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| What happens when all that which was built to replace the ruins of post-industrial America is ruined itself? (Pic : detroityes.com) |
Outside of the US, Detroit is probably famous for four things : cars, Motown, Eminem and Robocop (filmed in Dallas).
A few weeks ago, it became famous for another thing – the largest municipal bankruptcy in American history. It's estimated the city carries debts to creditors in the region of $18.5billion (~£12.2billion).
It's unusual for an entire city to "go bankrupt", and the concept is perhaps alien to Europeans. American cities have a great deal of autonomy and can borrow by issuing bonds. They also have the ability to file for legal protections when restructuring their debts – called Chapter 9 bankruptcy – when creditors say, "We're cashing you out, Detroit."
What's the relevance, you ask?
Well, Detroit lies in the post-industrial region of the United States - dubbed the "Rust Belt" - which shares many characteristics with Wales. With talk of borrowing powers for Wales on the table, Detroit might serve as a warning of what could happen here if fiscal powers aren't properly matched with economic responsibility.
How does a city go bankrupt?
There were numerous direct and indirect contributing factors.
Decline of the US car industry – Three of the biggest American car companies are based in and around Detroit – Chrysler, Ford and General Motors. US car companies manufactured cars for domestic consumption, including so-called "gas guzzlers", mainly because they had high profit margins – who cares if they worked or not? With oil gradually becoming more expensive, these models became less desirable even to Americans.
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| Were America's "Big Three" seduced by high-profit margins from "gas guzzlers", without taking note of long-term global trends? (Pic : imcdb.org) |
Although global car production was hit by the 2008 financial crisis; in the "recovery", smaller, imported European and Asian cars became more attractive. This process had happened for several years beforehand too, with more production shifting overseas and factories being mothballed or closed.
Chrysler and General Motors were very nearly bankrupted until they were bailed out by the Bush administration to the tune of $17billion.
The car industry and the city itself aren't directly connected, but the wider economic impact will have had a knock on effect in other areas.
Race relations & "white flight" – Once solid, thriving working class communities home to many black people were ripped apart by the construction of new cross-city motorways in the 1950s and 60s. Detroit also saw major race riots during the 1940s and during the Civil Rights era in the 1960s, so there's a history of distrust between different races.
Gentrified white middle and lower-middle classes moved from the inner city, to suburbs or cities surrounding Detroit itself, taking their tax dollars and purchasing power with them. The city population fell from 1.8million in 1950, to just 700,000 in 2010 - a fall of 60%.
All that were left within the city of Detroit's borders were immobile white working classes and their predominantly poor, black neighbours. All of them were increasingly looking for the state to give them a hand.
Urban decay – The city gradually became a concentrated ghetto of deprivation, taking additional big hits due to de-industrialisation. Because of that, the city's tax base was decimated, so the government presumably had to keep borrowing more and more money to keep its head above water, building up its debt to unsustainable levels, with no subsequent improvement to cash flows.
Income from things like property taxes collapsed as so many people lived in homes worth so little that they were valued (for tax purposes) way way higher than people could afford to pay, leading to massive tax arrears.
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| You really can buy that for a dollar. (Pic : Financial Times) |
Land in large chunks of Detroit is practically worthless, and parts of the city look like they've been taken apart by shotgun-wielding criminals. This all created an image of Detroit as a no-hope case, perhaps putting off private investors, with the city government unable to make any significant investments themselves because of their cash problems.
City employee pensions - The public sector pension burden on Detroit wasn't onerous. However, the bankruptcy could be a cynical attempt for the city government to walk away from paying out pension entitlements to city employees, the liabilities of which run into billions of dollars. If Detroit manages to, it could encourage other urban areas to view Chapter 9 bankruptcies as desirable, failing to serve a public trust.
Political stagnation – Detroit has been run by the Democratic party for 50 years, and they've had Democratic mayors since 1962. Detroit City Council only has nine members for a city of ~700,000 people. With such a guarantee of success there's little motivation to innovate or change, thus leading to laziness, complacency and perhaps ultimately the situation the city now finds itself in.
They've made mistakes, but they were at least trying to erase those mistakes. They've tried to boost incomes by taking the traditional way out - liberalising and encouraging casinos and gambling. They also put forward a $300million development plan in 2008.
Michigan state is led by a Republican governor for the first time since 2003, and although there was an agreement that the state government would have more oversight in the city's finances, the Republicans are hardly renowned for their support for state intervention.
The warnings for Wales
As said earlier, Wales is quite firmly in the "Rust Belt" of the UK. The most obvious warning would be to compare the decline of the US car industry with the decline of coal and steel in Wales – inevitably having a similar impact, but never the recipient of a bail-out.
With regard the car industry, we've seen the effects closer to home with Visteon in Swansea, and although all things point to a bright medium-term, I'm worried that should something catastrophic happen to the Ford engine plant in the future, a little bit of Detroit could come to Bridgend.
The overall economy of Detroit isn't actually that bad either. They're a major centre of research for things like hydrogen fuel and the life sciences – the latter of which Wales is trying to pursue too.
Relative poverty levels in some parts of Wales – in particular Communities First areas – are worse or equal to those of Detroit (the low 30s percent wise). This has the same knock on effect on our own localised versions of urban decay – often dubbed the "decline of the high street".
Regardless of where you live in Wales, you'll notice our own version of the "white flight" problem too. There are pockets of deprived people – usually living centrally or shoved on an estate up a hill somewhere – with wealthier suburbs and villages surrounding them. Bridgend, for example, has its Pen-y-Fai, Broadlands and Litchard, but it also has its Wildmill and Meadows Estate.
We might like to think we live in a more egalitarian society in Wales, and that's true to a certain extent, but we have social stratification that can be as bad as parts of inner London.
Then there's political stagnation. Wales is effectively a "1.5 party state", with Labour as an entrenched dominant party (or indeed other parties depending on where you are in Wales) alongside two smaller bit-players (Tories and Plaid Cymru).
We also have our own public sector pension obligation time bomb. That's an issue across UK - perhaps Europe as a whole - thanks to shifting demographics. So it doesn't just affect Wales.
Having said that, there are plenty of reasons why Wales won't go down the same path.
Why Wales won't become a Detroit
A stronger welfare state – Westminster Governments of all colours have done their best to undermine it to keep Middle England happy. Needless to say though, the British welfare system is still significantly more comprehensive than that offered in the US. Although the might be pockets of high relative poverty in Wales, the national rate is significantly lower at 23% compared to Detroit (36.2%).
No significant race problems – As pointed out in the census, Wales is largely ethnically homogeneous outside of the major urban areas. We have the opposite problem to Detroit of "white flighters" moving to Wales. Some probably won't consider themselves such and are no problem. Others might bring their poisonous attitude towards minority groups with them, including antagonism towards Welsh-speakers or the Welsh language/culture in particular.
But when they get it wrong, the collapses can be spectacular. Wales doesn't really have this - and it's perhaps to our detriment in the economic development stakes – but there's more to life and keeping the population happy than company balance sheets and productivity figures.
No public sector taboo – Heathcare in the US is, of course, in the private sector while it's public sector here. A reliance on government jobs - even if significantly lower than European levels - is perhaps seen as a major economic weakness, betraying American free market principles. Although there are concerns from the right (maybe parts of the centre-left) too in Wales about our reliance on the public sector, working for the state or having a big state employer isn't seen as that much of an issue.
We still have potential – So does Detroit. Some sectors of the Welsh economy are showing signs of increasing importance, in particular energy, certain financial services like insurance and life sciences. I've addressed some of those things before. It's obviously also a very different dynamic when dealing with a whole country as opposed to a single city.
I think there's hope wherever you find it, but for Detroit, they're going to have to do something far more fundamental to turn things around. If they can't, then Detroit will likely become the first great ruin of the American Empire.
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