Mayor Dave Bing announced the filing of Chapter 9 bankruptcy protection on July 18, 2013 for Detroit after decades of decline and economic stagnation. This bankruptcy will be the largest municipal bankruptcy in U.S. history will $18.5 billion in debt obligations being renegotiated.
But the bankruptcy of Detroit didn’t just happen overnight, the city has been in decline since the 1950’s. Just in the postwar decade alone 150,000 jobs were lost as industrial manufacturing started to flee Detroit (an alarm sign for the city to start promoting other industries and diversifying its economy…which it didn’t).
Part of Detroit’s decline starting in the 50s had to do with the deindustrialization of the city and also with race based policies that compelled the affluent white population to leave (also known as white flight). Which in turn led to the loss of businesses, employment opportunities, and tax revenues for the city. But that is just a general explanation to the root of Detroit’s problems. Detroit had a serious racial segregation problem. In general, Michigan is notorious for having residentially isolated and racially segregated neighborhoods. Many residents in Detroit and its outlying suburbs live in either all white neighborhoods or all black. It is hard for a city to start promoting racial integration when for the past century, this city was THE most segregated major city in the US.
Red dots Caucasian, Blue dots African American, Orange dots Hispanic
After the 1967 Riots where 43 people died, and thousands of homes and stores burned down, white people began to flee in droves to the suburbs. This riots signaled to the white population that Detroit was not a safe place for them and so they left…very quickly. The blighted neighborhoods where the riots occurred did not rebuild right after and continued to be boarded up. The losses are incalculable as lost jobs, tax revenues to the city, corporate taxes, development and investment dollars, and tourism dollars all led to the stagnation of Detroit’s economy.
In 1970 whites still made up a majority of Detroit’s population with 55% white, however, by the 1980 census, whites had fled so rapidly that Detroit was only 34%. And this was in just ONE decade! And things didn’t get better, they continued to get worse for Detroit.
Failing to Diversify its Economy:
Detroit failed to diversify its economy from heavy manufacturing from such industries as the automobile industry. Cleveland and Pittsburg had similar problems when American steel production went into decline…But those cities diversified its economy and went into things like biotech, health care, and refining higher end metals such as aluminum, among others.
Even the big three automobile companies GM, Chrysler, and Ford moved/outsourced much of their manufacturing to different parts of Michigan, the US, and even the world. So, with the lack of jobs, the most skilled and productive workers fled to other parts of the country looking for jobs. The heavy loss of population led to homes being abandoned, not to mention abandoned commercial buildings and warehouses from the businesses that fled. All of these abandoned buildings were a breeding ground for crime, prostitution, gangs, and arson. Every Halloween, a rampage called “Devil’s Night” starts where Detroit’s youth start fires in abandoned buildings and homes. What started in the 1930’s as a tradition of light-hearted vandalism became “a vision from hell” according to Mayor Young.
From there, was a negative cycle of high crime, arsons, unemployment, and gang violence. With less tax revenues, the city was not able to give proper services. Detroit is also massive in size. 142 square miles! You can fit Manhattan, San Francisco, and Boston into Detroit at the same time!
Lack of Public Transportation:
Detroit, in my opinion, was a poorly planned city. Not only was it heavily segregated, there was no real investment in public transportation. Afterall, Detroit is named the motorcity, and everyone had a car (no need for public transportation…they thought). Nowhere is suburban sprawl as imminent as it is in the suburbs of Detroit. Instead of investing money in trains, subways, bus routes, bike paths, and walkways, there were more roads and suburbs being built. A city that is more tightly packed and denser can deploy its public services more efficiently and will cost less (per household). With most of its population leaving and public services scrambling to provide in such a large city wide area It is no wonder why Detroit became broke. So when things got tough, people packed their bags and drove away.
What can we learn from Detroit?
I am not here to boo Detroit but to analyze why this city went into decline to the point where Detroit could not pay for its expenses with the tax revenue it was receiving….Bankruptcy. The City had no vision for the 21st century and did not diversify its economy from manufacturing to other emerging industries, and that is precisely why it went into decline.. Failing to innovate led to its decline and stagnation over the long run.This serves as a stern lesson to other cities the painful price of segregation, failing to diversify its economy, failure to invest in public transportation, and a lack of vision for the future as a city of the 21st century.
If you like what you read, follow me on twitter @samleefinance to get more updates on all things finance and entrepreneurship (along with witty dialogue and inspiring quotes) and like my facebook page.