Detroit is Bankrupt -The End of and Era

–Jeff Myhre

Last week, the City of Detroit, Motown, the place that made the tanks that stopped Fascism and the autos that created America’s car culture, filed for bankruptcy. The city owes about $18 billion, and it hasn’t got the resources on its own to fix things. There’s a lot of politics behind this move, but in truth, the culprit here is demographics. Detroit went broke because it lost almost two-thirds of its population in a half century. There are lessons here for other places.

The politics here are kind of ugly. Detroit is the biggest city in the State of Michigan, and Michigan law allows the governor to appoint a financial manager if any local government gets itself into financial trouble. This law is not without controversy. Originally, it passed a couple of years ago, only to be overturned by the voters in a referendum. Republican Governor Rick Snysdet, though, simply had the state legislature pass the law anew with an extra clause – one that said the new version was not subject to repeal by referendum Conservatives say this is necessary to ensure that elected officials aren’t profligate with taxpayer money. The left claims the law is cover to allow the state to sell off city assets to private interests.

I lived through this kind of thing once before in London. Margaret Thatcher abolished the Greater London Council because Ken Livingstone (head of the GLC and later Mayor of London) kept raising local taxes to pay for tings like cheap transportation. She went on to sell off the water companies etc.

In Detroit’s case, the city as currently structured doesn’t work. Back in the 1950s, it had a population of about 2 million. Now it has about 713,000. The changes started when the middle managers of the large car companies started moving to the suburbs, where they no longer paid taxes to the city. This accelerated throughout the 1960s.

At the same time, America’s dominance globally began to ebb. That isn’t the same as saying America went into decline. Instead, I mean that the other industrial powers recovered from begin bombed to bits. At the end of World War II< the US accounted for more than half of the world's economic activity – an artificial situation. As other nations with car-making histories got back in the game, Detroit was going to lose market share. Many Americans laughed at the VW Bug and the Toyota Corolla in the 1960s, but when the first oil crunch hit in the 1970, the gas guzzling American models couldn't keep up. So, car manufacturing moved to states where the United Auto Workers weren't so powerful. Tennessee offered better tax concession than Michigan. Indeed, the BMW most yuppies in the US drove in the 1990s were made in South Carolina, not South Bavaria. With a population shrinking, jobs were fewer and tax revenues lower. A death spiral began. Today, there are over 70,000 abandoned properties in the Motor City. On any given night, 40% of the streetlights don't work, contributing to a violent crime rate that is the highest of any major US city. In 2011, just 53% of property owners paid their property taxes. At the beginning of the year, only a third of Detroit’s ambulances were in service. The bankruptcy is now under challenge in court because of the ramifications it might have on people with city pensions. And the cops and firefighters from Detroit deserve every penny they were promised – I can think of fewer jobs more difficult. But the underlying truth here has little to do with politics and everything to do with population decline. Since 1953, Detroit's population has dropped about 1% a year. The result is financial disaster, but 1% a year doesn't sound so dramatic. America has about $2 trillion in unfunded public pension liability, and a GDP of about $16 trillion. This is not lethal, but it is serious. Simply put, America's state and local governments need more tax revenue to meet those obligations. That doesn't require higher tax rates, but it does mean better tax collection and more people paying taxes. Immigration is vital to keeping US population levels rising so the country can pay these debts. And in this America is lucky. People want to come here and start a new life. Japan, for example, is less accommodating to immigrants and I believe the last two decades of economic stagnation there are, in part, due to a flat population growth rate and a rise in the median age. Italy is not quite as bad off, but it's got the third biggest debt on the planet, and its relatively small population is growing at less than 0.4% a year. The modern world has never had to deal with a decline in population, so our understanding of the economics of this decline is minimal. However, after the Black Death wiped out a third of Europe, economic activity dropped radically for decades. Detroit is another example of what happens when there aren't enough workers to carry the load. Despite this gloomy story, I am upbeat about Detroit. It's well located on the Great Lakes, they've got a cultural and sporting heritage, and the countryside around it is lovely. When Alaric and his barbarians sacked Rome, it was the end of the world. But today's Romans are elegantly dressed (Armani and Gucci) and well-fed (gelato, bucco, and vino). Life will go on.