A bankrupt city

 

For years the bankruptcy of Detroit, Michigan’s largest city, was a financial accident waiting to happen. Last week it finally did. With debts of more than $18 billion (€13.6 billion) the city, where two million people once lived but only 700,000 now reside, admitted defeat and filed for bankruptcy. Detroit became the first major US city to go broke. And it did so four years after two of the city’s major employers - General Motors and Chrysler - went bankrupt. The motor companies have since recovered, helped by a bailout from the US government. Detroit will struggle to do so.

Many explanations are given for the demise of a once great city. For decades, Detroit, or Motown, has been badly governed. The city was over reliant on a contracting motor industry that had lost its competitive advantage, and was struggling to survive. In a globalised world with few barriers to trade, Motown failed to compete against cheaper cars manufactured overseas. The city’s politicians blithely ignored the challenges the industry faced. They produced no alternative jobs strategy, failed to invest in Detroit’s infrastructure, and now deserve much of the blame for the city’s decline and fall.

The economic downturn has accelerated the pace of that decline, with high unemployment and a falling population, as a mobile middle class leaves. Public services have become less efficient - the police take 60 minutes to respond to a call for help, and 40 per cent of the city’s street lighting no longer works. Detroit can neither raise taxes - already high; nor cut services - already greatly curtailed. Municipal retirees now risk losing a large part of their pensions and bondholders too are facing a substantial haircut on their investment as the bankruptcy process unfolds. Can Detroit save itself, by using the opportunity that bankruptcy presents to start again, and to reinvent itself? New York once came close to bankruptcy, and recovered strongly. Detroit faces a much bigger challenge, and like the city’s motor industry in 2009, will almost certainly need a bailout.

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