The Bankruptcy of Detroit and its Shock Waves

The Motor City, home to the American automotive industry, was never really a great city. It was a large, booming industrial park, but if one defines a city as a community where residents live, work and play together, Detroit misses the cut. For generations the poor migrated into the auto plants in Detroit and there they were able to earn a middle class living. Concurrent with their arrival was the “white flight” to the suburbs surrounding the city. Segregation, in spite of law and good intentions, existed via economics.

The decline of Detroit is not something that began in the mid-1970s. In 1961 Time Magazine published an article cataloging the conditions that would explode into the 1967 riots. The title “Motor City” had already become the “Murder City” to many of its residents.

By the 1970s, if one approached Detroit via I-75 the Ford River Rouge Plant would be on the right between the Detroit River and the interstate. The plant would be belching clouds of smoke into the air and pumping cars out of the door in great volumes. If the approach was from Windsor, Ontario across the Ambassador Bridge, arrival into America would be into one of the worst slum areas ever conceived. These first impressions were good examples of what Detroit was.

 In a search for the reasons for the decline of the city, many political voices are pointing to such issues as Detroit was a one industry city, population decline and even the weather. One writer opined that the city failed due to poor planning; city government abdicated its responsibilities to the auto industry. Detroit is over 80% African-American with a string of African-American mayors going back to Coleman Young in 1974. Some have indicated that this contributed to the decline, but the problems began decades earlier.

The decline of the city of Detroit follows a familiar pattern in the “Belt”. A community is dependent upon a single industry and establishes its budget around that industry’s success. Foreign competition, competition from another geographic area of the country, or a paradigm shift within the industry obsoleting the business, causes the business to shut down or leave.

Detroit is only the latest city in Michigan to come under state emergency control and it is also the largest.  Other Michigan cities include Allen Park, Benton Harbor, Ecorse, Flint, Hamtramck and Pontiac found themselves with an emergency manager. Except for Benton Harbor, the other five cities had close ties to Detroit’s automotive sector.

Outside of Michigan, cities in Indiana and Ohio were also closely aligned with the automotive business. Toledo, Ohio is one of the more populous cities in Ohio and has seen a decline in population since 1990. It was said that “If Detroit sneezes, Toledo catches cold”. Toledo was the home of Champion Spark Plug, Dana Corporation and Jeep. These businesses remain but Toledo had a well-established glass making business and this helped it weather the automotive decline.

Gary, Indiana rests at the southernmost point of Lake Michigan, a four hour drive from Detroit. The Detroit pattern repeated in Gary; loss of the primary industry of steel manufacturing to foreign competition brought unemployment, increasing crime and white flight.

Each city has attempted to find a path to diversification and recovery.  Cities like Pittsburgh and Cleveland have managed to cope with the downturn. Pittsburgh lost the steel industry and Cleveland lost manufacturing. Pittsburgh suffered for a while but with steel plants closing the city switched emphasis to other areas. Pittsburgh focused on health care and education and, as those areas grew, expanded into financial services and high tech industries. Likewise, Cleveland focused on health care and financial services and worked to revitalize downtown. With its proximity to Lake Erie and a blue collar community in love with its professional sports teams, Cleveland is a model revitalized city.

Gary continues to suffer having not found an alternative to the business lost. It is taking a unique approach, actually an experiment, to turn neighborhoods around.  It is offering some of the 10,000 abandoned properties for $1.00. This comes with some requirements such as a minimum income and the ability to bring the property within code within six months.  If the new owner lives in the home for a specific period the property becomes theirs free and clear.

In April Governor Rick Snyder appointed bankruptcy lawyer Kevin Orr as emergency manager. This was in response to a nearly $18 Billion debt the city is unlikely to ever be able to pay. Other states are carefully watching how Orr handles Detroit situation. There are several states that have protection of city employee pensions written into their constitutions. Messrs. Orr and Snyder contend that Chapter 9 bankruptcy law, a federal statute, trumps the state constitutions. Various organizations are suing Michigan and Detroit over this issue and the precedence established will provide guidance to other states facing similar circumstances.

The final issue yet to be addressed is what will happen when Mr. Orr packs his briefcase and returns to Washington, D.C. When elected officials resume control will they repeat the wasteful spending that helped to bring Detroit to this sad end? There is a long list of companies that entered bankruptcy protection multiple times and failed to ever truly recover. If the product or service is no longer viable no amount of protection will permit survival in a capitalistic world. Witness the buggy whip, for example. The question to be addressed is: are cities similar to Detroit obsolete, like the 78,000 abandoned building that dot Detroit’s landscape?