In 1953 Charles Erwin Wilson, the President of General Motors, was nominated by President Eisenhower for Secretary of Defense. During Senate confirmation hearings, he was asked if he could make a decision as Secretary of State that would be bad for GM (GM at the time was one of the largest companies by market capitalization). He replied in the affirmative and went on to say the “he couldn’t imagine a situation that was good for our country and wouldn’t be good for GM and vice versa”. Over the years this has been bastardized to “what’s good for GM (and hence Detroit) is good for the US”. In the heyday of GM & Detroit, the city swelled to almost 2 million residents. Fifty-five years later, GM and Detroit went bankrupt and Detroit was down to 700,000 residents with the highest unemployment rate (above 16%) amongst any major American city.
Looking back, the exodus and downfall of the city began in the 1960s when a building boom pushed people into the suburbs. If I correctly remember my college sociology, it was a zone of transition; one ethnic group (whites) moved out and another (black Americans) moved in.
Looking back, the exodus and downfall of the city began in the 1960s when a building boom pushed people into the suburbs. If I correctly remember my college sociology, it was a zone of transition; one ethnic group (whites) moved out and another (black Americans) moved in.
What happened to Detroit? It didn’t happen overnight. In my previous employment as a police officer, I was assigned to the DEA (Drug Enforcement Agency) and had the opportunity to travel to Detroit on a case in 1992. At that time, 1 out of every 5 buildings in Detroit was vacant and 1 out of 12 was burnt. All day parking in downtown Detroit was $3; by comparison all day parking in Boston was $20 (the good old days). The exodus and downfall of the city began in the 60’s, continued into the 70’s, and accelerated in the 80’s and continued since then. In the 60’s, there was a building boom and people started moving into the suburbs. As a result of the racial riots in Detroit in 1967 and then again during the Democratic National Convention of 1967, this continued at a faster pace. By the 1970’s, the auto companies began moving factories into right to work states. These are states that don’t require non-union members to pay the union an agency fee. From 1979 to 2008, UAW membership decreased from 1.5 million to slightly over 300,000. This was a combination of workers in right to work states choosing not to join the union and replacing labor with capital. According to Reuters, union membership is now hovering at 100,000.
Liberal benefits to workers and a product that was declining in quality further contributed to the downfall of GM and Detroit. During the 2008 financial crisis, the average union auto worker was being paid $74 per hour with benefits (CNBC), $31 without. By comparison, the average Toyota worker was being paid $47 per hour with benefits. In Detroit, for every $1 of pay, $1.08 was paid in benefits. Compounding the problem was the largess of government. Prior to bankruptcy, there were 18 city workers per 1,000 residents compared to a national average in big cities of five to 10 per 1,000 workers.
Demographics also played a role.
In addition, Detroit had a 3.5% income tax, that residents had to pay in addition to both Federal and state income tax. It is no wonder that there was a huge migration out of the city
It doesn’t take a CFO to recognize that these numbers are unacceptable, and a major catalyst in a dwindling tax base and a lack of city revenues. At $18 billion in debt (of which $11 billion are pension-related liabilities), Detroit is the largest American municipality to declare bankruptcy. Formerly it was Jefferson County in Alabama at $4 billion.
Last fall, President Obama stated, “We refused to throw in the towel and do nothing. We refused to let Detroit go bankrupt. We bet on American workers, and American ingenuity, and three years later, that bet is paying off in a big way.”
Oops.
Looking at increased welfare bases and similar situations in many other cities and states across America, I suspect there are more bankruptcies to follow.
Are you listening, California?
Liberal benefits to workers and a product that was declining in quality further contributed to the downfall of GM and Detroit. During the 2008 financial crisis, the average union auto worker was being paid $74 per hour with benefits (CNBC), $31 without. By comparison, the average Toyota worker was being paid $47 per hour with benefits. In Detroit, for every $1 of pay, $1.08 was paid in benefits. Compounding the problem was the largess of government. Prior to bankruptcy, there were 18 city workers per 1,000 residents compared to a national average in big cities of five to 10 per 1,000 workers.
Demographics also played a role.
- The high school education rate is 77 percent compared to a national average of 88 percent.
- The four-year college graduation rate is 13 percent compared to more than 30 percent nationwide.
- Approximately 40 percent of the households are below the poverty level (15-16 percent nationwide)
- Detroit is breeding poverty. Close to half the children are being born to single mothers and the child poverty rate is close to 60 percent.
In addition, Detroit had a 3.5% income tax, that residents had to pay in addition to both Federal and state income tax. It is no wonder that there was a huge migration out of the city
It doesn’t take a CFO to recognize that these numbers are unacceptable, and a major catalyst in a dwindling tax base and a lack of city revenues. At $18 billion in debt (of which $11 billion are pension-related liabilities), Detroit is the largest American municipality to declare bankruptcy. Formerly it was Jefferson County in Alabama at $4 billion.
Last fall, President Obama stated, “We refused to throw in the towel and do nothing. We refused to let Detroit go bankrupt. We bet on American workers, and American ingenuity, and three years later, that bet is paying off in a big way.”
Oops.
Looking at increased welfare bases and similar situations in many other cities and states across America, I suspect there are more bankruptcies to follow.
Are you listening, California?
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