What Caused the Bankruptcy Disaster for America’s Motor City?

Abstract: Through over 30 years’ experience of reform, people more frequently recognize the enlightening significance of former leader Chen Yun’s saying in relation to fiscal investment issues, “First, feed the people; second, build the country.” The “feeders” need to protect the people’s welfare; only upon this foundation may public works be constructed. They absolutely must not exceed their means.

Detroit, America’s Motor City, applied for bankruptcy protection on July 18, becoming America’s largest-scale municipal bankruptcy case, as well as sensational world news (see China News for July 19, 2013). How could this world-famous Motor City go bankrupt, and what are the principal reasons for bankruptcy?

The media has attributed blame for Detroit’s bankruptcy to a sharp decline in population, from what once numbered over 2 million to a current population of 700,000. Large numbers of the middle class have left the city, making the suburban districts a desolate wasteland. There are also analysts blaming it on the “financial crisis,” while others point to Detroit’s racism and severe ethnic conflict: Whether the early discrimination of whites against blacks or subsequent harsh resistance from the blacks, it has become a source of turmoil for Detroit.

Of course, many also place responsibility on consistently huge expenditures for municipal projects. The enormity of Detroit’s administrative projects has gained fame within America. Records show that just within the term of Mayor Coleman Young, a whole series of projects were seen to completion including the Renaissance Center, the “People Mover” monorail system, commercial centers (150 West Jefferson, One Detroit Center), large apartment buildings (Millender Center Apartments, Riverfront Condominiums, Harbortown), factories (the General Motors Detroit/Hamtramck Assembly Plant, the Chrysler Jefferson North Assembly Plant), the Detroit Receiving Hospital, the Joe Louis Arena and more. In 1987, to win back the Red Wings Hockey team, Detroit spent $57 million to construct the Joe Louis Arena, leasing it to the team at a discounted rate.

Detroit officials once dreamed that they could promote local prosperity by financing a series of construction projects. However, because of the influence of ethnic conflict and crime, stylish buildings are not enough to stop middle class people from “rolling up their quilts and leaving” one by one. It has been calculated that from 2000 to 2010 alone the population of Detroit decreased by 25 percent. The enormously costly government-funded municipal projects have thereby all become empty buildings; Detroit has no choice but to continue to reduce prices for rent or sale at auction. Each political party, after coming into power, borrows and spends like crazy, whereas repayment is a matter for those next to serve in office. Modern financial markets develop day by day, and debt financing is very convenient, to the extent that many administrations go excessively into debt. There is no debt that is completely free; the costs of borrowing must be paid eventually. Meanwhile, since the city has accumulated a mountain of debt for construction projects — a long-term debt of $18 billion plus billions of dollars in short-term debts — Detroit’s finances are totally unable to operate. General international stipulations are that budget deficit cannot exceed 3 percent of revenue, while government debt cannot exceed 60 percent of gross domestic product. Once this proportion is exceeded, the government loses the capability to service its debt. Confronted with the danger of bankruptcy, voluntary bankruptcy became Detroit’s only option.

Detroit’s bankruptcy unnerves the Chinese people because somewhere there is a similar lesson to be learned. In recent years, some locales have surpassed their capabilities for municipal projects. Becoming “fashionable” and keeping up with others has also become more and more critical. Earlier this year, the media revealed that many provincial officials in succession had paid visits to the National Development and Reform Committee and the Ministry of Land and Resources, requesting subways, high-speed rail and other such large-scale projects and land-use indicators. Some places are constantly setting up all kinds of tourism projects. It is not difficult to see, as long as there is a local celebrity, even a Xi Shi or Li Hongzhang, some people will inevitably organize some scholar to hype it up and establish a tourism project, spending a huge fortune on construction. As for golf courses nationwide, they are likely to retain a high priority in the long-term. The 2009 “Toward the White Paper – China Golf Industry Report” revealed that China currently had 348 operating golf facilities and 7,772 holes (equivalent to approximately 432 standard 18-hole courses) distributed across 29 provinces, autonomous regions and municipalities. (Tibet Autonomous Region and Qinghai Province have still not opened golf facilities.) But city real estate has really become a heavy financial priority in real estate development for local officials. And now, rumor has it that some local seats are moving forward with a new round of urbanization, currently working hard to expand the midsized town of Hexian into a city.

Through over 30 years’ experience of reform and opening, people more and more recognize the enlightening significance of former leader Chen Yun’s saying in relation to fiscal investment issues: “First, feed the people; second, build the country.” The “feeders” need to protect the people’s welfare; only upon this foundation may public works be constructed. They absolutely must not exceed their means. The saying “working within one’s means” dictates that everything must begin out of practicality; construction projects must be designed on a solid and reliable foundation. How much money is spent must simply equate to how many projects are managed, and one must not constantly surpass one’s own powers of investment for impractical and overreaching consumption. Experience proves, surpassing financial investments seldom creates “garbage projects,” just “problem projects.” Going beyond the bounds of local government finances or family financial consumption can gradually lead to a kind of competitive consumption. I see that after the 18th National Congress of the Communist Party, China’s top-level economic policies have been put in place, putting the stable development of people’s welfare first, thereby ensuring the stability of society. Detroit’s bankruptcy, for Chinese people everywhere, provides a reference for construction within one’s means.