded productively and continually allowed Detroit to fall deeper and deeper into the bankruptcy hole.

Due to poor leaders who have continually raised taxes, given out huge bonuses, missed chances to make changes and mismanaged legacy costs, Detroit has had to cut a huge amount of its spending for infrastructure. Today Detroit’s schools, roads, and funding for police and fire departments have taken a huge hit. All the budgeting is going to paying back debts and loans rather than improving the city. Due to this and high unemployment, Detroit is characterized by extreme crime and deteriorating roads and buildings. Police are also incapable of responding to all the crime since the funding for the police department is so low.

If Detroit could improve its infrastructure, it could turn into a more attractive place to live. People do not want to go to a city where the high school graduation rate is extremely low as well as having abnormally high crime rates. If Detroit can climb out of debt and fix its infrastructure become more attractive for college grads as well as families a lot more industry will come back into the city. If people can start moving into Detroit, business will follow. However, no industry will move into Detroit with the current low percentage of the population (20%) holding college diplomas. Serious changes need to happen in Detroit in order for it to recover from bankruptcy, that will start with good leaders and philanthropists improving the City’s infrastructure to make it a more attractive destination for employers as well as skilled workers.

2 comments to Detroit’s Bankruptcy

  • Louis Ike

    Detroit obviously has an image problem regarding its perception to the rest of the country. You mention that perhaps investment in infrastructure and successfully getting out of bankruptcy would lead to movement back into Detroit. However, I do not see Detroit making a comeback anywhere in the foreseeable future. The industry that made Detroit great, automobile, is becoming an industry of moderately skilled workers with little or no college education outside of the management. You also mention that if people were to move back into Detroit, then businesses would follow and a virtuous cycle would begin. However, the problem is that people are not going to move into a desolate run-down city that has no businesses offering jobs, and on the other side of the coin, no business is going to open up new operations in a town thats perception is so bad such that even with high paying jobs people would be inclined to look elsewhere. I hope all the best for Detroit, but they have an incredible uphill battle in rising from the ashes of their 20th century economic structure to the service industry structure of the 21st century.

    • First, Mr. Ike’s comment: mfg staff are increasingly high-skilled, running multiple robots rather than feeding parts by hand, doing quality control calculations, etc….bu more important is that fewer are needed, rather than the skill mix. So indeed, there is no automotive-based comeback in Detroit’s future. And between facilities in the suburbs and the overall movement of the economic center of gravity southward, there’s less and less need for office space as a regional business center.
       
      Second, leadership could have made a difference – Pittsburgh is the example. But Detroit’s decline could not have been prevented, at best the city could have survived without bankruptcy at a scale perhaps a bit bigger than today. That however is a hypothetical; you’d need to do a careful comparison of legacy costs with (say) Pittburgh. My hunch is that the ratios in Detroit were significantly worse. Once a downward spiral begins, it’s very hard to overcome, as taxes fall faster than population, whereas retirees live on and on. Detroit would be in even worse shape save for teachers falling under state rather than city pension plans. However, Martin Lavelle is an economist in all but PhD and surely has done his homework on this issue, so I can only lay out a devil’s advocate position, without offering anything concrete as a counter.

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