PERSPECTIVES ON DETROIT

The failure of Detroit can not go unnoticed. The main causes and potential side effects have been reported [here] and [here].

Let's see now the point of view of professor Stephen Cohen.  

Stephen Cohen teaches economics at the University of Berkeley [1]. Specialist of urban economy and territory, after the failure of the city of Detroit answers some questions at the information portal Liberation.fr [here].


1. What is the importance of this failure of American scale?

It 's the worst failure of a local authority ever made in the United States from the years of the Second World War. The debt of the city is 20 billion dollars. A considerable sum, but it is not a surprise.
Once Detroit was the fourth largest city in the country. Since 1950, has lost half of its inhabitants. Today it has 700,000, versus 1.8 million over fifty years ago. They were the poorest, with a population of color equal to 80%.
The real estate industry has collapsed, as well as tax revenue. The debt has entered a spiral such that today the city is put under the protection of Chapter 9.

It was inevitable, the city did not even have the means to keep the power grid, with half the lights out at night and use many neighborhoods in the dark. Since 2008 he has been closed half of the city's parks.

2. What are the consequences after this failure?

The indebtedness of the municipality has created two problems. On the one hand, the city could no longer cope with the payment of interest on loans from municipal bonds that had issued on a local debt market absolutely colossal.
It's an interesting system: to allow the community to attract investors, the Federal State does not levy any tax on interest. On the other hand, Detroit has been stifled by the payment of pensions and services to its officials.


Now the question is to know who will pay. Will the investors have to shoulder the losses through the partial reduction of the debt and its renovation? Or will they be pensioners and officials of the municipality who will pay the heaviest toll, accepting pensions revised downwards and cuts in wages?
In other words, the failure of Detroit will be absorbed by the markets or by city officials? You may think that both will go to the cashier, but the question is to know in what proportion.

In the case of a debt restructuring, there is the risk of destabilizing the whole of the municipal bond market.

How will the holders of claims in the other municipalities behave? Will they sell​​? On the other hand it is unthinkable that the markets do not take part in the rescue of Detroit. An extreme possibility is that the State of Michigan will take on the debt; legally possible but I do not think that this will happen.

3. What about the racial and political dimension of this failure?

The State of Michigan is mostly white and Republican, while Detroit is black and democratic. From this point of view there are potential conflicts between the two parties.

For example, the "black and democratic" municipality had the jurisdiction maintenance of the Detroit Institute of Art, while those who went to see the works of art were mostly the "white Republicans" who live outside the city. So who will pay?

4. Why Detroit is bankrupt even though the industry was coming up, after a deep crisis?

Today in the city remain two or three car factories. The others are located in the Detroit region, which represents a pool of assets of 5 million inhabitants and is located in the best conditions of the city.

Since this region has seen something of a renaissance, especially with the return of General Motors, perhaps the city can start again from this area, but on condition that put its finances in order. Reorganization that has already begun, since a crisis manager has been appointed to replace the mayor and the city council.

5. Detroit will rise again?

We read a lot about the fact that many young people invest in Detroit attracted by a real estate close to zero cost, which begin to create businesses, new activities, etc..

A new opportunity after a deep crisis. Detroit is not doomed to failure, and this must be seen as a new starting point. 



1. Professor at UC Berkeley and co-director of the Berkeley Roundtable on the International Economy