Reasons for hope in Detroit’s bankruptcy

Once the symbol of American industrial power, Detroit filed for bankruptcy last month. The causes of the largest municipal bankruptcy in American history are clear, but there are also reasons for hope.

The federal government is unlikely to bail the city out, as it did for financial institutions and the big three automakers, because the fallout from Detroit’s bankruptcy is not expected to affect other cities and states. Detroit, unlike American banks, is not too big to fail. But bankruptcy offers the city an opportunity to nullify ridiculous labor contracts and reform pension and health care agreements.

Detroit was once the center of an economic miracle. In the 1950s it was one ofthe nation’s wealthiest cities and by the early 1960s automobile manufacturing accounted for half of Michigan’s gross domestic product.

But by 2008, automobile manufacturing’s share of Michigan’s GDP had declined to less than 5 percent. Detroit, the cradle of the automobile industry, developed with its expansion and also suffered as a result ofthe industry’s  decline.

The scale of the city’s decline is amazing. Detroit, which had 1.8 million residents in 1950, currently has about 700,000. The property tax base has been gutted. Large parts of the city consist of abandoned residential buildings and industrial sections that resemble war zones. Many of the remaining residents are essentially deprived of many basic public services like police and fire protection.

What set Detroit on the path to extinction? By the late 1960s, management at the big three automakers had become insulated and more interested in maximizing their own value than delivering value to customers. The 1973 OPEC oil embargo resulted in increased fuel prices and provided an opening for Japanese automakers to flood the American car market with cheaper, fuel-efficient alternatives. Many Americans soon became convinced that Toyota, Honda, and other Asian-based manufacturers offered better quality for their dollar than did domestic vehicles.

In an effort to preserve profitability in the face of a dramatic loss of market share, the big three’s lessĀ­ than-sure-footed managers evolved defensive business models that emphasized selling fewer vehicles at higher profit margins. This increased their dependence on SUVs, high-performance cars, light trucks, and similar gas-guzzlers that faced less Asian competition. As long as gas prices remained relatively stable, as they did through the 1980s and 90s, their strategy seemed viable.

But beginning in 2001, rising gas prices again cut the legs out from under the big three’s business models. Demand for fuel-gulping vehicles plummeted and sales started falling. This trend was compounded by the financial crisis in the fall of 2008. When the global recession took hold that fall, sales plunged, including a 32 percent drop in October alone, to the lowest level in 25 years. The big three had to depend on multibillion dollar taxpayer assistance to survive.

But it was not just the auto industry’s collapse that killed Detroit. Decades of mismanagement, fiscal and political ineptitude, municipal corruption and racial tensions exacerbated middle class flight, sending the city into a death spiral. Anyone who could get out did; since 2000, Detroit has lost a quarter of its inhabitants.

Detroit has also long been governed by a Democratic machine controlled by the city’s powerful labor unions, which mustered voting blocks big enough to ensure that only Democrats got elected. The result is that almost half of the city’s $18 billion in debt consists of unfunded pension obligations and retiree health benefits.

But there are hopeful signs. The automobile industry is again profitable. Businesses are slowly moving in and the city is becoming more attractive to entrepreneurs. Young people are returning to live downtown. Developers are buying office buildings and large tracts of land and turning them into living, office and retail spaces. The downtown sports teams sell out and firms such as Blue Cross/Blue Shield, Quicken Loans and others have recently arrived.

Building on these signs will require both city and big three leaders to resist the temptations they succumbed to in the past. Instead of quick profits and machine politics, the focus must now be on giving middle-class families a reason to return.

originally published: August 17, 2013

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