Detroit’s bankruptcy is a cautionary tale

In 1960, according to official census data, Detroit was the most prosperous city in America. Last month it filed for bankruptcy. Viewed through the lens of the Census Bureau metrics, its collapse is a scary example of what happens when municipalities fail to adapt to changing economic conditions, or to invest in education and training. The statistics are staggering: one in five of Detroit’s adults are unemployed, half the population is functionally illiterate, three out of five children live in poverty, four out of five new births are to unmarried mothers, and a third of the city is either vacant or derelict.

With hindsight it seems clear that some of Detroit’s downfall is due to the NAFTA legislation that wiped out almost 700,000 well-paid manufacturing jobs in the US (although this was somewhat offset by less remunerative service jobs), but high labour and energy costs, a shrinking tax base ‒ due to middle class flight to the suburbs ‒ corruption, incompetence, and a comprehensive lack of political imagination also played their part.

The quarrel over who should be blamed for what happened in Detroit, and what should be done to rebuild the city highlights the dysfunctional hyper-partisanship in US politics and echoes much of what is taking place in Eurozone countries balking at austerity measures. American liberals blamed free market absolutism for the city’s woes (although NAFTA legislation was Clinton’s initiative and warmly embraced, at the time, by the left-leaning economist Paul Krugman), while Republicans put the city’s ruin down to a corrupt and incompetent culture. (Revealingly, the Republicans view a bailout with distaste ‒ even though it would cost a small fraction of what is routinely squandered on national security measures.) The blame game allows both sides to avoid confronting the unpopular political choices that might lead to a sustainable recovery.

What the debate over liberal naivete and conservative heartlessness misses is that Detroit’s fate is merely the largest example of a crisis confronting many American cities. In the wake of the financial crisis and the long recession, many of these towns can no longer honour pension and benefit commitments made in more prosperous times. In his chastening 2011 book Boomerang: Travels in the New Third World Michael Lewis recounts a visit to Vallejo, California ‒ a city that sounds like a harbinger of Detroit’s collapse. Surveying the newly bankrupt city, Lewis concludes that much of the blame lies with the generous benefits and pensions promised to municipal staff:  “Back in 2008, unable to come to terms with its many creditors, Vallejo had declared bankruptcy. Eighty percent of the city’s budget ‒ and the lion’s share of the claims that had thrown it into bankruptcy ‒ were wrapped up in the pay and benefits of public safety workers. Relations between the police and the firefighters, on the one hand, and the citizens, on the other, were at historic lows.” The warning is quite clear: unless the American workforce is prepared to make do with fewer of its hard-won benefits and pensions, or the government is willing to intervene decisively in the labour market crisis, the current financial woes could continue indefinitely.

This stark reality is one the American electorate is still struggling to come to terms with, and one that has provoked spectacular discontent in parts of the European Union. But five years into a recession that shows few signs of recovery, one in which the “jobless growth” that afflicts the majority is accompanied by spectacular profits in the highly networked financial sector, the relatively sudden unravelling of Detroit is unlikely to be the last casualty of these uncertain economic times.

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