The times have been tough for the city of Detroit. The city was once the proud home of American’s auto-industry and a key hub in America’s manufacturing belt and it’s fall from grace over the last thirty years has been nothing but astounding.
A panel of five experts has determined that Detroit’s leaders lack the capability and know-how to guide the city back to financial stability and has declared the city “operationally dysfunctional.”
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Michigan Governor Rick Snyder must now decide if the city should be taken over by the state and an emergency manager appointed to oversee the city.
Should an emergency manager be appointed he or she would be given control of Detroit’s finances, essentially making him or her the most powerful person in the city. The emergency manager would also have the authority to force the city to declare bankruptcy and could rework labor agreements and other city contracts.
It’s hard to believe that just a few generations ago Detroit was one of the wealthiest and most powerful cities in the world, home to nearly 2 million people. Now the population has dropped to under 700,000 with entire neighborhoods boarded up and abandoned.
Many of the factories that once provided numerous low-skill, high-wage jobs have now shut their doors, sending business to China, Mexico, or elsewhere with lower wages and better business conditions.
Detroit’s decline has occurred over the course of the last several decades but the last 10 years have been especially tough. During and after World War II Detroit was the heart of America’s manufacturing industry, boosting a huge number of factories that produced goods in demand around the world. Slowly, however, global trade winds began to shift and the city didn’t fully grasp the dire straights it was in until it was too late.
High taxes, uncooperative unions, declining productivity, crime, mismanagement on the part of business and government leaders, declining social values, you name it Detroit has likely had to face it. No single condition can be blamed for Detroit’s spectacular down fall but instead a perfect storm of conditions coalesced to finally bring the mighty city to its knees.
Detroit has long been a hub of union power and while unions started as a fight for fair wages and better working conditions, many gradually morphed into exploitative power structures that repressed both their own workers and forced crushing concessions on companies.
Perhaps no union is more well-known than the United Auto Workers (UAW) who represent workers at the Big Three’s auto plants. Until General Motors Company (NYSE:GM) and Chrysler Group LLC were forced into bankruptcy just a few short years ago, the unions were famous for being unwilling to make concessions and demanding ever higher wages (in excess of $20 per hour for unskilled workers). These high wages made American cars more expensive to produce compared to more efficient manufacturers, such as Japan, and cheaper manufacturers, such as China.
And while Unions pushed up wages the Big Three auto-manufacturers, fell further and further behind competitors from Europe, Japan, and South Korea in terms of design and quality.
The Big Three executives made misstep after misstep. Even after the oil crisis in the 1970s, Detroit executives refused to acknowledge the need for fuel efficiency and instead bet most of their business on producing trucks and SUVs. This paid off in the 90s with cheap oil prices; however, in the 2000s, rising gas prices left many Big 3 dealer lots stuffed with unsellable SUVs and trucks. American cars also fell behind in magazine and customer reviews, being lambasted for shoddy build, cheap materials, unreliable engines and poor looks.
At the same time Detroit has been hit by scandal after scandal. From abuse in awarded government contracts to prostitutes in the Mayor’s mansion, Detroit’s public leaders have repeatedly failed to provide strong and ethical governance. Unsurprisingly many people have lost faith in the government.
Now with debt levels dangerously high and a plummeting tax base, Detroit is standing on the verge of bankruptcy. While Governor Snyder has made no announcement as of yet, the city appears to be corned and buried under bad debts and poor choices. With no prospect of a Federal bail out, Detroit appears to be heading towards a takeover.
Should the city be forced into bankruptcy it would amount to the largest municipal bankruptcy in U.S. history.