Detroit’s Emergency Manager, Kevyn Orr, filed Chapter 9 bankruptcy for America’s 18th most populous city. The $18.5 billion debt made it by far the largest municipal bankruptcy in American history. It was nearly five times larger than number two on the list, which was the $4 billion bankruptcy filing of Jefferson County, Alabama in 2011. Few people were surprised as many economic observers saw the bankruptcy filing miles away.
Detroit was one of America’s leading cities in the early 20th Century. The city’s population skyrocketed from 285,000 in 1900 to a peak of 1.8 million in 1950. At that time, Detroit was the nation’s fifth largest city and one-third of Michigan’s population. Sadly, the city’s population declined 61 percent by 2010 after decades of poor fiscal management, economic decline, and urban decay. How did this happen?
It all started in 1961, when Democratic Party nominee Jerome Cavanagh defeated the city’s last Republican mayor, Louis Miriani. To close the deficit of the city’s budget, Cavanagh created the city’s income tax and then doubled it 1969 to 2 percent. During his eight year tenure (1962-1970), housing values dropped to $32 billion and the population started to decline for the first time.
Mayor Roman Gribbs (1970-1974) created the city’s utility tax and increased property taxes by 30 percent. To the surprise of liberals and hardcore Keynesians, revenue actually decreased even though taxes went up. Revenue dropped from about $1.25 billion in 1973 to $0.75 billion a year later. Middle-class people fled the city. Businesses began to leave as the tax climate quickly deteriorated. The increased tax burden made it significantly more difficult for taxpayers to remain living in the city.
Facing Chapter 9 bankruptcy in 1980, five-term Mayor Coleman Young (1974-1994) created a blue-ribbon panel to clean up the city’s financial mess and actually began to implement some fiscally conservative policies. The Detroit Free Press reported:
“Young achieved the politically unthinkable: He persuaded Detroit voters to increase their own income taxes from 2% to 3%. He got Republican Gov. William Milliken to sign off, too. And he coupled it with deals to freeze wages for thousands of workers and lay off several hundred police officers.”
The spending cuts saved the city, but only temporarily. Detroit’s debt skyrocketed after 1985 because of public employees’ pensions. Big Labor refused to reform the pension system. Instead of cutting more spending, Mayor Young stopped supporting fiscally conservative policies and started to borrow money by selling city bonds.
To make matters worse, Mayor Dennis Archer (1994-2002) used the surplus he inherited to increase city employees. By growing the size of government, Archer exacerbated the problem.
But wait, it gets even worse! As reckless as these mayors were, not were as bad as Kwame Kilpatrick (2002-2008), who decided to gamble the city’s revenue on the stock market, and lost badly when the global financial system collapsed in the fall of 2008.
So what should have these mayors done? Instead of new taxes, they should have reduced the number of city employees at a time when the population declined. Instead of borrowing money, they should have reformed the pension system. Instead of gambling on Wall Street, they should have followed Pittsburgh’s model and tried to diversify the economy.
Economist Thomas Sowell concluded that Detroit went broke because of a pattern of “increasing taxes, harassing businesses, and pandering to unions. In the short run, it got mayors re-elected. In the long-run, it reduced Detroit from a thriving city to an economic disaster area, whose population was cut in half, as its most productive citizens fled.”
Author’s note: This article has been updated.