7 November 2013
On July 18th, Detroit became the largest city in US history to file for bankruptcy. This was amazing considering the city, once the home of the enormous auto industry, had been an affluent and dynamic powerhouse, part of the very bedrock of capitalism in that country.
Perhaps we should have not been too surprised after General Motors and Chrysler had filed for bankruptcy a few years back and Ford had only avoided it by mortgaging the entire company in 2006 to raise money in order to survive the ravages of the economy.
Detroit owes about $18 billion to an estimated 100,000 creditors, that caused Kevin Orr, the city's emergency Financial Manager, to seek Chapter Nine bankruptcy protection. Michigan State governor, Rich Snyder, was quick to respond approving the filing and saying the decision was necessary. In his letter authorizing the filing, Snyder justified his decision by citing the following statistics:
There wa plenty Snyder did not say. The combination of lost jobs in the auto plants and rising crime rates caused many inhabitants of the city, both black and white, to leave the city over the past few decades. That left an extremely poor, eighty-three per cent African-American population, making Detroit the nation's largest black majority city. The population has dropped from 1.8 million during the auto industry boom years of the 1950s to 701,475, according to a recent census.
According to Brad Coulter, a managing director of O'Keefe LLC (a turnaround consultancy in the Detroit area), "I think your are looking at a very long and protracted bankruptcy. The fight that is taking place in Detroit is a fight that is going to take place around the country as other struggling cities and municipalities come to grips with major financial issues." Since January 2010, there have been thirty-six municipal bankruptcy filings in the US, two of which, Harrisburg, Pennsylvania, and Boise County, Idaho, were dismissed. It is possible that this one may be dismissed also. One day after the filing, Ingham County Circuit Court judge, Rosemarie Aquilina, ruled that the filing would be devastating to thousands of city pensioners and must be reversed. Aquilina said, "The state law passed by the Michigan State legislature that allowed Governor Snyder to approve the bankruptcy violates the state constitution and that the governor lacks the power to diminish or impair pension benefits."
About $9 billion, or about half of Detroit's debts are owed to retiree pension funds and benefits. The bankruptcy filing was carried out too suddenly for union representatives who said city officials had blindsided them. They did, however, manage to get a restraining order from the judge to stop further actions to cut pension benefits, the Detroit Free Press reported. Whether his action was sudden or not, Kevin Orr spent months in unsuccessful negotiations to get creditors to settle for a fraction of what they are owed and to persuade municipal unions to accept cuts in benefits.
According to a report in the Wall Street Journal, Orr, in obvious desperation, directed officials on the day of the filing to investigate the city's two pension funds and look for "waste, abuse, fraud, or corruption, including, but not limited to, administrative misfeasance or other impropriety." The journal stated that the city could take over the pension system that could make it easier for them to force pensioners to accept concessions.
The city currently owes $3.5 billion on its pension fund and $5.7 billion in unfounded retiree health care liabilities. For years there have not been enough workers contributing to the retirement system to make up the shortfall. In 2011, Free Press data for one of the plans showed 61% of former city workers were drawing on it and only 39% contributing.
The filing starts a thirty to ninety day period that will determine whether the city is eligible for Chapter Nine protection and define which claimants may compete for whatever resource the city has left. At the time of writing (mid-August) it is not known how things will play out. What we do know is that it will not be good for most people, especially the ones at the bottom of the income ladder.
To many, the present situation in Detroit may be mind-blowing compared to the boom years when unemployment was low, unions were strong, wages were relatively high and inflation low (throughout the eight years of the Eisenhower administration it was 2%) and the average worker could afford things previously beyond his grasp. As fine as it all seemed, capitalism does not stand still and every boom carries with it the seeds of the next recession that inevitably follows that, in Detroit's case, was exacerbated by making cars that did not measure up to rising foreign competition causing the Big Three to lay off workers and close factories. Since every slump carries the seeds of the next boom, we may surmise that the economy will eventually improve though no one knows when and to what extent and how many of the problems that capitalism continually throws up we will have to endure until then.
This is a typical scenario in the capitalist system, though, and has been repeated many times in many places. While things are going along well and profit is high it seems the sky is the limit, but when profitability sinks, the owners of capital pull out as fast as they can like rats off a sinking ship. Who it hurts, what damage is done, the ecological mess left behind, does not get a consideration. For Detroit, the turnaround in attracting capital back may well be a long time in coming. Insecurity is part of the DNA of capitalism and Detroit is a prime example.
The obvious answer to right this state of affairs would be the establishment of a system where there are no such things as slumps and booms and where security and prosperity are constant for everyone. Lost your job? No problem, you still have free access to satisfy all your needs and there is plenty of other work to volunteer for.
Some may ask, " If socialism were established today, how would it deal with Detroit's present problems? In short, socialism would abolish money and the people's locally elected production council would ensure that all needs would be met. Many may not be able to envisage a world without money, yet for the vast majority of the time that humans have been on the earth they have managed quite well without it. Imagine instead where production is for use, not for profit and all may take of their needs from a common store. Some may argue that no one would work yet millions today work for nothing at volunteer jobs that give them satisfaction. Imagine instead a world where technology takes care of the drab, dirty, and boring jobs and where all can work at jobs from which they can derive satisfaction as we enjoy our hobbies today. In such a world the miserable situation of the Detroit people would not arise.
