Detroit Bankrupt News: How's It Going For the Motor City?

The past decade hasn’t been the kindest to Detroit, and it doesn’t look like things have gotten much better since Obama declared that the city was coming back in 2011. Automakers are still not back to where they were a few years back, and it doesn’t look like that will change anytime soon. While putting up a Robocop statue may help decrease Detroit's astronomical crime rates, it probably won't do much to fix the city's fiscal situation. Big statues aren't free. The Obama administration has been working to develop a response for when it meets with public, business, and community leaders at the end of this week. There are some signs of positive development in the housing market, but until all parties can come together and create a plan, Detroit will be stuck with feelings of nostalgic success, but little prosperity. 

Earlier this week, Chrysler, the smallest of the big automobile companies in Detroit, began the process of filing for its IPO. About four years ago, Fiat CEO Sergio Marchionne masterfully negotiated with the Obama administration to take control of the brand, transforming it from a zombie bitten by the federal government’s bailouts to a profitable company. The decision to go public was spawned by an inability to strike a deal with the United Auto Workers Retiree Trust. Marchionne is smart, and he has gained the advantage by showing the truth of the situation: Most heavily unionized institutions don’t have enough money to pay for everything they promised in the past. This is true for many poorly designed pension and health care plans. By showing how much the world thinks Chrysler is worth, Marchionne has shaped the playbook for renegotiating with auto unions towards a more stable fiscal future for all parties. Even though the IPO was the union’s idea, it may backfire when the reality of the numbers sinks in. 

Both private companies and the government can’t function without workers, and unions are a part of that reality. The problem for unions is that the reality that we live in now is not the reality where their pensions and health care were designed. Earlier this week, the New York Times published a piece that exposed the billions of dollars of over-payments from Detroit’s municipal pension fund over the course of the past few decades. While this excess is not a new thing for anyone who has read about government spending, it is a special obstacle the city of Detroit, which largely depends on one heavily unionized industry for its economic survival.

There has been some positive growth, most recently in the housing market where home prices rose at an annual rate of 16.9%. If prices are going up that means that demand is increasing or supply is decreasing. If the demand is increasing, then maybe Detroit is going to get out of this ditch. Mayor David Bing recently said, “I welcome and applaud President Obama and his administration for any financial support they can provide, in whatever form is appropriate.” 

In an October 2012 weekly address, Obama said that he “refused to let Detroit go bankrupt.” We’ll see if that was a principled or political statement on his part. Either way, Detroit is going to have issues for a while. But anything that helps get the interests of Detroit aligned around a solid fiscal future will go a long way towards bringing back that nostalgic feeling of the golden years.