THE STORY OF DETROIT: THE LARGEST BANKRUPTED CITY IN THE U.S.
STORY OF THE BANKRUPTCY OF DETROIT
Detroit has been a city where the American Car Industry has settled for a long time. Detroit could be able to manage to create a high tech industry and develop new technologies. A successful investment city has fallen down because of some political, economical and social reasons. Political reasons are due to the mismanagement of the city finance and investments. The global financial crisis has influenced the Detroit Economy negatively and the production and the income in the city have decreased and this bad economic environment caused a decrease in the revenues of the city management. The social reason for the bankruptcy was the white flight, in another word, because more black people moved to Detroit, some white people wanted to move to other cities from Detroit. The white flight caused a decrease in the amount of high skilled workers in the city and it also has caused some other social problems. The issues behind the bankruptcy will be explained in this essay.
The Detroit managers have followed a policy requiring large amount of expenditures from different investments to generous bonuses to the workers and retirees by using large borrowings. After a while they have seen that they needed to cut expenses, however, instead of cutting expenses, they have increased the tax burden on the people and the companies in Detroit. The strong labor unions in Detroit have created an important influence on the city management and the managers could not be able to cut the health care benefits and other benefits from the workers and the retirees.
The Detroit Management, while trying to recover from the financial issues, have exhibited a mismanagement in the finance and they have applied to federal aid programs and these resources have been directed to the incentives generously. The city managers could not handle the financial management and finally they have faced a large amount of debt up to $20 Billion and unfunded health care liabilities.
At the same time when the Detroit Management was struggling with the debts, the revenue of the Detroit has not shown any increase and also it has started decreasing due to the financial crisis. The companies have struggled to recover themselves from the crisis, however, especially the car manufacturers in Detroit has crushed during the crisis. The city management tax revenues have decreased sharply.
As easily can be seen in the graph above, the revenue of the Detroit Management looks stable over time while the debt of the management has increased after 1985. In this situation the management should have been able to do a good financial management, however, they could not and the global financial has ended the financial sustainability. The deficit has reached the peak level after 2005.
The high tax rates in Detroit are also a fact which might be an important risk for the city. Especially, very high real estate tax rate might be repelling for the people and the high rates might make the tax collection harder. The high tax rates do not guarantee a high tax collection. Also we can say that the high tax rates might decrease the expenditures of the consumption and the investment in Detroit. This situation might create an important challenge for a recovery policy.
Another important fact behind the bankruptcy was the fact called “White Flight”. After 1970s, more black people have moved to Detroit while some white people have moved out of Detroit. This fact has caused some social problems and also it has caused a migration of the white collar workers to leave Detroit. The social balances in the city might create a big challenge for the future. Even though fixing the economy of the city might not be enough for a better Detroit, because the social balances might have a big negative effect on the development of the city.
SUGGESTING A RECOVERY POLICY FOR DETROIT
Detroit has been a centre of automotive industry production and the city could attract many producers as well as the specialists in the automotive industry. After the bankruptcy, the city needs social and infrastructural investments and legal adjustments relating to the taxation to recover.
The Detroit city is a place where many gangs are creating some social problems and new people are hesitating to move in Detroit. To create a recovery in Detroit, the city management should be able to create a social environment where families can move in and have a comfortable life. The need for a secure city has a great importance for recovering the city.
For providing a better life for Detroit people, the city management should invest more in redesigning the city infrastructure. After many people left the Detroit city, the city infrastructure might need to be redone.
One important strategy might be changing the taxation in the Detroit city. The high taxes might cause a crowding out effect for the companies, to decrease this negative effect, the high taxes can be eliminated and a good business environment can be provided for the entrepreneurs. Going beyond elimination of taxes, similar to Delaware’s tax strategy can be followed to attract the investors to the Detroit city. If a profitable business environment can be provided for the investors, it might be possible to attract the capital to Detroit. This program might be a part of the recovery program from the global financial crisis. As we know that the U.S. government has paid a large amount of resources to bail out big companies. Thus, the U.S. government can spend some resources for Detroit.
The previous solution suggestions are important, however, the most important part of the recovery has to be creating new jobs in the Detroit city. Two main strategy can be followed to do this: 1) Moving federal institutions to Detroit thus some federal governments might start an economy and 2) Creating new industries for Detroit. The first option might be easy respectively. It is a political decision and if the government wants to do it, it might happen in a short time period. However, it will not be enough to create a dynamic Detroit economy, thus we need new entrepreneurs and new business ideas. The Detroit economy has been specialized over the automotive industry and the city has a potential. Creating a Detroit brand in automotive industry might help us create some other side industries in the city. Especially, making the Detroit city high technology development centre for the automotive industry can be a good strategy to stimulate the Detroit economy. High tech development might attract many specialists to the city again and the Detroit economy might start creating new jobs for high quality workers.
REFERENCES
Hicken, M. (2013, Dec. 3 ). In Judge: Detroit Can Proceed with Bankruptcy. Retrieved Jan. 21, 2014, from http://money.cnn.com/2013/12/03/news/economy/detroit-bankruptcy-ruling/
Lichterman, J. (2013, Dec. 3 ). In Largest-ever U.S.Ccity Bankruptcy, Cuts Coming for Detroit Creditors, Retirees. Retrieved Jan. 21, 2014, from http://www.reuters.com/article/2013/12/03/us-usa-detroit-bankruptcy-judge-idUSBRE9B20PZ20131203
