DETROIT – BANKRUPT AND DEVOID OF HOPE

According to the 1960 US census, Detroit was the richest city in the US on a per capita basis. In August it filed for bankruptcy. Detroit was not the first US city to file for bankruptcy, but it is by far the largest. For the record, others that share that dubious distinction include San Bernardino, CA, Stockton, CA and Central Falls, RI, among others.

What happened? How did Detroit get from point A to point B? Is its situation an isolated case or a portent? The answers are disturbing and do not bode well for the future.

Some of the factors over the last 50 years that have led to Detroit’s current situation are as follows. Note, many of these are interrelated.

1. The precipitous decline of the auto industry, which was Detroit’s bread and butter. There were many factors that contributed to this decline, but, simply put, the Big 3 could not compete with foreign manufacturers. Their operations were more inefficient and more costly, and their cars were qualitatively inferior. By 2009 the US auto industry was on the verge of extinction. The Federal bailouts in 2009 saved the Big 3, but not the city.

2. White, middle class flight to the suburbs. Detroit’s population has declined from 1.85 million in 1950 to approximately 700,000 in 2013. Many of those fleeing the city have simply abandoned their homes or businesses because they were severely underwater. This has eroded the tax base further.

3. Political corruption, which was exacerbated by the fact that the voters continually voted Democratic.

4. Exorbitant debt. This includes substantial underfunded pension and healthcare benefits for public employees. Even under the best case scenario these workers are likely to endure significant reductions in their retirement benefits. Furthermore, to add insult to injury Federal law dictates that bondholders’ claims would have priority over those of retired workers.

5. Crime, especially violent crime, is on the rise. The homicide rate is the highest its been since the 1970s. The police are stretched so thinly that it takes 58 minutes, on average, to respond to calls for help compared to the nationwide average of 11 minutes. Only 1/3 of the city’s ambulances are operative.

Under these circumstances, the chances of a reversal of fortune are slim and none.

I don’t mean to single out Detroit. Most US cities are heading toward the same fate. Detroit just got there first. There are common threads running through most of these cities. The following factors are present in varying degrees:

1. Substantial debt.
2. High taxes.
3. Declining population.
4. Generous entitlement programs.
5. Strong, often implacable, unions.
6. High compensation to public employees.
7. Substantial pension and healthcare commitments to retired public employees.
8. Non-right-to-work laws.
9. High crime rate

Want more bad news? When the stock market advances slow or reverse themselves, as they inevitably will, the debt and underfunding will increase accordingly. Additionally, the states in which these cities are located are not financially able to bail them out as they, themselves, are often in financial straits. California leads the pack, but New York, New Jersey, Texas, Illinois, Ohio and Pennsylvania are right behind it. Moreover, if you’re think that the Feds will come to the rescue, forget it.

PREDICTION AND CONCLUSION

I don’t see any relief on the horizon. In my view, this is one mess that the Feds will not be able to spend us out of. There are simply too many municipalities that need assistance and not enough money. Bailouts would not be popular among the voters. Remember the unpopularity of a prospective bailout of New York City in the 1970s? Remember the famous newspaper headline – “(President) Ford to NYC: Drop Dead.” Besides, why reward bad behavior? I believe people should be responsible for the consequences of their actions.

Other municipalities should take heed and put their own house in order. They will need to change their modus operandi substantially – control expenses, reduce debt, incentivise businesses and middle class folks to stay, maintain a reasonable tax structure, reduce crime, etc. It won’t be easy, and it won’t be corrected overnight. It will require a significant shift in policies. But, it must be done or the consequences will be dire.

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