The city of Detroit has filed for Chapter 9 bankruptcy, and the unfolding collapse of the city may prove to be a small window into what could happen on the national scale if we don’t turn around our debt crisis.
For years, Detroit has been struggling to pay its debts. Like the nation it once represented, Motor City used to be all about manufacturing. Detroit was the throbbing heart of the strong American car industry. But that industry started to tank as soon as Americans realized that they could pay less for a higher quality product from Japan. And no matter how much American Big Auto have tried to make their cars sleeker, more efficient, and more dependable, American consumers just weren’t buying it. After years of sluggish market response, union politics, and pumping out lemon after lemon, Big Auto had no reputational capital to work with. People just didn’t trust them. And Detroit paid the ultimate price.
In the 50s, Detroit had a population of 1.8 million. Now, that number has dropped to 700,000. More than half of Detroit’s property owners have stopped paying property tax. Without money, Detroit has stopped policing the neighborhoods (answering emergency calls only during business hours). Public transportation has almost completely collapsed. In fact, public services are so poor, that some companies are cropping up in Detroit offering private police services.
At $2 billion, the biggest financial burden on Detroit is the general pension fund. Detroit’s past greatness, in other words, is her heaviest current burden. If she had not been so populous and so successful in the past, she would not have had so much to pay in pensions now. The bottom line is that Detroit is finished. She is insolvent, and she may even default on her loans.
And Detroit may just be the canary in the coal mine for our national situation. Let’s look at her demise:
- She became great through manufacturing and a reputation for excellence and opportunity.
- Her manufacturing capital and good reputation were commandeered by entitlement-minded people more interested in cashing in on her assets than continuing the policies that had created those assets in the first place.
- The good reputation and then the capital ran out.
- The debts resting on the once good reputation remained, and she became completely insolvent—finished.
As a nation, we are in stage three. Our good reputation is all but shot and our capital is all but spent. I think we can expect to experience the same fate as Detroit. And I really don’t know that there is much we can do about it at this point.