The Motor City Is Out of Gas

Detroit is bankrupt.

A city that was 2-million-strong and wealthy in 1950 is a city that is now down to 700,000 residents and shrinking. That can happen. As Peter Drucker noted in Management: Tasks, Responsibilities, Practices, stable demographics are a thing of the past. “Populations nowadays can and do change drastically, in developed as well as in developing countries,” he wrote.

But such change is often disastrous for cities. In Detroit, “nearly 80,000 buildings are abandoned or seriously blighted, and 40% of the city’s streetlights do not work,” reports Michael Fletcher in The Washington Post.

The immediate reasons for Detroit’s bankruptcy are clear: The city’s shrinking population is servicing $18.5 billion in debt—much of it for pensions and healthcare for retired municipal workers. Observes the Detroit Free Press, “Decades of mismanagement and bad practices, coupled with catastrophic market declines, have altered the pensions from a reliable way to assure retirees’ futures into a massive financial burden.”

Many commentators agree that one major turning point for the city, perhaps the most devastating one, was the race riots of 1967, which left 43 dead. In Drucker’s view, the unrest was born of fear: The mass-production economy was being displaced by the knowledge economy, and African-American workers had the most to lose.

“It is . . . no coincidence that Detroit had the worst of the recent riots in America—in the summer of 1967—despite record employment in Detroit at the time,” Drucker wrote in The Age of Discontinuity. “For the Negro is also the worst sufferer from the reversal in the ascendancy of the mass-production worker. … And the shift began just at the time when large masses of young Negroes were being lured from the rural South into the Northern city with its promises of well-paid and respected jobs.”

Image source: NASA
Image source: NASA

The riot hastened an exodus of wealthier denizens of the city, leaving a shrinking tax base that meant cutbacks in services and higher payments on debt. Eventually, but perhaps inevitably, the burden became unsustainable (even for a mayoral administration that we’ve generally admired).

This is the sort of financial problem Drucker anticipated more than 60 years ago, as companies began to institute pension plans. Where pensions and city governments were concerned, Drucker viewed generous early retirement plans as a particular threat, not to mention an injustice. They allowed, say, the “police captain in a big city—such as Los Angeles or Detroit” to go “into early retirement after 20 years of service” but use his pension to subsidize a cushier line of policing work in the suburbs.

This, Drucker felt, could not last. “As the big cities and the large state governments become increasingly insolvent under the pressure of unfunded or inadequately funded pension promises,” he wrote in Toward the Next Economics, “the early retirement pension will come under increasing attack—and it cannot be defended.”

The question now, however, is whether Detroit will be able to fund much retirement at all.

Was Detroit’s decline avoidable? If so, how?