To Crisis | thedetroitcrisis

How did this horrendous financial crisis occur?

Over a 30 year period, between 1900-1930, Detroit added 1.28 million people to its population, according to the U.S. Bureau of Labor Statistics (2013). During this time period, not only did the population increase, but public and private construction also expanded the city: industrial and commercial buildings, housing, streets, and water and sewer lines (Davey & Walsh, 2013).

However, between 1950-2010 the city saw a dramatic decline of 1.13 million, which is almost the amount of people it added 60 years earlier (Reese & Sands, 2013).Many buildings and facilities in the city of Detroit are now 80 to over 100 years old. If the city wishes to continue to operate efficiently, it is important to renovate or replace these significantly dated institutions.

The popularity of the auto industry played a significant part in the city’s quick expansion. The auto industry paid its workers fairly good money which allowed for them to live comfortably, even those who did not hold a college degree. Many people saw Detroit as a place to raise a famiy. The city was mostly filled with one and two family home flats, built on smaller lots between 4-5,000 square feet. Due to the rapid growth of the

automobile industry, the use of public transit was seen as being of little importance. Despite the rapid growth of the population and the auto industry, the city began to decline. Here are some of the main causes of Detroit's decline:

According to Davey and Walsh (2013), Detroit’s fall started in the late 1950’s when developers starting building suburbs. After the 1967 riots in the city, many white residents moved to the northern suburbs, taking their businesses with them. After the riot, Detroit struggled to rebuild to where it once was. Within 6 years of the riot, Detroit became a mostly black city, with a black administration. Residents began to vacate their homes and there were numerous mortgage and property tax foreclosures. The demand for housing appeared non-existent. As a result, houses on Detroit’s east and northwest sides became dilapidated and abandoned.
The oil crisis of 1970 was another cause of Detroit's decline. In the early 1970s, the oil embargo had a significant impact on the domestic auto industry. The Israeli War of 1973 caused an oil embargo on shipments to the United States and other nations between 1973-1974 (Reese & Sands, 2013). According to Reese and Sands (2013), the prices of oil and gasoline increased 4 times more than its original price in just a few months. Shortly after the oil embargo, jobs began to decline by over 50% in the auto industry and unemployment dropped to 43.5% (Reese & Sands, 2013). Because residents in the city had a limited amount of education and skills to qualify them for many other jobs, they found themselves out of work. Soon, the decline of the population to nearby suburbs and the decline of residents' income took a toll on the city's housing market.
After WWII auto companies began replacing workers with machines and shipped various jobs to suburbs and out of state, according to Davey and Walsh (2013). This caused people to move out of the city for employment. Eventually, Detroit’s property value started to fall, causing tax revenue to drop.
Improper spending also likely contributed to the fall of Detroit. Detroit's property value fell 77% over the past 5 decades (Bomey et al., 2013). However, in 2004, Bomey et al. (2013) explained that Detroit only cut 28% of its workers, despite the fact that they barely had money to pay the remaining workers. It was not until the last decade that the city finally decided to cut half of its workforce. City leaders allowed retiree pensions and health care costs to overwhelm the city's budget, even though the State of Michigan and private industries were encouraging workers to sign up for less costly plans. This put a big strain on the city's budget and took money from other services such as streetlights and public safety. According to Reese and Sands (2013), the city's spending on retiree health care went up 46% from 2000-2012 and its general fund revenue fell 20%. Pension officials gave a very generous bonus of $1 billion from the city's two pension funds to retirees and active city workers from 1985-2008 (Reese & Sands, 2013). The city has also spent billions of dollars restructuring downtown Detroit to attract tourist to the city. However, making the city more beautiful does not help with the serious financial problems this city has been dealing with for decades. In 2000, Detroit worked to close budget holes and to build infrastructure. This more than doubled the city's debt to $8 billion by 2012. Then, in 2002 mayor Kwame Kilpatrick took office and used borrowing as his stock answer to budget issues, then mayor Dave Bing came into office and borrowed more than $250 million. The final blow to the city's crisis was when former mayor Kilpatrick, with the help of Wall Street, borrowed $1.44 billion in a finance deal to restructure pension fund debt. Reese and Sands (2013) argued that this deal could cost the city $2.8 billion over the next 22 years. This debt represents one-fifth of the city's debt. For more information on how spending contributed to this crisis please visit this website: http://www.humanevents.com/2013/09/17/how-taxes-and-spending-killed-detroit/
Auto companies started opening plants in other cities, causing the rise of autos imported from Japan to cut the size of the US auto industry (Galster, 2012).
More than half of the city’s police officers were laid off -due to budget cuts- causing crime to sky rocket. This led to the flight of many middle-class blacks to safer suburbs (Reese & Sands, 2013).
According to Galster (2012), the collapse of the economy in 2008, along with the auto industry, caused the city to dramatically decline. The Great Recession of 2008-2009 caused uproar throughout the country, especially in Detroit. During this recession, housing opportunities became more affordable in the suburbs. Therefore, many people moved out of Detroit and took advantage of this opportunity to purchase newer homes in an area they deemed more desirable. In addition, General Motors filed for chapter 11 bankruptcy in 2009, causing many of its plants to shut down. As a result, many auto workers found themselves without jobs and many lost their homes to foreclosure.