Jim Armitage: Desolation of Motor City carries a warning for other American cities as Detroit files for bankruptcy
Bondholders and unions will see Detroit as a test-case for cash-strapped cities
Global Outlook For many advocates of the free market, the collapse into bankruptcy of one of the biggest cities in the US will doubtless be seen as the epitome of good sense. If a city fails to make enough of a profit to pay off its debts, just like a company, it should collapse and its creditors should lose out.
The problem is, while this may make sense for a company, like, say, Chrysler or General Motors, it’s hard to see how it can be anything but another disaster for the long-suffering residents of this once-blessed conurbation.
Already, services have been cut dramatically. Around 40 per cent of the city’s street lights no longer work. More than half of its parks have been closed since 2008. Only a third of ambulances are operating. Police take nearly an hour on average to respond to calls in a place where the murder rate is at a 40-year high.
The Michigan governor (a Republican ruling over this Democrat city) says he hopes this will be the first day of the city’s path to recovery, “the foundation of the city’s future”, as he puts it.
But that’s far from clear. Where bankruptcy allowed Detroit’s big car makers to shrug off their past debts, pension and healthcare liabilities, this was based on the promise of renewed growth in the future. The promise of fairly reliable future cashflow with which to negotiate renewed terms.
In the case of Detroit, as with Greece, there can be no such promise. It’s hard to see how, in this city that has been in decline for the best part of 50 years, it will be able to attract new investment. The decline of centrally provided services such as police and ambulances is hardly an advertisement for new businesses to move there, or for wealthy young go-getters to move their families in. Quite the opposite: the population has fallen from 1.8 million in its 1950s pomp to fewer than 700,000 today.
The flight has gathered pace in recent years, with more than a quarter of the population packing its bags since 2000. That means thousands upon thousands of taxpayers disappearing every month. It means house prices collapsing, with a further impact on the city’s income as property tax revenues melt away. It means more empty, boarded-up districts to put off newcomers.
It’s not even clear how bankruptcy will make it easier to force creditors and state employees to accept bigger haircuts on their loan repayments and pension entitlements. The municipal bondholders and the unions will clearly see Detroit as a test case for other cash-strapped cities. A line that must be held. Expect them to throw the country’s best lawyers, and big bucks, at the situation.
It’s plausible that a judge may have more luck in the negotiations than the city’s emergency manager, Kevyn Orr, has had so far. But the city will still need to win support from the majority of those it owes for the judge to give any plan his or her blessing.
Uncertainty abounds. But one thing’s for sure, Detroit will be using up huge resources of time and money sorting out this mess at a time when its citizens can ill afford either.
Alarming number of fracking violations
What the sprawling city of Detroit really needs is a whopping great shale gas discovery. Believe it or not, the state of Michigan is actually not too badly furnished with fracking opportunities. Unfortunately for the people of Detroit, most of it seems to be far to the north, away from the empty acres of Motor City’s wastelands.
One can imagine that given the Detroit’s current plight, it would bend over backwards to appeal to exploration companies to set up shop there – even ignoring the occasional tremor or pollution incident, such as that which hit the courts of fellow rustbelters in Pennsylvania this week.
The Exxon subsidiary XTO was fined and ordered to spend $20m (£13m) improving the way it handles the water it jets into the ground to free up the gas during the fracking process. The water emerges full of chemicals, including barium, strontium and chlorides. Failure to handle it properly and you end up getting serious pollution of the local water supplies, as happened when XTO polluted a tributary of the Susquehanna river in Pennsylvania with up to 57,400 gallons of the sludge over a period of two months.
It’s the latest in a long run of fracking violations in the state which are causing unease among many residents.
Just to give an idea of how widespread environmental mishaps are, records show that 25 of XTO’s wells have had 179 violations of pollution laws. Thanks largely to XTO’s poor environmental performance, the 1,000 citizens of Penn Township, Lycoming County, where this incident occurred, have endured one of the highest number of drilling violations in the shale gas-rich state.
Not wishing to spread alarm, but residents of Surrey might take note. XTO has its UK base in Exxon’s UK and European headquarters in Leatherhead, not a million miles from the proposed fracking sites of the Home Counties.
Exxon so far has adopted a watch-and-wait stance on fracking in the UK. But they’ll surely have noted new tax breaks for Britain’s would-be frackers announced yesterday.
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