Monday, September 23, 2013

COTW: Detroit in Three Graphs

Intrepid reporters at the Detroit Free Press have produced a graphic explanation of the Detroit bankruptcy.  They dug into the city finances, some of which records are lost or still analog to show how the city slipped in irretrievable debt over six post-war decades. The reporters singled out a complicated refinancing deal by Mayor Kwame Kilpatrick with Wall Street involving credit swaps as a major contributor to the inevitable bankruptcy; but the cause of the bankruptcy is a familiar one: the city financed its operating needs beyond its shrinking means for too long. The derivative deal now accounts for one-fifth of Detroit's outstanding debts. Unlike the federal government a city cannot print money. Selected charts are reproduced here:

Outspoken Mayor Coleman Young has been blamed for Detroit's downhill run. But as the chart shows, Young actually achieved a city budget surplus leading to an upgrade in the city's bond rating that allowed more borrowing to build Chyrsler's Jefferson North Assembly Plant, among other projects (more free market in action). The following chart shows how an increasing amount of the city's doubled borrowing was needed to meet legacy pension costs. Police pension costs climbed from 12% of the budget in 1960 to 32% in 2012:


White flight from racial integration and increasing taxes caused the revenue stream to shrink in half despite four local taxes and the highest property tax in the state of Michigan. The city began an income tax in 1962 which surpassed property tax revenues in 1974, and as the population continued to fall and unemployment increased, resorted to a gaming tax in 1999.


The Free Press reporters conclude that given the city's continued spending despite falling revenues bankruptcy was on the horizon, but it did not have to happen. If city leaders had taken decisive action against deficit financing, especially financing involving credit derivatives such as credit swaps too risky to be sustained. In a land were what we want it all, and we want it now, who can throw the first stone at Detroit?