Detroit’s Bankruptcy: Motor City's Path to Recovery

Detroit’s declaration of bankruptcy earlier this year—the largest municipal bankruptcy in U.S. history—astounded the country. In response to this fiscal disaster, Michigan Gov. Rick Snyder appointed emergency financial manager Kevyn Orr to wrestle with the city’s finances. Toying with Detroit’s balance sheet issues will not be enough, however, to bring the city back. Detroit has been stabilizing itself slowly: by diversifying its economy and becoming home to new, powerful financial institutions. Detroit must maintain sustainability and minimize the risk of another financial debacle and therefore needs to attract a new type of business: small business.
Detroit’s Regression
Motor City will probably never be the mighty industrial giant that it was in the mid-20th century. Unfortunately, Detroit’s height of success came early compared to that of other large cities; cities such as Austin and Houston, both have projected economic growth rates of 6.1 percent from 2011-2016. Detroit, meanwhile, has precipitously declined in stature over the last few decades as a result of demographic change, global competition, and mismanagement.
During the 1950s, 1.8 million called Detroit home; wages were good and life for autoworkers was great as Detroit produced cars for global sale. It was then that the phenomena known as ‘white flight’ began, primarily due to a population explosion as southern African Americans migrated to northern cities in the millions. Many white residents left for the suburbs because the arrival of African Americans raised city-housing prices. White ‘Detroiters’ moved to cities north of Eight Mile Road, considered the city’s racial dividing line; this movement created racial inequality that exists to the present day.
Black migration enhanced the distinctive pattern in which blacks lived in cities and whites lived in suburbs. “A lot of suburbs became centers themselves, such as Dearborn, which became home to Ford Motor Corporation headquarters,” Leigh Gallagher, an Assistant Managing Editor at Fortune, told the HPR. The federal government greatly subsidized suburbanization and created a racial red line. But demographics were only part of the problem.
Detroit took a punishing blow as foreign automakers, specifically Japanese ones, began to produce cheaper and more fuel-efficient cars, undercutting the American companies. European imports, also fuel efficient, developed a niche market with the upper class, creating further competition with Detroit’s industry. This competition seriously threatened the American manufacturers following the 1973 oil embargo that raised gas prices. Detroit continued producing gas-guzzling, inefficient cars when Americans needed cars that would not require them to overpay for gas. Detroit did not respond, and in turn outside competition took greater command.
Because Detroit saw a decline in productivity, property values also fell. Less people generated less tax revenue, and devalued property lowered property tax generation. This hurt city operations, most notably law enforcement. The murder rate in the city soared, from 4.6 murders per 100,000 in 1950 to 9.8 murders per 100,000 in 1975; the police could hardly do anything about the situation given the lack of funds. This unsafe environment contributed to Detroit’s decline in its own right.
Most detrimental to Detroit’s growth, however, was that the city administration did not respond immediately. “Detroit did not heed the wake-up call of declining population until it got to the point of bankruptcy,” Jennifer Bradley of the Brookings Institution told the HPR. The situation worsened, and as other cities along the Rust Belt reacted to the decline of their respective industries, Detroit never did. Pittsburgh, for example, recognized its steel industry would not sustain the city’s economy for much longer, took evasive action, and became a hub for the tech industry, health care, education, and financial services.
How Motown Is Getting Back Up
Recent investment in Detroit has helped heal some of the city’s woes. “The good news is that market momentum in Detroit’s core is real and palpable and provides a strong foundation for future growth,” Bruce Katz of the Brookings Institution wrote in an online article concerning the growth strategy for Detroit. It is embracing industries previously foreign to its economy, like finance and health care.
Many investors have seen return on investment exceeding 17 percent. Detroit was recently ranked among America’s top ten downtowns and led the housing market rebound seeing home prices increase by 23.3 percent annually. Bradley considers Detroit’s healing process similar to “rebuilding a plane while you are flying it.” The situation is delicate because, if Detroit continues in a downward direction, it may never recover again. Yet, Detroit has realized that it needs to become a center of economic activity once more.
Substantial planning has gone into Detroit. Some worry a smaller population will impede Detroit’s recovery, but “no city can remake itself with a fairly large population,” said Bradley. The people of Detroit are helping revitalize their city; but there are also investors who see potential future gains.
No person has put more capital into Detroit, or displayed more confidence in the city’s future, than Dan Gilbert, founder of mortgage provider Quicken Loans. He has invested $1 billion in downtown Detroit and bought some 3 million square feet of real estate. Because of Detroit’s bad shape, Gilbert has great flexibility to do what he wants. He has moved his 7,600 employees downtown and has brought 80 startups to the buildings he already owns. Gilbert publicly announced after Detroit filed for Chapter 9 bankruptcy that the city will “thrive again.”
Shrinking Detroit Even More
Detroit isn’t just building things up; it’s knocking them down as well. It has approximately 78,000 “abandoned and blighted” structures. Abandoned structures are a breeding ground for drug dealing, prostitution, and serve as a symbol of despair for children growing up in those areas. “These buildings are not aesthetically pleasing and children feel hopeless looking at them,” said Gallagher. Detroit needs an environment that isn’t so attractive to illicit activities.
The city isn’t the only entity that funds demolition. The Detroit Blight Authority, hired 25 locals with a budget of $500,000 and cleared 14 blocks of one of the most blighted areas of Detroit, Brightmoor. It is important to “clear the debris and make the overall environment much more pleasing,” Gallagher added. Plots of grass that replace rundown buildings stop illegal activity from happening. It also prevents many of Detroit’s contractors from driving into blighted neighborhoods and illegally dumping waste.
Abandoned structures exacerbate many of Detroit’s municipal problems, especially crime. “Vacancy and density does not make it easy to say that let’s make something good out of this,” Bradley noted. However, 700,000 people are “still a lot of people,” Bradley added and are still a substantial amount of people that can help their city fix its problems. Demolition has created a more sustainable environment, and now police patrol smaller areas of land. The city has cut the tall grass that covered those buildings so that shady activity isn’t so shady anymore.
More Sustainability
Elimination of abandoned structures and increased investment are helping Detroit right now, but the economic system that will serve this city well enough to prevent future bankruptcies will be small business.
For as long as Detroit has been an economic powerhouse, it has relied on the auto industry. Yet, what will propel Detroit in the future are its small businesses. Dan Gilbert is one businessman who owns one big business. But those startups that he has brought to his downtown offices are smaller and have the potential to be sustainable. “Many smaller businesses will come in and make Detroit interesting and lively again,” said Gallagher. The influx of money that small businesses will bring to Detroit will create both a healthier economy and reduce safety concerns.
Gilbert isn’t the only one giving prospective businesses a hand. The city has created many incentives for small businesses to open up. Detroit has created “Renaissance Zones,” which total more than 1,200 acres in 12 different areas of the city. In these zones, qualified businesses receive a waiver on most state or local taxes for up to 15 years. The Workforce Development Department also offers workforce training assistance to new and existing businesses in the city.
Small businesses will give the city revenue in taxes. This in turn will support municipal institutions, such as law enforcement, and create a much safer environment. “Dan Gilbert has given commercial businesses a reason to be there, but they find Gilbert hard to listen to because of safety concerns,” said Bradley. When the security concerns diminish, investors will flock to Detroit.
Detroit’s slow healing process is going to have unmatched benefits: Motown will become a city that prides itself in reinvention, prolonged sustainability, and an unparalleled comeback story.
Photo Credit: Business Insider