Has Detroit collapsed?
The City of Detroit, once the pride of the USA and the automobile capital of the world, is in decline and this is a warning to the rest of the country. The city declared bankruptcy, has $18.5 billion in debt which it is unable to meet, and has cut its staff and reneged on its pension obligations to retirees. This is the 61st local government bankruptcy in the USA since 1954 but it is the largest. Its population has dwindled from 1.8 million to a mere 700,000. Large areas of this once rich city are derelict with abandoned homes and filthy streets where public services have been cut off. These surreal pictures mimic films depicting the end of this world and the death of humanity. But in its boom days it was hailed as the auto capital of the world and its workers were among the highest paid in America.
But has Detroit really collapsed? The city still hosts the Big Three in the US auto industry: General Motors (GM), Ford and American Motors. True, these corporations were nearly bankrupted by the US inspired world financial collapse of 2008 and were saved by generous federal government loans or other loan facilities and the booming car markets in China and, to a smaller extent, in India. Also, the economic crisis in the EU contributed substantially to these companies’ losses. But it is a mistake to assume that Detroit is in collapse: another part of the city is thriving in luxury.
China has contributed in no small measure to the revival of the US automobile companies. The Chinese car market is the largest in the world, almost 40% more than that of the USA, and is also the fastest growing, despite Chinese government efforts to currently curb car ownership due to over-crowded roads and air pollution. The US auto companies are a big presence in China, manufacturing and selling in China, with nearly 25% market share. The other little known fact is that US car makers are now increasingly sourcing their auto parts from China and employing large numbers of Chinese white collar workers in their factories and research facilities. The New York Times of 13 May 2013 in an article states that around 50,000 Chinese engineers and researchers work in Detroit for GM and Ford. Chinese talent has also contributed to the turnaround of these corporations.
Chinese auto parts manufacturers like Wanxiang have also bought up several US Detroit-based auto-parts makers that were financially strapped and are expanding their supplies to the US auto industry. This replaces the cheaper auto parts bought from US factories in Mexico. Chinese auto companies like Changan have set up research facilities in Detroit and hired many US researchers who had lost their jobs in US auto firms. The Chinese companies are able to make the large investments in these companies that the US companies are unable or unwilling to make.
As in other parts of the world, the Chinese maintain a very low profile and go out of the way to avoid advertising their presence, in stark contrast with US businesses. But they also contribute to social services, sponsoring sporting events and contributing to charitable organisations doing poverty relief.
Detroit is a microcosm of what is happening in America. According to the New York Times, corporate profits after tax were the highest in recorded history: 9.7% of GDP in 2012. At the same time, wages and salaries for the total US population was the lowest in history at 44% of GDP.
What has happened in Detroit is what is happening in the USA as part of its new economy: the massive transfer of national wealth to the microscopic class of super-rich and the impoverishment of the general population. Detroit has not collapsed: its middle and working class have been marginalised and evicted. Despite the massive government bailouts for General Motors in 2008, the company closed down several of its US facilities, most of them in Michigan. Fifty of these had been set up with tax breaks and outright grants by local authorities anxious to create local employment.
(http://www.nytimes.com/2012/12/02/us/how-local-taxpayers-bankroll-corporations.html?pagewanted=all)
Have US corporations failed the nation? US corporations and their lobbyists are always complaining of foreign competition and demanding lower taxes, even though their real tax rate after exemptions is around 10-15% of profits actually declared (two trillion dollars in profits are hidden annually in tax havens abroad). At the same time, most of America’s manufacturing, including auto manufacturing, and much of its services have been shifted to other countries like China, India, Mexico and Canada. And yet, foreign auto makers are investing in US manufacturing and doing well: Toyota, Honda, Mercedes, Hyundai, Volkswagen, Fiat.
While US cities decline due to the impoverishment of the middle and working class, one hundred mega cities (defined as having a population of over a million) are being created annually in China for the last decade. But Detroit has not failed: it is the US politico-economic system that now transfers most of the national wealth to the super-rich and impoverishes the middle class that is failing the cities and states.
Kenneth Abeywickrama
14 August 2013.