Not the ‘Worst’ Detroit Bankruptcy

Detroit’s bankruptcy is not surprising. In fact, the stagnant infrastructure and the shrinking public service showed that Detroit was going broke long ago.

Though Detroit’s bankruptcy is just a legal concept, it is an outcome of long-term political and economic policies of the Detroit City Council and the government. Nevertheless, the same or similar political and economic policies are flourishing in many other places around the world with the same industry background as Detroit, including many places in China that once promised to become China’s Detroit.

Detroit is a world famous automobile capital, where the headquarters of the Big Three U.S. automakers are based. All the Big Three U.S. automakers have considerable annual outputs, although the automotive industry is not a sunrise industry and automobiles are consumer durables with a long replacement cycle. Merely within the U.S. automobile market, more than 10 million cars are produced and sold nearly every year. Logically speaking, the place where the manufacturers with such large-scale production are based should have a very solid financial foundation and a plentiful supply of public goods, with the support of public finance. In no case should it go bankrupt.

However, Detroit did go bankrupt. In fact, Detroit started on the road to bankruptcy when Japanese automobiles, represented by Toyota, began overwhelming U.S. automobiles. From the perspective of technology, productivity and markets, the performance of U.S. automobiles is as good as that of Japanese cars. But an industry analysis in 2007 indicated that the average welfare cost that U.S. automakers paid for each car was approximately $1,000 higher than what Japanese automakers spent on labor welfare. As a result, even if the U.S. automakers could make profits, the profits would only be between $10 and $20 — or as low as a few bucks for each automobile. Under the status quo, the task of saving the U.S. automobile industry became the final burden on the Bush administration and the first tricky problem Obama had to solve.

The welfare patterns of the automakers inevitably affect the public welfare policy in Detroit where they are based. There is no doubt that the welfare patterns have profound influence on voting and a strong motivation to spread, in a city where African-Americans account for more than 80 percent of the population. In a political system where everything is determined by ballots, it is the welfare patterns that attract the most ballots from voters.

On the other hand, in the political system where everything is determined by ballots, everyone who participates in voting will be directly faced with and responsible for the results. The system represented by ballots does not necessarily produce the best results, but it is able to avoid the worst results. The best way to let the voters discern what is right or wrong on their own is to directly confront them with the results of their political participation and to let them take the consequences of their political choice.

Therefore, Detroit’s bankruptcy is not only a result of industrial change and a shift in economics, but also a result of failure in public policies and administration of the city. From another point of view, Detroit’s bankruptcy is a legally produced consequence of “protection.” The legal “bankruptcy protection” prevented anarchy and avoided the worst results, like shortage of public goods and social disorder.

Bankruptcy is a “limit” on legal liability for the debtor. The limit not only restricts the debtor’s unlimited compensation liability legally, but also restricts the creditor’s unlimited right of recourse. It requires the creditors to partly or fully take the risk of their “investment.” From the political perspective, the limit means Detroit should take the consequences of the debt problem it produced. Detroit cannot expect the state government or the federal government to waste taxpayers’ money from other places in order to stabilize the social order of Detroit, unless taxpayers from other places are willing to “lend a hand.”

On the contrary, in the places without public participation or with very limited public participation, the public is only allowed to play a passive role in enjoying the benefits of public policies or taking the consequences of policy failure. The policymakers who made the failed policies are actually blackmailing the higher levels of government by kidnapping social stability. They make every attempt to force a wider range of taxpayers to pay the bills of failed public policies in a single place, which further leads to the worst consequence — a local crisis turning into a nationwide crisis.