‘Motor City meets with an accident’

On Thursday, July 18th 2013 the American city of Detroit known for its automobile industry (GM, Ford and Chrysler) filed for Chapter 9 bankruptcy protection from creditors with estimated debt of $ 18 – 20 billion according to Mr Kevyn Orr, the emergency manager of the city.

Meanwhile, essential and basic services in the city of Detroit such as policing, street & lighting maintenance, etc are operating at a bare minimum. Apparently it takes one hour for the police to respond to emergency. Most of the street lights don’t function. Phew!

Some Statistics

Detroit

     
 

1950

2013

%

 

 

 

 

Population

1700000

700000

-58.8%

Mfg. jobs on offer

300000

27000

-91.0%

 

  • As one can see, the population of the city has declined alarmingly over time, after peaking at ~ 17,00,000 in the 1950’s. Apparently, the booming city attracted lot of labour as it offered a lot of mfg. jobs.
  • Oil price spike in the 1970’s resulted and the resultant increase in petro – product prices resulted in the need for more fuel efficient cars. Competition was ahead of the Big 3 of Detroit in this aspect. This set the decline in the mid – 70’s & 1980’s
  • Being dependent on the auto industry, as the auto majors fumbled due to the onslaught of competition from the global car makers, there was drastic fall in number of auto jobs (fell 90% as flight of jobs started in 1980’s) the city had to offer.
  • Exodus of labour resulted in the tax base shrinking enormously which resulted in falling revenues which was insufficient to support the expenditure (high employee salary, pension & healthcare benefits)
  • Detroit’s over dependence on only one industry resulted in its fortunes being linked to the fortunes of that industry and also the creation of an automobile based society. Detroit apparently lacks a transit system and the principal mode of transportation of the habitants of the city of Detroit is, what else, the car.
  • The city administrators have demonstrated an amazing lack of foresight in dealing with the problems here. Clearly, population of the city didn’t decline so precipitously overnight. It was a structural problem with the fortunes of the city so tightly linked to the fortunes of the auto industry. Other cities like Seattle, NY, Cleveland and Pittsburgh have experienced similar situations. Especially, Pittsburgh which along with steel diversified into other industries according to https://en.wikipedia.org/wiki/Pittsburgh.
  • Falling revenues and rising costs is a recipe for disaster. Either attempts to increase the revenues or contain costs should have been initiated.
  • Municipalities and city administrators need to broaden their revenue base, control costs & leverage. Incentivise diverse industries to set – up base in the city rather than being linked to one cyclical industry.  
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