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The billion dollar question: What happened to Detroit? When the U.S. city declared a record-breaking $18 billion bankruptcy in July, Americans looked on in awe. Now municipal workers are left wondering how to survive without a pension and an emergency manager is taking over mayoral duties. But Detroit’s demise didn’t happen overnight.
In its heyday about 55 years ago, Detroit was home to automaker giant General Motors. The city swelled to almost 2 million residents — the fifth largest in America. Today, GM and Detroit are bankrupt. The population plummeted to 700,000 with the highest unemployment rate (more than 16 percent) in any major American city.
Looking back, the exodus and downfall of the city began in the 1960s when a building boom pushed people into the suburbs. If I correctly remember my college sociology, it was a zone of transition; one ethnic group (whites) moved out and another (black Americans) moved in. The Detroit exodus quickened in 1967 following racial riots.
By the 1970s, auto companies began moving factories to right to work states that don’t require non-union members to pay the union an agency fee. From 1979 to 2008, United Automobile Workers membership decreased from 1.5 million to slightly more than 300,000; workers in right to work states chose not to join the union and auto companies replaced labor with capital. According to Reuters, union membership is now hovering at 100,000.
Liberal benefits to workers and a product that was declining in quality further contributed to the downfall of GM and Detroit. During the 2008 financial crisis, the average union auto worker was being paid $74 per hour with benefits (CNBC), $31 without. By comparison, the average Toyota worker was being paid $47 per hour with benefits. In Detroit, for every $1 of pay, $1.08 was paid in benefits. Compounding the problem was the largess of government. Prior to bankruptcy, there were 18 city workers per 1,000 residents compared to a national average in big cities of five to 10 per 1,000 workers.
Demographics also played a role.
- The high school education rate is 77 percent compared to a national average of 88 percent.
- The four-year college graduation rate is 13 percent compared to more than 30 percent nationwide.
- Approximately 40 percent of the households are below the poverty level (15-16 percent nationwide)
- Detroit is breeding poverty. Close to half the children are being born to single mothers and the child poverty rate is close to 60 percent.
It doesn’t take a CFO to recognize that these numbers are unacceptable, and a major catalyst in a dwindling tax base and a lack of city revenues. At $18 billion in debt (of which $11 billion are pension-related liabilities), Detroit is the largest American municipality to declare bankruptcy. Formerly it was Jefferson County in Alabama at $4 billion.
Last fall, President Obama stated, “We refused to throw in the towel and do nothing. We refused to let Detroit go bankrupt. We bet on American workers, and American ingenuity, and three years later, that bet is paying off in a big way.”
Oops. Looking at increased welfare bases and similar situations in many other cities and states across America, I suspect there are more bankruptcies to follow. Are you listening, California?
Next week: What other U.S. municipalities can do to avoid Detroit’s pitfall.
John Tommasi is a senior lecturer in economics at Bentley University.
College Factual, an online portal designed to assist students in selecting a college, has released its top colleges for a degree in finance ranking and Bentley University stands at #4 overall in the U.S.