Detroit files for bankruptcy
Detroit has gone bankrupt, some $18bn or more in debt. It is the largest US city ever to do so. The reason for its crash is overproduction, and in particular the world overproduction of motor cars, an industry on which Detroit thrived for several decades from the time in the 1920s when Henry Ford built the first assembly line in the world for the Model T Ford. Detroit became the car capital of the world and the fourth largest US city.
In pursuit of profit, car production, as indeed every other kind of production, escalated, with ever more advanced technology reducing the unit costs of motor cars while generally improving their quality relative to cost. However, mass production requires ever expanding markets, and there comes a point where there is no further room for expansion. At this stage the least “efficient” producers (i.e., those whose costs of production per unit are highest) tend to be driven out. Capital flees to areas where wages and outgoings such as rent are lower. This is the process whereby a booming town such as Detroit, which for years held the competitive advantage because of its advanced technology and as a pioneer of conveyor belt mass production, could start to become ‘de-industrialised’, its industrial muscle being gradually whittled away. Loss of industry meant loss of jobs, and loss of jobs has led to a massive exodus of the population which fell from 1.9 million in 1950 to 710,000 in 2010, of whom the overwhelming majority are black or Hispanic. Loss of population has of course led to a drastic decline in the City’s income which is needed to pay for the education of its young, the pensions of its retired employees, the maintenance and renewal of its massive infrastructure, the provision of amenities such as street lights, parks and museums, the police and fire service, etc. And as services deteriorated and crime rates soared, the population kept shrinking as those who could left to seek a better life elsewhere. At the same time, unemployment has remained very high among those who remained, who therefore lacked the means to make much contribution to the City’s income.
Of the hundreds of thousands of Detroiters who descended from the Irish, Polish, German and English families who settled in the city in the 18th and 19th centuries, by 2010 there were only 56,000 left. From a beautiful city full of important architectural gems and known as the Paris of the West, it has become a wasteland, with more than half its parks closed over the last 5 years and ” tens of thousands of abandoned buildings, vacant lots and unlit streets” (Monica Davey and Mary Williams Walsh, ‘Billions in Debt, Detroit Tumbles Into Insolvency’, New York Times, 19 July 2013).
Unable to pay its bills notwithstanding severe cutbacks in public services, the City resorted both to borrowing and to speculation in the vain hope of retrieving the situation. These, however, both made things a great deal worse. By the time it declared bankruptcy, the City had a negative cash flow of $115.5 million (for the fiscal year 2012), rather less than it has to pay in debt interest alone to the banks, which are due to receive from it $139.9 million in interest alone in 2013. In addition it is proposing to repay to the banks this year an addition $105.8 million in debt principal.
As its financial situation deteriorated and its credit rating was downgraded, its borrowing costs rose way beyond what the City could afford to repay, its services having been cut to the bone to the point of being for the most part substandard, there was no further scope to ‘save’ in order to pay the banks. The banks, however, kept lending, with most of the lending secured by mortgages over the City’s assets, ensuring that when these are sold they are used to pay the banks everything owed to them before any other creditors, including pensioners, get a single penny. For the banks it was money for jam!
Throughout these hard times, however, pensions and benefits for retired workers have been safeguarded under the provisions of the constitution. Although nearly all US states are legally obliged to balance their books at the end of every financial year (i.e., they are not allowed to overspend) and therefore are forced when their income falls, for whatever reason, to cut their expenditure, they are forbidden to cut expenditure on pensions and benefits of retired workers. They have to make do with slashing services such as education, policing, ambulances, public sector pay and jobs – all of which Detroit has done to the utmost. What, therefore, the banks are hoping is that by using the bankruptcy procedure it will be possible to sidestep the constitution: it won’t be the MUNICIPALITY that is reducing pensions, etc., it will be the bankruptcy court which it is alleged is not bound by the same restrictions.
If in the event the courts do decide to allow the banks to raid pension funds, it can be expected that a whole host of other US cities will be filing for bankruptcy:
“So Detroit files for bankruptcy. What does this mean? Pay close attention because it may be coming to you soon, Los Angeles, Baltimore, Chicago, Philadelphia. In 2011, Moody’s calculated the unfunded liabilities for Illinois’s three largest state-run pension plans to be $133 billion. (It is expected to be even larger this year.) That’s the size of six Detroit bankruptcies – give or take a few hundred million.
“Of Detroit’s debt of at least $18 billion, about $7 billion is secured by collateral like casino revenues and utility taxes. That means creditors – read: big banks – will get paid. Of the remaining $11 billion dollars or so in unsecured debt, about $9 billion is owed to retirees and current municipal workers, people like firefighters and police officers. These debts come in the form of promised pension checks and health care benefits, all backed by a false, unsecured promise. These are the people who are likely to lose out.” (Charlie LeDuff, ‘Come see Detroit, America’s future’, New York Times, 25 July 2013).
Clearly if the $9 billion owed to retirees, etc., do have, under the constitution, to be paid in full come what may, it is they who would have first call on the casino revenues and utility taxes, and it would be the banks who lost out.
Besides raiding pension funds, many of the City’s assets, paid for with taxpayer money and intended for the benefit of the taxpayers, may be put up for sale for the benefit of the banks. These include public parks such as the renowned island park Belle Isle which could be closed to the public and sold off as a playground for the ultra-rich, as well as the precious contents of its art galleries and museums. It may have to surrender to the billionaires who can afford to buy them art treasures which for half a century and more have been available for public appreciation in the city’s museums and art galleries. The Detroit Institute of Arts contains such artworks as “The Wedding Dance,” by Pieter Bruegel the Elder and a self-portrait by Van Gogh along with dozens of paintings by famous artists such as Matisse, Rivera, Picasso and Calder. Christie’s, the auctioneers, have already been summoned to inspect the collection which is estimated to be worth in the region of $2bn. If acquired for speculative purposes, they may never be seen in public again. As likely as not they will be stored away in a strong box awaiting the date when they can be sold to another billionaire at a huge profit.
How can it even be contemplated that bankruptcy proceedings should be used to privatise publicly-owned assets in this way?
It may seem that the bankruptcy of Detroit is a misfortune in which the rich and poor should share and share alike. However, quite apart from the fact that the rich are by and large avoiding taking any share of the losses, but are as ever trying to palm the whole lot off on the poor, it should be noted that there is a considerable difference in the merits of the claims of the pensioners as opposed to the claims of the banks. Richard Brodsky, a Senior Fellow at Demos, a prestigious left-leaning US think tank, writes in the Huffington Post blog (‘Detroit and Wall Street: the moral conflict between pensioners and bankers’, 16 August 2013)
” But the bankruptcy filing has given rise to a moral question that we won’t be able to avoid: Is there a moral distinction between the obligation to pay pensioners the pensions they contracted for and earned and the obligation to pay creditors the money they lent to the City?
“On the one hand, both lenders and pensioners received a promise by Detroit that it would pay them what it owed. There is real moral value in protecting folks who relied on a promise. But on this front it’s hard to find a moral distinction between pensioners and lenders. They stand on equal footing.
“On the other hand, the consequences of non-payment seem to be quite different. The average pension payment is in the $20,000 range, and many pensioners don’t receive Social Security. A reduction in pension payments to such folks is likely to have a real effect on the quality of their daily lives. It is not irresponsible to raise questions of health, safety and even survival for these people.
“Reduction in payments to lenders is more likely to have consequences that are measured by diminished profit and income for folks who do not rely on them for survival. This is a real hardship and some of Detroit’s creditors are pension funds and individuals who are by no means wealthy. But there is in fact a measurable distinction between the economic security of pensioners who live hand-to-mouth and bondholders, and that distinction has, in my view, a real and unavoidable moral consequence that we will, sooner or later, recognize.”
Even more important in our view is the fact that “There’s also a moral component to the issue of who helped create the problem. An individual pensioner had almost nothing to do with the economic collapse of Detroit. Lenders, especially those who knew or should have known about the City’s inability to meet its’ obligations, may have a greater moral responsibility for the collapse.
“These factors persuade me that low and moderate income pensioners have a higher moral claim to protection in the Detroit bankruptcy than do bondholders. Whether the bankruptcy judge has the authority or inclination to factor it into the final plan remains to be seen.”
The creditors who lent to Detroit at inflated rates of interest because they knew of its financial difficulties are now claiming to have priority over creditors who lent the city their deferred wages only because that was a condition of their employment, who never had any right to interest at all and who for most if not all their working lives had no reason to think that the city was broke. But the new creditors are rich and powerful. The pensioners are poor and oppressed. Which of the two groups will find the law on its side?
Furthermore, Steven Rattner makes the point: “the 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them.
” America is just as much about aiding those less fortunate as it is about personal responsibility. Government does this in so many ways; why shouldn’t it help Detroit rebuild itself? ” (‘We have to step in and save Detroit, New York Times, 20 July 2013).
We might add to that, however, that Hurricane Sandy was a natural disaster of a kind that can cruelly wipe out a person’s lifetime savings by destroying their home and crops and imposing horrendous hardship. The Detroit disaster, however, is not natural at all. It is a quirk of the capitalist system that at a time when the productivity of labour is so high that everybody would be able to enjoy a comfortable existence were everybody able to find full-time work commensurate with his or her abilities and the products of their labour were to be equitably distributed; instead the high productivity is leading directly to mass unemployment and destitution, because the relations of production are in conflict with the mode of production. The mode of production is social, but appropriation is private. The production process can only be put and kept in motion so long as private profit can be made, so ‘overproduction’, instead of leading to more for everyone, leads to less and less for the masses of poor, while the super-rich get richer and fewer. The effects of crisis of overproduction are a thousand times worse than those of a hurricane, affect an infinitely larger number of people and last for decades. While there may be little we can do to prevent hurricanes, however, we can prevent crises of overproduction – by overthrowing the dangerously outmoded capitalist system and substituting socialist planning.