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Detroit and the bankruptcy of America’s social contract

Robert Reich, professor of public policy | July 22, 2013

One way to view Detroit’s bankruptcy — the largest bankruptcy of any American city — is as a failure of political negotiations over how financial sacrifices should be divided among the city’s creditors, city workers, and municipal retirees — requiring a court to decide instead. It could also be seen as the inevitable culmination of decades of union agreements offering unaffordable pension and health benefits to city workers.

But there’s a more basic story here, and it’s being replicated across America: Americans are segregating by income more than ever before. Forty years ago, most cities (including Detroit) had a mixture of wealthy, middle-class, and poor residents. Now, each income group tends to lives separately, in its own city — with its own tax bases and philanthropies that support, at one extreme, excellent schools, resplendent parks, rapid-response security, efficient transportation, and other first-rate services; or, at the opposite extreme, terrible schools, dilapidated parks, high crime, and third-rate services.

The geo-political divide has become so palpable that being wealthy in America today means not having to come across anyone who isn’t.

map of Detroit areaDetroit is a devastatingly poor, mostly black, increasingly abandoned island in the midst of a sea of comparative affluence that’s mostly white. Its suburbs are among the richest in the nation. Oakland County, for example, is the fourth wealthiest county in the United States, of counties with a million or more residents.

Greater Detroit — which includes the suburbs — is among the nation’s top five financial centers, the top four centers of high-technology employment, and the second-biggest source of engineering and architectural talent. Not everyone is wealthy, to be sure, but the median household in the region earns close to $50,000 a year, and unemployment is no higher than the nation’s average. The median household in Birmingham, Michigan, just across the border that delineates the city of Detroit, earned more than $94,000 last year; in nearby Bloomfield Hills — still within the Detroit metropolitan area — the median was more than $150,000.

The median household income within the city of Detroit is around $26,000, and unemployment is staggeringly high. One out of 3 residents is in poverty; more than half of all children in the city are impoverished. Between 2000 and 2010, Detroit lost a quarter of its population as the middle-class and whites fled to the suburbs. That left it with depressed property values, abandoned neighborhoods, empty buildings, lousy schools, high crime, and a dramatically-shrinking tax base. More than half of its parks have closed in the last five years. Forty percent of its streetlights don’t work.

In other words, much in modern America depends on where you draw boundaries, and who’s inside and who’s outside. Who is included in the social contract? If “Detroit” is defined as the larger metropolitan area that includes its suburbs, “Detroit” has enough money to provide all its residents with adequate if not good public services, without falling into bankruptcy. Politically, it would come down to a question of whether the more affluent areas of this “Detroit” were willing to subsidize the poor inner-city through their tax dollars, and help it rebound. That’s an awkward question that the more affluent areas would probably rather not have to face.

In drawing the relevant boundary to include just the poor inner city, and requiring those within that boundary to take care of their compounded problems by themselves, the whiter and more affluent suburbs are off the hook. “Their” city isn’t in trouble. It’s that other one — called “Detroit.”

It’s roughly analogous to a Wall Street bank drawing a boundary around its bad assets, selling them off at a fire-sale price, and writing off the loss.  Only here we’re dealing with human beings rather than financial capital. And the upcoming fire sale will likely result in even worse municipal services, lousier schools, and more crime for those left behind in the city of Detroit. In an era of widening inequality, this is how wealthier Americans are quietly writing off the poor.

Cross-posted from Robert Reich’s blog.

Comments to “Detroit and the bankruptcy of America’s social contract

  1. Detroit had the same boundaries 40 and 50 years ago when it was prosperous.

    Reich barely mentions rampant crime and makes no mention of political corruption. He won’t mention the corruption because it has all been by Democrats and most of it by black Democrats.

    Many of my liberal friends have their boxers in a knot about Detroit, but most of them never get close to Detroit and most of them drive foreign nameplate cares. I been there three times in six week and drive a Chevy, but it’s my fault.

  2. “The geo-political divide has become so palpable that being wealthy in America today means not having to come across anyone who isn’t.” Touche. I was not aware that Detroit’s suburbs were flourishing so wildly – white flight has certainly left the city in a bad position. Working with
    Twin Cities bankruptcy lawyers I have developed increased interest in municipal bankruptcies, and the circumstances that cause them, beyond just commercial and personal bankruptcies. It’s saddening and ironic to see the Detroit metropolitan area with the means to care for its citizens, as you point out, declare its inadequacy publicly.

  3. Jack Kessler – we have such a thing in this country as freedom of association. Most people want to live with their own kind. For example, i have on numerous occasions noticed that Jewish liberals live and seemingly want to live next to other Jewish liberals (eg in Berkeley, Mill Valley or in Newton, Mass). The “others” to them are “white trash” who live in “Fly Over Country.”

    Of course, Mr. Reich can move into Detroit but probably won’t.

  4. The gutting of the tax base by the multinational transplant vehicle manufacturers and foreign machinery producers are primarily responsible for this. They; not the top 1% are the biggest tax evaders in the world and the federal government is complacent and culpable. When a foreign vehicle manufacturer opens in the south and receives a sweetheart deal from the state which allows them to pay no property tax and lower payroll tax it reduces the amount of money available to pay for schools roads and everything else everywhere. Add to this the fact that most of the value added goods like engines are made in the source country where the manufacturers receive subsidies of all kinds like free health care for their workers and subsidized steel; these products enter the US duty free because the cars are FINAL assembled here. If a person in Alabama puts a hand on the vehicle it is treated as American made and not subject to the same import duty. In addition to this type of undermining there is the case of like machine tools no longer produced in the US sold to subsidiaries for 10%-20% of what the end user pays for such a machine thus systematically undervaluing the import value of the machine. Since all the Japanese producers free from anti-trust go to the same seminars on how to beat US customs they are all able to pay less duty than would otherwise be due if a purely wholesale good was valued by what the end user production facility paid for it. Lastly and Particularly with Asia; following the Japanese model they have systematically institutionalized currency manipulation and we, here in the US have just accepted it as normal and without any federal resistance. When the BOJ announces publicly that they are going to drive down the yen to increase exports; the not so invisible hand shows up on the streets of Detroit and we have done nothing about it. Could you imagine if the US made the same public statement? It is this inept trade and industrial policy and lacky enforcement that is as much responsible as anything else. Cheating has become institutionalized. I hate to sound fringe but the anti federalist may have had it right when you take this and add it to the further gutting of sales tax and Main St by the federal policy not to have UPS collect the sales tax on internet sales; I am surprised everywhere is not Detroit; but there is at least a little Detroit Syndrome everywhere. The feds have sold the states and the municipal governments down the river and short of repealing the 17th amendment I don’t know how their interests will ever be represented. The founding fathers understood the flow of current better than any group ever and this is collateral damage from the interruption of that flow; no matter what the logic for the change.

  5. RReich is right about city boundaries. Those have been gerrymandered for so long that now, in addition to political segregation we have economic segregation, age segregation, and in many situations the race segregation we worked so long to grow out of. And our cities increasingly don’t work: my own, San Francisco, has become a tiny wealthy enclave of 800,000 on the western edge of nearly-9,000,000 megalopolis — Greater San Jose. To pay for a functional urban region we need a functioning urban regional tax system — not a tax evasion gerrymander hiding behind 19th c geographies. Detroit is not the only one.

  6. It sounds like the residents of Michigan or the Federal government will have to step up and take action to revitalize Detroit into a thriving city again.

  7. Teachers at the Cranbrook Schools have a longstanding joke that when they move from central Detroit to Bloomfield Hills they lower the average incomes in both areas.

    When I was a kid in Philadelphia, it was easy to tell if you were on the subway platform for trains heading your way — if everyone on the other side of the tracks looked like you, you were standing on the wrong side.

    Now BART is trending the same way — those Dublin-bound passengers may start demonstrating for first-class amenities, while the Richmond-bound among us are passing around a hat.

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