Detroit: Cautionary Tale

I doubt anybody missed the news this week about Detroit.  Or the subsequent protests from city employees and pensioners. Or how a Michigan state judge has since blocked the city's attempt to file for bankruptcy.  And, just for good measure, everybody and their mom's dog's opinion on why Detroit got into this mess in the first place.

In short, it was a bad week for Detroit and just about everybody there.

As Jared Bernstein said, "It’s obviously been a long way down for Detroit."  There's an understatement.  Detroit, in recent years, has been more of the proverbial snowball, rolling down a hill and rapidly collecting and compounding problems, than falling straight done to a hard landing.  The warning signs were there, and Detroit responded, but it was too little too late.

Detroit was a perfect storm of bad things.  With a largely homogenous industrial base, a rough reputation and housing stock that is particularly susceptible to price swings, it comes as no surprise that Detroit's tax base shrunk with gusto when the economy first started to shake.  Without that foundation, Detroit faced massive revenue shortfalls and with already substantial debt and pension costs. The whole house of cards came down pretty quickly as Detroit had few safeguards in place.  And here we are. 

Of course, that's only the local view.  Others can point to globalization, which hurt Detroit's major economic players.  As that occurred, the housing bubble compounded the problem.  Perhaps it's all a matter of perception about exactly whose fault it is.

However, I think this is a clearly cautionary tale to the rest of us and our communities.  Some clear lessons which we should take to heart:

1. Diversify: Detroit flew high when American autos corporations were kings.  When they fell, Detroit fell even harder.  Further damage came from the fact that Detroit wasn't just housing the auto corps but all their supply chains.  Once upon a time, keeping all the supply chains close was a smart philosophy for everybody, but those days are gone.
2. Manage Your Reputation: Detroit has long had a rough image.  Even native Detroit metro inhabitants admit this.  Of course, this has a subtle but still powerful impact on where businesses and individuals want to locate.  Detroit or Chicago? Detroit or Houston? These are generally not hard decisions.  Businesses can be incentivized, but individuals not as easily.  Keeping ahead of our reputations is an important part of keeping a vibrant community.
3. Plan Ahead: I'm not sure to what extent Detroit officials knew how bad this situation could become.  Nate Silver argues in his new book The Signal and the Noise that economists themselves had significant difficulty predicting the 2008 recession.  However, it's obvious to us now that we have to at least consider the worse case scenario and plan accordingly and install safeguards.
4. Obligations and Liabilities Need Proper Consideration by All Parties: Many are quick to blame pensions for Detroit's problems.  Pensions are one of many institutional factors that contributed to the situation.  To some extent, Detroit may have been able to control its pension liabilities - I'm not exactly an expert on pension law in Michigan.  However, in many states, it's up to the State Legislature to define pension benefits, which accordingly drive pension costs and contributions.  Communities must be vigilant in educating their elected representatives about pensions, how they function and their costs.
5. Federal Policy Matters: It's commonly said that local government has the most impact on the lives of residents.  That's true, but what's not as commonly understood is how federal law ultimately impacts local government.  In the case of Detroit, globalization is obviously a key factor in the problems which lead to the bankruptcy as major economic players struggled.  We often watch our State legislatures - we should be constantly watching Capital Hill as well and predicting its impact on us.

 So what say you, readers? What else can we learn from Detroit?