Detroit’s decision to file for bankruptcy last week is a landmark moment in America’s greatest urban tragedy. It’s the necessary next step to bring fiscal sanity to an awful mess created by 50 years of private-sector decline and public-sector irresponsibility.
Yet, the public policies that helped bring Detroit to this precipice were hardly unique, and the city’s bankruptcy is a warning to the many local governments that pay their workers today with unfunded promises for future pensions and health care.
A city and its government are not the same thing. Thriving cities can have terrible governments; declining cities can have good leaders who manage their problems sensibly. In Detroit’s case, better local leadership could not have saved the city’s signature auto industry. Still, more farsighted leaders might have pre-funded the pensions and health care that the city promised to its workers decades ago but cannot afford now.
Detroit rose as a great inland port. The city’s waterways made it a natural home for producers of marine engines, such as Detroit Dry Dock Engine Works, which employed the young Henry Ford. The region’s abundant lumber made it a natural home for carriage companies such as Albert Fisher’s Standard Wagon Works. By the 1890s, the region had become an entrepreneurial cluster that combined carriages and engines to make cars.
The city’s greatest breakthroughs occurred when it was dominated by small, nimble start-ups, but the greatest of those breakthroughs — Ford’s automated assembly line — made automobiles affordable by producing on a grand scale. By 1950, Detroit was probably the most productive place on the planet.
But the seeds of its decline already were sown. Urban regeneration depends on education and entrepreneurship, but Detroit had become a city of middle managers, with little entrepreneurial inclination, and a vast industrial labor force, with little formal schooling. While the 1967 riots are seen as a turning point in the city’s fortunes, Detroit’s decline began in the 1950s, during which the city lost almost a tenth of its population. Powerful historical forces buffeted Detroit’s single-industry economy, and Detroit’s federally supported comeback strategies did little to help.
The hallmark of declining cities is that they have more buildings and infrastructure than they need. Yet in the 1960s, under Mayor Jerome Cavanagh, Detroit used public money for urban renewal, building new structures that weren’t necessary. Under Mayor Coleman Young, the city spent hundreds of millions on an absurd monorail system that glides over empty streets. Instead of spending on schools and safety, Young doubled down on automobile employment, using eminent domain and tax subsidies to induce General Motors to build a plant on what had been the Poletown neighborhood.
Despite those missteps, Detroit still could have avoided bankruptcy if its fiscal policies had taken account of its diminishing tax base.
Like many of America’s cities, Detroit underfunded its pensions and its retiree health care system, which now represent about half of the city’s debt of more than $18 billion. When cities or residents are getting richer, it occasionally makes sense to borrow. But sensible people don’t incur debts during their peak earning years and then expect to pay the bills when their income starts to fall. Detroit did just that. Detroit’s debt overhang doesn’t just impose overly high costs on the city’s now modest tax base. It also scares off new businesses. What firm wants to own part of that obligation?
Cities generally operate under balanced-budget rules meant to avoid this sort of situation. But delayed compensation, such as pensions, and debt for capital projects provide tools for avoiding those wise strictures. To ensure that Detroit’s bankruptcy remains an anomaly, states need to impose stricter rules on capital projects in declining areas and to require full pre-funding of retirement expenses, perhaps by moving from defined benefit to defined contribution systems.
The temptation, of course, is in the opposite direction — for a declining city to avoid tough steps now in the hopes that conditions will improve in the future. Fortunately, local economies in most of the rest of the country are far healthier than in Michigan. But as Detroit’s bankruptcy filing shows, fortunes sometimes reverse, and putting today’s costs off until tomorrow can have terrible consequences when that happens.
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