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Reich writes: "Detroit is the largest city ever to seek bankruptcy protection, so its bankruptcy is seen as a potential model for other American cities now teetering on the edge."

Economist, professor, author and political commentator Robert Reich. (photo: Richard Morgenstein)
Economist, professor, author and political commentator Robert Reich. (photo: Richard Morgenstein)


The Bankruptcy of Detroit and the Division of America

By Robert Reich, Robert Reich's Blog

06 September 14

 

etroit is the largest city ever to seek bankruptcy protection, so its bankruptcy is seen as a potential model for other American cities now teetering on the edge.

But Detroit is really a model for how wealthier and whiter Americans escape the costs of public goods they’d otherwise share with poorer and darker Americans.

Judge Steven W. Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan is now weighing Detroit’s plan to shed $7 billion of its debts and restore some $1.5 billion of city services by requiring various groups of creditors to make sacrifices.

Among those being asked to sacrifice are Detroit’s former city employees, now dependent on pensions and healthcare benefits the city years before agreed to pay. Also investors who bought $1.4 billion worth of bonds the city issued in 2005.

Both groups claim the plan unfairly burdens them. Under it, the 2005 investors emerge with little or nothing, and Detroit’s retirees have their pensions cut 4.5 percent, lose some health benefits, and do without cost-of-living increases.

No one knows whether Judge Rhodes will accept or reject the plan. But one thing is for certain. A very large and prosperous group close by won’t sacrifice a cent: They’re the mostly-white citizens of neighboring Oakland County.

Oakland County is the fourth wealthiest county in the United States, of counties with a million or more residents.

In fact, Greater Detroit, including its suburbs, ranks among the top financial centers, top four centers of high technology employment, and second largest source of engineering and architectural talent in America.

The median household in the County earned over $65,000 last year. The median household in Birmingham, Michigan, just across Detroit’s border, earned more than $94,000. In nearby Bloomfield Hills, still within the Detroit metropolitan area, the median was close to $105,000.

Detroit’s upscale suburbs also have excellent schools, rapid-response security, and resplendent parks.

Forty years ago, Detroit had a mixture of wealthy, middle class, and poor. But then its middle class and white residents began fleeing to the suburbs. Between 2000 and 2010, the city lost a quarter of its population.

By the time it declared bankruptcy, Detroit was almost entirely poor. Its median household income was $26,000. More than half of its children were impoverished.

That left it with depressed property values, abandoned neighborhoods, empty buildings, and dilapidated schools. Forty percent of its streetlights don’t work. More than half its parks closed within the last five years.

Earlier this year, monthly water bills in Detroit were running 50 percent higher than the national average, and officials began shutting off the water to 150,000 households who couldn’t pay the bills.

Official boundaries are often hard to see. If you head north on Woodward Avenue, away from downtown Detroit, you wouldn’t know exactly when you left the city and crossed over into Oakland County — except for a small sign that tells you.

But boundaries can make all the difference. Had the official boundary been drawn differently to encompass both Oakland County and Detroit – creating, say, a “Greater Detroit” – Oakland’s more affluent citizens would have some responsibility to address Detroit’s problems, and Detroit would likely have enough money to pay all its bills and provide its residents with adequate public services.

But because Detroit’s boundary surrounds only the poor inner city, those inside it have to deal with their compounded problems themselves. The whiter and more affluent suburbs (and the banks that serve them) are off the hook.

Any hint they should take some responsibility has invited righteous indignation. “Now, all of a sudden, they’re having problems and they want to give part of the responsibility to the suburbs?” scoffs L. Brooks Paterson, the Oakland County executive. “They’re not gonna’ talk me into being the good guy. ‘Pick up your share?’ Ha ha.”

Buried within the bankruptcy of Detroit is a fundamental political and moral question: Who are “we,” and what are our obligations to one another?

Are Detroit, its public employees, poor residents, and bondholders the only ones who should sacrifice when “Detroit” can’t pay its bills? Or does the relevant sphere of responsibility include Detroit’s affluent suburbs — to which many of the city’s wealthier resident fled as the city declined, along with the banks that serve them?

Judge Rhodes won’t address these questions. But as Americans continue to segregate by income into places becoming either wealthier or poorer, the rest of us will have to answer questions like these, eventually.

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+56 # AMLLLLL 2014-09-06 10:56
Hey Robert, Rachel Maddow did a piece on this issue and one of the shockers discussed was that the State of Michigan owes the City of Detroit enough to get it out of debt. WTF?
 
 
+59 # Barbara K 2014-09-06 11:17
I am a MIchigan resident. Detroit's problems were made much worse since Snyder took over. Detroit hasn't been given its share of the taxes in many years. Even the bailout didn't give any help to Detroit. This crooked governor has done all he can to bring down Detroit. If he would pay what Detroit is owed, the bankruptcy wouldn't be necessary. This governor made Detroit so poor. Why? Because they vote Democratic there.

..
 
 
-37 # Lucretius 2014-09-06 10:58
Why is Robert Reich talking about Detroit instead of the two Oakland's he teaches near? The city that has put off bankruptcy for several years but is living in debt to Wall Street? Or should I say the Two Oakland, the poor flatlands and the more affluent neighborhoods above Broadway and Telegraph that aren't shooting galleries or where psychopaths dump the bodies of women they burn?
 
 
+37 # DD1946 2014-09-06 11:17
"Why is Robert Reich talking about Detroit instead of the two Oakland's he teaches near?"

Possibly because Detroit is the most glaring failure in the entire country?
 
 
+42 # wantrealdemocracy 2014-09-06 11:43
Lucretius is telling us the same situation that Detroit is facing in happening in the Bay Area too. Why did people put a thumbs down on this post? You think this is just a matter in Detroit? This is going on all over our nation. The rich are getting richer and refusing to pay taxes to maintain programs needed to maintain a decent standard of living for all of us.

Reason for this is that the rich purchased our government--loc k stock and barrel. The rich own nearly everything and all they want is MORE. They bought our democracy for cheap because our 'representative s' are corrupt---both the Democrats and the Republicans are equally bought and paid for by the greedy few. We must change our government.
 
 
+21 # Farafalla 2014-09-06 13:32
You really think he has no right to talk about Detroit because Oakland is also a stressed city? I don't get it. Reich does not run the city of Oakland, but he consistently writes about inequality in this country. That inequality is everywhere.
 
 
+22 # tomtom 2014-09-06 11:57
What if, all the business school students in America made it a communal project on making Detroit a successfull city, using all their creative ideas with the technology, already at hand. What a beautiful test case: saving and making it better. It would be rewarding on somany levels yielding lessons the rest of America can learn from.
 
 
+13 # arquebus 2014-09-06 12:07
I suspect that those who could started moving out of Detroit after the '67 riots when so much of the city was destroyed.

Forty odd years later and the scars remain. When I drove through Detroit a few years ago, there were still business' and homes which were torched and never rebuilt. Some areas looked like a war zone.

I know people who live in the area and they are of the opinion that people who could moved out of Detroit out of fear...fear that next time it could be their business, their home, themselves.

Perhaps a new generation won't feel that fear and move back to Detroit.
 
 
+27 # reguspatoff 2014-09-06 12:18
Lucretius: Oakland CA has neighborhoods that are affluent, middle class, and poor, all within its city boundary. In contrast, Detroit has only poor neighborhoods now. That is an important distinction. Despite problems with its police force and schools, Oakland CA has revitalized its downtown area and attracted new housing, has created the Uptown Arts district, and is in the midst of a resurgence. Oakland County MI has sucked all the wealth out of Detroit, but that has not happened in Oakland CA.
 
 
+18 # fredboy 2014-09-06 12:22
Sadly, Detroit's failure was inevitable.

It's auto companies, once the mightiest in the world, annihilated all trust why building crap. Allowing foreign companies enter and seize the markets with a strange (to Detroit) approach: quality.

I will never forget the arrogant assholes who lived in our neighborhood in Franklin, TN. All GM managers, they thought they were the smartest guys and women in the room and the region.

They built--hang on--the Saturn. America's Yugo!

But their arrogance and hubris blinded them to the fact that most of us viewed their products--and most American autos at that time--as garbage.

Detroit destroyed itself. Zero leadership, zero innovation, zero quality.
 
 
+25 # tgemberl 2014-09-06 12:39
fredboy,
You can't really explain Detroit's problems with the decline of the automobile industry. As Reich points out, the suburbs are affluent, even ones that lost auto plants. Maybe the decline of the auto industry tells you something about the decline of Michigan in general--it was the only state to lose population from 2000 to 2010--but not Detroit. Detroit's decline is mainly caused by white flight. It's outrageous that the people in the suburbs who are so prosperous don't have any responsibility for Detroit's problems.
 
 
+7 # arquebus 2014-09-06 12:49
I've never driven a Saturn nor even rode in one, but have several acquaintances that have. They like the Saturn and were disappointed when it was discontinued.

I was disappointed when the Olds and Pontiac lines were discontinued even though the Olds was a sort of poor man's Caddilac.

But, I think there was a niche for Pontiac in the performance arena.....Go Lil' GTO (yep I had one...wish I still did).
 
 
+21 # tgemberl 2014-09-06 12:29
Detroit's problems come from at least two things. One is white flight, which probably really started before the 1967 riots. It probably started as soon as integration was mandated.

"White flight" actually wasn't entirely white. Motown Records also abandoned Detroit and moved to Hollywood when they had enough money. That was a blow to Detroit's pride.

Another problem is our love affair with the automobile. By building the interstate highway system, we essentially subsidized suburbanization and things like shopping malls. Businesses that could afford big parking lots and were next to the freeways had an advantage over others. Local businesses were doomed in all the cities in America that were car based (that is, all but cities like New York, San Francisco, Chicago, Philadelphia, Boston, and a few others).

Compare Detroit with Toronto, another metro area in the same region which is roughly the same size. Canadians took pride in Toronto and built it up. Americans abandoned Detroit.
 
 
+18 # skipb48 2014-09-06 13:18
Toronto is a completely different story due to the power of the Provincial Government. In that case Ontario told Toronto and it's suburbs that they must form a new government unit, the Metropolitan Government of Toronto which included the suburbs. Thus the local governments had to give up a lot of power to the Metro Gov't. A lot of zoning power was included in the mandate. It was not an easy pill to swallow for the burbs and as Detroit's burbs have great sway in the State Legislature none of this is likely to happen soon.

Also, Toronto had a subway system for the central city to expand to the burbs. Detroit will never make it until they get viable mass transit in the region. That will be very expensive, but it will never be any cheaper than now!
 
 
+10 # Farafalla 2014-09-06 13:39
Indeed, the change in the political map of Toronto opened the suburbs to the politics of the city and then Toronto got Rob Ford. He campaigned as a vengeful suburbanite with a deep contempt for urban Toronto. He loves his gas guzzler and fought to end bike lanes. Rob Ford is the quintessence of suburban bubble mentality that sadly now has a big role in Toronto government. Suburbs are the worst project in social engineering ever undertaken by the species.
 
 
+7 # tgemberl 2014-09-06 14:00
skipb48,
Thanks for more background on Toronto. I'm glad they were able to incorporate the suburbs into Toronto. That needs to happen in some American cities, too, like Detroit and Birmingham where I live. I hope Rob Ford won't be able to do too much damage, as Agricanto points out.

One more point: yes, I think Detroit was too wedded to the magic of the car and didn't realize the importance of transit.
 
 
+9 # 6thextinction 2014-09-06 14:03
You're right; white flight started in the 50's when auto workers could afford suburban houses with large lots (compared to Detroit's) and garages. Blacks came from the South for the auto factory jobs and to escape the more severe racism.

Integration "mandated" in Detroit? Where did you get that?

Detroit did have suburbs which did not allow Blacks to purchase houses there as late as the '60s
 
 
0 # tgemberl 2014-09-07 15:12
6thextinction,
What I meant was that after Brown vs. the Board of Education, in 1954, or soon after that, integration was probably mandated in Detroit schools. But I'm not sure. I imagine different school districts around the country might have implemented the decision at different times.

I know here in Birmingham hospitals weren't integrated until about 1964, and at least one hospital remained segregated till 1968. I would think northern cities would integrate sooner, but that may not always have been true.
 
 
0 # 6thextinction 2014-09-07 16:09
No, it was not mandated. In the 70's, there was a movement to bus Detroit students to the suburbs (it failed), and later to bus middle school students and up from integrated communities to primarily black schools, which caused more white flight to the suburbs, and as I remember was short-lived.
 
 
+4 # arquebus 2014-09-06 12:57
Once upon a time,when you wanted bread, you went to the baker. Needed veggies--the produce market. If you needed meat, it was off to the butcher.

Then along came the Piggly Wiggly stores in 1916....and all those mom and pop food stores began to wither on the vine.

Ask yourself, though, would you rather go to half a dozen stores to get your groceries or go to a super market where everything from aspirin to zucchini can be bought in the same place?
 
 
+8 # tgemberl 2014-09-06 14:03
arquebus,
I see how the supermarket does simplify things for consumers. But in places like New York and San Francisco, you have both supermarkets and mom and pop stores. Even mom and pop stores with meat departments! When there is a large amount of pedestrian traffic, a community can maintain a higher level of diversity in businesses. When a community is car based, it tends to become more homogeneous.
 
 
+1 # arquebus 2014-09-06 15:22
I think that is probably correct, but I have to wonder who in their right mind would want a pedestrian based community. So stultifying. My oldest boy lives in Manhattan....he , his wife, and son rarely leave the island. His life reminds me of that painting showing a gargantuan Manhattan in the foreground and the rest of the country shown in Lilliputian scale beyond the Hudson.

In our car driven community in SoCal, I have been able go skiing in the morning, sailing in warm weather in the afternoon and go out for a first class meal or a play in the evening. Tough to do that in places like Manhattan unless you own a Lear.
 
 
+5 # pegasus4508 2014-09-06 17:51
Manhattan is a world onto itself. Why WOULD someone leave, other than for vacations. With excellent Public transportation and most everything else under the sun, give me Manhattan anytime. They have sailing,culture and diversity. I hope it never changes. Oh, and 1st class meals originated in New York - they migrated to SOCAL
 
 
0 # arquebus 2014-09-06 20:06
Absolutely right...a world unto itself. I like NY, but it's people tend to have the most parochial views.

Case in point...while visiting NY,the family was going to go do....something one day. Finally, I got tired of waiting and informed all that at 10 AM my kids and myself would be in the Suburban headed for Philly to see the Liberty Bell, etc. At the appointed hour all were in the vehicle, but the New Yorkers were moaning about how far away Philly was. At 11:30--exactly an hour and a half after leaving Queens, I was putting change in the meter across the street from the Liberty Bell.

Another time, my wife and her brother were discussing our future vacation plans. When informed that we were going to Maine, he wanted to know if I knew how far it was to Maine. I told him it was about a thousand miles from his house---an easy 24 hour drive. Parochial---pro vincial.
 
 
+3 # tgemberl 2014-09-06 18:01
arquebus,
I'm sure southern California is an exciting place. But I think it may be transitioning towards being more pedestrian- and transit-based, too. I know a woman who lives in West LA near UCLA, and she says when she goes to conventions in Anaheim, she has to stay in a hotel. It's too scary to commute that short distance (maybe 30 miles?).

LA has become high-density, and more people are using transit from what I understand.
 
 
+1 # arquebus 2014-09-06 19:44
Scary? ROTFLMAO. Perhaps what scares her is leaving the whiteness and affluence of Westwood. There is nothing scary happening between West LA and Anaheim except the LA airport....I suppose a jet could fall on her head. Now if she was going to ELA or South Central and is mildly paranoid, she might feel scared, but the 405 doesn't come near those places.

Yes.....and nothing wrong with using transit as long as you are locked stepped along the same route and the same office day after day. My daughter takes the train from the Valley to downtown where she works.
 
 
0 # tgemberl 2014-09-07 15:08
Well, I don't think her fear is ethnic in nature. She's just afraid to drive on the freeway. I'm guessing you have to be a very skillful driver to feel comfortable on LA freeways.

If she were driving, she wouldn't be stopping anywhere between Westwood and Anaheim.
 
 
0 # arquebus 2014-09-08 09:29
No great skill to drive the 405 between the West Side and Anaheim. Driving in LA is not a problem. Now Manhattan----yo u feel like your life is at high risk to drive there.
 
 
+12 # Sweet Pea 2014-09-06 13:20
Flint Michigan is almost like Detroit--just smaller. Most of Michigan's once-industrial cities have been victims of imports. The mega-wealthy have discovered that investments in imports is much more profitable. Free Trade is not Free! It is very expensive for the people of the middle class.
 
 
+23 # Votekeeper 2014-09-06 13:23
I applaud Reich for nailing the institutional racism at work in the Detroit situation. However, he takes on faith that the City was actually insolvent and thus eligible for Chapter 9 bankruptcy. The City was not, according to Tom Barrow, respected CPA and veteran of bankruptcy cases, and Demos, the democracy think tank. The City had enough cash to pay its bills, and its long term debt from underfunded pensions was no worse than many other cities. In short, the forced bankruptcy by the Governor and his appointed emergency dictator and law school buddy Orr, is a classic example of disaster capitalism based on cooking the books. The City if left alone could have sued to get out of the fraudulent bond obligation incurred by the now-incarcerate d former mayor.
 
 
-6 # dick 2014-09-06 20:57
Detroit is not just financially bankrupt. That's a symptom of a deeper problem. We should probably focus on Kwame Kilpatrick
for starters. Snyder is not the villain others make him out to be.
People, like Ms. Maddow, should refrain from generalizing about situations they know almost nothing about. "I have no idea on Earth what's going on there, but I know it's the fault of the GOP & the suburbs." Very understandable Black Flight is a huge part of the situation. Not many people WANT to live in most areas of Detroit. I live 1 mile away, don't feel responsible for the mess Detroit has gotten itself in by responding poorly to changing conditions. City govt has been catastrophic for years. City schools management has been notorious, infamous, DISGUSTING. Things are actually looking better now than in 15-20 years. Bankruptcy focuses, gives fresh starts.
 
 
+2 # tgemberl 2014-09-07 15:25
dick,
Detroit has had an incompetent government at times. But it's wrong to blame that on the residents. Once white (and black) flight happened, the city was drained of its tax base, and its talent pool was diminished, too. When a city is in decline, it's like a sinking ship, and the people who can get out get out. It takes a lot of moral courage to stay when there aren't many advantages in staying. So it's not surprising if some of the leaders turn out to be corrupt.

We had a similar situation here in Birmingham. One of our former mayors is in prison.

Like Toronto, Detroit's boundaries should be redrawn to include the suburbs. It's outrageous that people whose livelihoods often depend on the city don't have to take any responsibility for its problems. It's a disgrace that we as Americans have let a once-great city like Detroit fall so far.

Even if some suburban residents' livelihoods don't depend on the city anymore, because of the dispersal of industries and offices over the decades, the livelihoods of the people who built the suburbs did. People in the suburbs owe Detroit a lot of consideration.
 
 
0 # DaveM 2014-09-07 09:17
Detroit was once one of the industrial centers of the world--not just cars, but all manner of support industries and others which kept paychecks coming and the city running beautifully.

That said, Detroit has been a crime capital for 40+ years--even dating back to the days of production and prosperity. That involves a moral bankruptcy, which extended into the city's industries during the late 70s and 80s when The Big Three were turning out terrible cars and workers, already among the highest-paid in the nation, began demanding major wage increases. Sales dropped off due to quality and Americans found that cars made overseas last twice as long and cost less, besides. So it remains. There is no longer such a thing as an "American-Made" car anymore. Considering that we invented the industry, I find that terribly sad.

I will say this: if our auto makers reopen the factories and offer jobs at a decent wage, though lower than those that bankrupted them, we'd see paychecks and taxes flowing out of Detroit again, instead of in. Perhaps hire a few Japanese consultants for quality control.

I oversimplify of course. But I do recall when Chrysler needed money c. 1980 and our government loaned (not gave) them $1 billion to get their act together. They did, and paid every penny back with interest. 35 years later, Chrysler is in the same state as the other two major U.S. automakers. But perhaps a hand up is in order.
 
 
+1 # tgemberl 2014-09-07 15:34
Dave,
You say it's the fault of workers asking for more money. But don't forget that another major source of trouble was the fact that we decided not to have national health care after World War II when a lot of other advanced economies started it. That meant that by the 80's, the cost of providing health care for workers was way higher than in Japan and other countries we competed with.

I really doubt that the automakers could "reopen the factories and offer jobs at a decent wage, though lower than those that bankrupted them." It would cost them billions of dollars to reopen those factories, and it wouldn't make sense to do so unless they knew there would be a market for the cars they'd produce.
 
 
0 # arquebus 2014-09-08 11:40
Detroit lost half of its population over a quarter century. The population decline tracks pretty well with the rise of automation. Where once 100,000 workers were required, it now takes 20,000. I suspect that situation is more than coincidental.
 

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