Detroit: A lesson in economics

By Rane McDonough

Courtesy of Wikimedia Commons

During the 2012 presidential election, candidate Mitt Romney caught a lot of flak for saying in a 2008 Op-Ed for the New York Times that he would let the city of Detroit go bankrupt. And today, under President Barack Obama, it basically is.

While admittedly Romney was talking about the car companies based in Detroit, and not the entire city, I still find it funny. Apparently I’m not the only one who sees the connection: Ingham County Circuit Court judge Rosemarie Aquilina that the city withdraw its federal bankruptcy filing in part because it was “not honoring the (United States) president, who took (Detroit’s auto companies) out of bankruptcy.”

The other reason she ruled against the city is a clause in the Michigan state constitution saying that pensions are inviolable, and bankruptcy would diminish or endanger them.

Aquilina then that a copy of her judgment be sent to President Obama. I guess that’s how you ask for a raise when you work for the Feds.

As crazy as it may seem to many of us in the under-30-year-old crowd, there once was a time when Detroit was not a decaying mess and was the pride of 1960s America. In 1960, Detroit was the fourth-largest city in the United States and had the highest per capita income in the country. It was culturally vibrant as well, famous as the birthplace of Motown music.

The median income was approximately $40,000 a year, unemployment was at around 10 percent and the homicide rate was 10.3 people per 100,000 residents. It was the closest you could get to a suburban-style city.

Fast forward to 2013. Now it is America’s 18th largest city, and a third of its land is vacant. Approximately 60 percent of all children in Detroit live in poverty. Detroit’s greatest cultural export is pictures of the decay, referred to derogatively by some as “ruin porn.” Nearly half of the population (47 percent) is functionally illiterate.

In 2010 it had a median income of $27,808 a year, 23.4 percent unemployment, and a homicide rate of 43.4 victims per 100,000 residents. It is facing $20 billion in debt and total unfunded liabilities (basically, potential debts), or more than $25,000 per resident.

In order to cut costs, the police department has been grossly underfunded. The security situation in Detroit is so bad that bus drivers stopped driving their routes in 2011 out of fear for their lives. They did so after one of their own was beaten to a pulp in downtown Detroit and it took the police a half an hour to respond. That is actually faster than the average Detroit police response time, which stands at 58 minutes.

So now we look at what has happened in Detroit between 1960 and now. Detroit has been run by Democratic mayors every year since 1962 and by African-American mayors since 1974.

Detroit reached its peak median income, $59,439, in 1970, after which it began its decline. By 1982, it had shed nearly 80,000 of its 180,000 manufacturing jobs and the median income had fallen to around $39,000. Although the decline has not been constant in every category, it has never recovered. Detroit is relatively unique in that it has been run by black Democrats for 39 years, but the problems of Detroit are not unique.

The combined debt and unfunded liabilities of the United States Government stands at roughly $100 trillion. That is a conservative estimate, by the way: other people have stated much higher numbers. Others have given artificially low numbers by saying that the money the U.S. government has pledged through entitlements such as Medicaid, Social Security and Medicare does not count as an unfunded liability.

But anyone who thinks any politician would dare cut entitlements is living in a fantasy world. The federal government has been able to sustain a debt over 10 times per person greater than Detroit mostly because it prints its own money.

However, the same principal that drove Detroit to bankruptcy holds for the country as well. You can’t spend money you don’t have. It’s that simple.

It’s high time to abandon the economic fantasy that spending money creates value. While favored corporations may be able to get the government to wipe away their debts with taxpayer money, we don’t all have that luxury. The key to a financially stable individual, household, city, state and country is a stockpile of saved money for hard times.

What we have instead, at every level, are larger and larger piles of debt. Detroit is our ghost of Christmas-yet-to-come, here to warn us of the perils of continuing along our chosen path. We would be foolish to ignore it.

Rane McDonough is a Collegian columnist and can be reached at rmcdonou.umass.edu.