Detroit’s bankruptcy: treating the symptom, not the cause

Abstract

In 2013 Detroit became the largest municipality to declare bankruptcy. Unfortunately, bankruptcy does not treat the long-term cause of Detroit’s financial crisis: the ongoing fiscal death spiral triggered by loss of industrial, commercial and residential tax base starting in the 1950s. The first loss came from manufacturers who abandoned older factories in the city in favor of suburban locations. The second came from the federal government, whose guarantees for FHA-VA mortgages and subsidies for expressway construction spurred suburbanization of Detroit’s (overwhelmingly white) middle class. Detroit trimmed services and raised tax rates in response. But this made it an increasingly uncompetitive location, thereby further contracting its property and income tax bases, forcing still more cuts in services and increases in tax rates. What is required to break out of the fiscal death spiral in which Detroit finds itself is substantially more federal and state revenue sharing and regional growth management.