A major American city teeters on the brink of financial ruin. Garbage goes uncollected. Crime is rampant. Municipal officials are so desperate for cash to pay creditors that they have to beg the local teachers union for financial assistance.
If this sounds like Detroit, think again.
The city was New York. The year was 1975.
Thanks to sensible assistance from federal and state government and a focus on economic growth rather than just reckless cuts, the Big Apple emerged from insolvency in the mid-1970s to become the most prosperous urban center in the modern world. As Motown navigates its current fiscal crisis, policymakers should remember the core lesson from New York's experience: The key to recovery is investment.
There is no doubt that Detroit's current situation is difficult. The fragile municipal tax base was decimated in the Great Recession, and the city now has thousands of abandoned properties, unacceptably slow emergency response rates, and painful levels of unemployment and poverty. But it's hardly the first American metropolis to face such a dire fiscal situation. In the 1970s, New York, faced skyrocketing rates of crime and homelessness, unprecedented blight, persistent fiscal shortfalls, and multiple credit downgrades. On October 17, 1975, New York Mayor Abraham Beame famously declared that the city would run out of money if the teachers union did not immediately move $150 million from its pension fund into municipal securities.
While many pundits have been quick to blame Detroit's current crisis on local mismanagement, the ultimate causes have been much the same as the causes of New York's 1970s crisis: not just overspending, but deindustrialization driven by outside forces-including national trade policy decisions-a loss of population to surrounding suburbs, and disproportionate impacts of national economic troubles. Just as the recession of the mid-1970s hit New York's economy particularly hard, the Great Recession left one in five Detroit homes in foreclosure.
The similarities between 1970s New York and today's Detroit are striking. But, with regard to recovery, there's a critical difference: Where New York benefitted from partnerships with state and federal authorities, Detroit has been abandoned.
The federal government took steps, including the Seasonal Financing Act of 1975 and the Loan Guarantee Act of 1978, to stabilize New York City's borrowing costs and help restore the city's solvency. What made these arrangements particularly effective was a partnership with New York's government to monitor finances and borrow funds on the city's behalf. While the city made serious sacrifices-including raising transit fares and imposing tuition for the first time at City University-most pension contracts and key city services were protected. All stakeholders were in agreement on a common point: The city could not simply cut its way to growth.
Contrast this with Detroit's current situation. While the Obama administration has admirably sought to free up some federal funding to aid retired city workers, a root cause of the crisis has been the Michigan legislature's unprecedented disinvestment in local residents.
Between 2010 and 2013, nearly half of the total decline in city revenue was attributable to cuts in state revenue-sharing with the city. The state-appointed emergency manager unilaterally filed for a fast-tracked Chapter 9 bankruptcy process that puts workers' pension contracts and city services-including lighting, sanitation, and emergency response-in jeopardy. Bankruptcy-driven cuts to the pensions of municipal employees-some of whom are ineligible for Social Security-come on top of $160 million in concessions agreed to by unions in 2012. These cuts reduce Detroiters' purchasing power, damage the local economy, and exacerbate population loss, further diminishing the tax base. If the goal is to restore Detroit's solvency, these extreme cuts are simply counterproductive.
For ethical and economic reasons, Detroit should not be subjected to a double standard. As in the case of New York, well-designed assistance can be not only essential to the city's success, but also fiscally responsible for state and federal authorities. New York paid back every penny on time or ahead of schedule, and, in preventing a default crisis, state and federal authorities averted more widespread economic shockwaves.
There's no shortage of cost-effective federal policy options to help Detroit. Congress should pass legislation to revive the popular Build America Bonds program to empower Detroit and other struggling cities to make investments in future growth, at borrowing costs closer to those the federal government pays. Lawmakers should also take steps to ensure that Chapter 9 of the bankruptcy code affords stronger protections to municipal employees and retirees. Ultimately, Congress and the administration must commit to a 21st century urban agenda that prioritizes full employment, good livelihoods, and sustainable economic growth.
Given that Detroit is not alone in its dire fiscal straits, I believe we can build a critical mass in Congress to advance these priorities.
Looking at New York's incredible wealth today, it's easy to forget that the city was in dire straits a few decades ago. While Detroit is a much smaller city-and one that's taken a harder hit from deindustrialization-it nonetheless has the workforce, the firms, the research institutions, and the drive to regain solvency and reemerge as an economic engine. Detroit deserves that chance.
