In Detroit, bad policies bear bitter fruit
Detroitís decision to file for bankruptcy last week is a landmark moment in Americaís greatest urban tragedy. Itís 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 cityís 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 crappy governments; declining cities can have good leaders who manage their problems sensibly. In Detroitís case, better local leadership could not have saved the cityís 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 cityís waterways made it a natural home for producers of marine engines, like Detroit Dry Dock Engine Works, which employed the young Henry Ford. The regionís abundant lumber made it a natural home for carriage companies like Albert Fisherís Standard Wagon Works. By the 1890s, the region had become an entrepreneurial cluster that combined carriages and engines to make cars.
The cityís greatest breakthroughs occurred when it was dominated by small, nimble start-ups, but the greatest of those breakthroughs ó Fordís automated assembly line ó 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 were already 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 cityís fortunes, Detroitís decline began in the 1950s, during which the city lost almost a tenth of its population. Powerful historical forces buffeted Detroitís single-industry economy, and Detroitís 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 werenít 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 could still have avoided bankruptcy if its fiscal policies had taken account of its diminishing tax base. Like many of Americaís cities, Detroit underfunded its pensions and its retiree health care system, which now represent about half of the cityís debt of over $18 billion. When cities or citizens are getting richer, it occasionally makes sense to borrow. But sensible people donít incur debts during their peak earning years and then expect to pay the bills when their income starts to fall. Detroit did just that. Detroitís debt overhang doesnít just impose overly high costs on the cityís 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, like pensions, and debt for capital projects provide tools for avoiding those wise strictures. To ensure that Detroitís 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 ó for a declining city to avoid tough steps now in the hopes that conditions will improve in the future. Fortunately, local economies in Massachusetts, and most of the rest of the country, are far healthier than in Michigan. But as Detroitís bankruptcy filing shows, fortunes sometimes reverse, and putting todayís costs off until tomorrow can have terrible consequences when that happens.
Edward L. Glaeser, a Harvard economist, is director of the Rappaport Institute for Greater Boston. His column appears in The Boston Globe.