Motown breaks down

The 2,500 seat Eastown Theatre hosted The Who and The Kinks. The Cass Tech High School taught Diana Ross and John DeLorean. Michigan Central Station, almost 100 feet long, 230 feet wide, and graced with 14 grand marble pillars, once had Franklin Roosevelt, Charlie Chaplin, and Thomas Edison pass along its platforms.

Nowadays these buildings are just three of the 78,000 abandoned and blighted structures in Detroit. Reminders of a bygone golden age, the authorities can’t afford to demolish them.

The decline and fall of Detroit, which recently filed for bankruptcy, is a staggering tale. In 1950 Detroit was home to 1,849,568 people, hundreds of thousands of them working in the booming motor industry. In 1955 80% of the planet’s cars were made in America, 40% by Detroit-based General Motors alone. GM’s German subsidiary, Opel, was only a little smaller than the largest non-American car maker, Volkswagen. And Toyota only built 23,000 cars that year compared to GM’s 4 million. In the 1950s the Detroit area had the highest median income and highest rate of home ownership of any major American city.

But as they grew together, so they died together. Between 1955 and 2000 global car production increased by 273% but the US motor industry saw little of that action, increasing its output by just 39%. Even at home, despite a hastily erected wall of tariffs and quotas, US car companies lost market share; between 1970 and 2000 Japanese car companies’ share of sales in the US rose from less than 5% to 30%. In the same period the share of US car manufacturers fell from 86% to a little over 50%.

The reason was productivity. In 2005 the average Toyota worker produced 16% more cars than the average GM worker and a staggering 128% more than the average worker at Daimler/Chrysler. Toyota made a profit of $12.5 billion, GM a loss of $10.9 billion.

In part as a result of the demise of the motor industry, less than half of Detroit’s over 16s are now employed. And as the jobs disappeared so did the workforce. In 2010 the population was down to 713,777, a fall of 61% in 60 years.

But the city’s government was left with the spending commitments and liabilities it had incurred in the not-so-bad times. One half of Detroit’s $18 billion debt is made up of pension and healthcare spending commitments to city employees. The share of city revenues being spent on debt servicing, pensions, and retiree healthcare has risen from 30% in 2010 to 40% today. It is forecast to rise to 65% by 2017.

The city tried to fund these commitments with higher taxes. Detroit imposes a per capita tax burden on its residents 80% higher than neighbouring Dearborn even though its residents have a per capita income 33% lower. Detroit residents face the highest property tax rates of any similarly sized city in Michigan, but with 3 bed, all brick, colonial houses on the market for under $10,000 many don’t bother paying. Nearly a third of property tax owed in Detroit went uncollected in 2011.

So Detroit slashed spending, even on ‘core’ functions of government. 40% of streetlights don’t work and aren’t being repaired. Last winter just 10 to 14 of the city’s 36 ambulances were in service at any time, some with enough miles on the clock to have circled the planet 10 times. In February, Detroit fire fighters were told not to use hydraulic ladders unless there is an “immediate threat to life” because they hadn’t been inspected in years.

But even with this, spending commitments without the tax base necessary to fund them have caused Detroit to add $700 million to its debt in the last seven years and brought it to bankruptcy. This is a real American horror story.

Is the death of Detroit “just one of those things” as Paul Krugman wrote on Monday? Or are there lessons to be drawn for the rest of us?

The essential problem of Detroit, that for decades its leaders have been writing cheques their tax base can’t cash, is true now to varying degrees of all western governments facing ageing populations. As I wrote elsewhere late last year

America’s unfunded liabilities (including Medicare, Medicaid and Social Security), rose by $11 trillion last year to $222 trillion. To put that in context, the entire US economy is just $15 trillion, of which $3 trillion a year is paid in tax. If you expropriated all the wealth of the richest 400 Americans…the $1.7 trillion you would get wouldn’t make a dent.

In Britain the Office of Budget Responsibility reported last week that with zero migration the costs of an ageing population would push government debt up to 174% of GDP by 2062. To hold it where it is Britain would need, the OBR estimates, immigration of 260,000 people a year.

Like the ruins described by Shelley’s “traveller from an antique land” the ruins of Detroit are a warning of hubris and complacency, of the belief that it’ll never happen to us. We should heed the warning.

This article originally appeared at The Cobden Centre

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One thought on “Motown breaks down

  1. Detroit was declared the “Model City” of the left in the early 1960s – due to its high government spending, city “planning”, and unionisation.

    The “Model City” is now an object lesson in the failures of Progressivism.

    As for Michigan generally – there are signs that it is trying to fight back against decline (witness the recent passing of a Right to Work law to weaken union power). But has come to late for Detroit.

    Detroit is a vision of what the future will be like for many major American cities.

    There is little or no productive industry in such cities as New York, Chicago and LA – yet millions of people still live in these areas.

    New York City – is kept afloat by the monetary expansion of the Federal Reserve but this (and the “financial industry”) must come to an end – and then the ultra high tax City (and State) of New York will be revealed as bankrupt.

    Chicago and the State of Illinois are also in a hopeless situation – due to government pension liabilities and so on.

    The State of California is also in a hopeless position – masked by the present credit bubble economy. The millions of people who live in LA can not live by making Hollywood films -and few films are made in LA anymore anyway (as with Wall Street in New York – it is only a matter of time before companies work out they should not be in a high tax, high regulation area – and no amount of Corporate Welfare will stop them eventually moving out).

    Demographic collapse is inevitable in these areas is inevitable.

    Of the top five American cities I would say that only Houston (in Texas – although the Economist magazine seem to have got into the habit of referring to Texas by its Mexican name, as part of a general desperate effort to attract Hispanic readers for the Economist “newspaper”) actually has a real economy. Whether Houston (in the “rebel Mexican province of Tejos”) will be able to avoid the collapse that is bound to hit places such as New York, remains to be seen.

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