Reality Checks

Taking the Hit

Detroit has filed for bankruptcy.  To those who have followed such things it will come as no surprise.  It is not the first and it will not be the last--but it is notable, just the same.  It is the biggest US city ever so to file.  According to The Guardian,

The filing sets a new record for municipal bankruptcies and dwarfs the previous record filings by Jefferson County, Alabama, and Stockton, California. No other city of Detroit's size has ever gone bust.

The causes of this final act are strikingly obvious.  But because the end has come after a lingering terminal decline folks assumed that because it did not happen quickly, it would never happen.  The bigger fools of the next generation would always be there to take the accumulated burdens of their predecessors.  What was the problem?  Municipal overspending led to growing debt which the city can no longer service, nor repay.  It was passed on to bigger fools.  It is like every bankruptcy.
 

There are two major classes of creditor: municipal bond holders (who lent the city money) and workers who are "owed" pensions.  Neither will ever see much, if any, of their money again.  The buck passed to others for decades has finally stopped with them.  They will take the fall.  Then, possibly, a new city will emerge.  But only if lessons are learned, and learned well.
 

[Michigan Governor] Snyder said he hoped the bankruptcy would be the beginning of the end of Detroit's woes. "This decision comes in the wake of 60 years of decline in the city, a period in which reality was often ignored. I know that many will see this as a low point in the city's history. If so, I think it will also be the foundation of the city's future," he wrote.

Where has the problem lain?  Clearly and most obviously, the US auto industry has been challenged by cheaper, better vehicle competition, particularly from Asia.  But the auto-industry is heavily unionised and has resisted change.  Competing auto companies preferred to set up manufacturing plants in states where unions could not dominate.  The resulting lower wage costs meant lower costs of production, which meant a growing market share for Toyota, Honda and the like.  The city of Detroit could no longer count on the Big Three US automakers being the geese to lay golden eggs for the city.  Repeatedly the US auto industry has gone begging to the taxpayer for handouts and bailouts.  Venal politicians, with eyes upon the next election and their career, were willingly complicit.  

But in the meantime, the city had committed to golden handshake payouts to municipal workers, along with high remuneration.  Retirement at middle age, with golden pensions, became the norm for police, firemen, and other municipal employees.  This has been the result of a city's work force controlled by labour unions over decades.  The strike-threat system worked a treat.  The city began to run deficits.  Its losses had to be funded by borrowing.  Spend, borrow, hope became a way of life. 

Meanwhile, the city began to shrink as citizens migrated to other cities and other states for work.  But the costs, being locked in through labour contracts, did not diminish much.  Result?  Lower tax revenue, bigger deficits, more borrowing.  The circling, downward spiral became vicious.  No way out. 

All of this was easily predictable.  It was foreseen by many.  But only fools and horses think they can defy financial and fiscal common-sense forever.  If the city and the unions and the politicians had acted responsibly and sooner, it would never have come to this.  But ultimately the folly and irresponsibility was sanctioned by the citizens themselves.  Debt is a form of slavery.  Perpetuating debt is perpetual slavery.  Detroit and its citizens were perpetually enslaved a long time ago.  But the chains were invisible to them, such has been their moral torpor.  No longer.  They are now clearly visible.  They are heavy.  They cannot be unshackled--at least, not without gnawing, lingering pain. 

But for Detroit's poor, bankruptcy is likely to make life even harder in the short term. About 60% of Detroit's children live in poverty. Orr had planned to bus creditors to some of the city's poorest areas so they could see what was at stake. Armed security would have gone along for the ride.

"If they can see what it's like for Detroiters, what they endure every day in this city, I think they'll begin to understand what's at stake," Orr told the Detroit Free Press. The tour was canceled as bankers became worried about the PR impact of captains of finance touring the city's poorest neighbourhoods.

Detroit screams out to us all: "Look on my works, you mighty and be afraid."