07.29.13 6:50 PM ET
Relax, We’re Not Detroit
No, Detroit is not a symbol, a harbinger, or a leading indicator of what is happening to America—despite what you may have read. Since the city initiated bankruptcy proceedings last week, a stream of anguished pieces have tried to warn America that Detroit’s fate is just the beginning. “Come See Detroit, America’s Future,” warns Charlie LeDuff’s op-ed in The New York Times. Meredith Whitney, the false prophet of municipal debt disaster, took to the Financial Times and Yahoo Finance to make her case. Whitney, who predicted dozens of massive municipal defaults in 2010, said: “We know [Detroit’s bankruptcy] is a game-changing event for certain.” In due course, companies will “either get their act together or follow Detroit’s lead.” The obligatory Time cover asked: “Is Your City Next?”
In a word, no.
To be clear, like Detroit, the U.S. as a whole—and many of its companies, states, cities, and consumers—has a significant mismatch between its assets, cash flows, and liabilities. There are large pockets of pain and financial misery throughout the U.S. There will be more failures. But the difference between Detroit and the rest of the country could not be more stark. In recent years Detroit had lost the capacity to stay current on its debts, to fund its operations, and to grow. At the same time, the rest of the country is doing a much better job staying currents on its debt, funding its operations, and growing.
The data and the trend lines all speak to a rapid decline in failure, not an increase. No bank has failed since June 7, the longest such streak since 2008. There have been 16 bank failures in the first 7 months of 2013, down from 39 in the first 7 months of 2012—off 60 percent in 1 year. Since peaking in 2010 at 1.593 million, U.S. bankruptcy filings fell in 2011, and again in 2012, to 1.22 million—a 23 percent decline. In the first quarter of 2013, filings were off nearly 16 percent from the first quarter of 2012 and were at their lowest level since the first quarter of 2008.
Through defaults and pay-downs, Americans have been reducing their credit-card balances—even as retail sales set new records each month. According to CardHub.com, U.S. credit-card debt stood at $788 billion in the first quarter of 2013, down from $985 billion in the fourth quarter of 2008. Since Americans are doing a much better job keeping up with their bills, the quarterly charge-off rate of credit-card debt has fallen from 10.92 percent in early 2010 to 3.83 percent in the first quarter of 2013—a decline of nearly two thirds. At 7.25 percent in the first quarter of 2013, the mortgage delinquency rate is down significantly from its 2010 peak. Sure, the Federal Reserve’s efforts to keep interest rates low have helped. But around the country, American businesses and consumers have become more intelligent and capable of handling their debt.
Now let’s look at the public sector. No U.S. state has defaulted on its debt. In fact, across the U.S., state tax revenue is up 9.3 percent in the first quarter from the year before. Dozens of states, including recent basket cases, are reporting surpluses, including California. Standard & Poor’s, which fatuously downgraded the sovereign debt rating of the U.S. in 2011 because of the lunacy of the House GOP, last month partially reversed its decision. Why? Well, as the U.S. was careening on the road toward being the world’s next Greece, it managed to slash its deficit by 40 percent in a single year. In fact, at the federal level, we are in a golden age of deficit reduction. Yes, several cities have filed for bankruptcy in recent years: Stockton, Vallejo, and San Bernardino in California; Central Falls in Rhode Island. But these are outliers.
Every day the overwhelming majority of borrowers—people, companies, cities, and states—manage to stay current on their debt. The reason, of course, is that sustained growth is the best cure for debt woes. Simply put, the economy is larger than it was in 2009. Compared with a year ago, two years ago, and three years ago, more people are working, at slightly higher wages, and paying slightly higher tax rates. This is not to deny long-term problems or the real failure that happens as a matter of course. But to a large degree, the debt doomsayers misread the data.
They’re also misreading Detroit. Detroit is an outlier, not the median. There’s a line from the Lisa Loeb song “Stay (I Missed You)” (sorry, I date myself) that goes: “some of us hover when we weep for the other who was dying since the day they were born.” Well, Detroit has been dying since the day I was born in a hospital in Lansing, Michigan, in 1967. Detroit’s collapse and bankruptcy are the result of a unique set of economic, geopolitical, and geographic circumstances. Literally built on the car, Detroit was built to sprawl. The city had an industrial monoculture—autos—that dominated the prosperous midcentury in part because it faced no foreign competition. The jobs the car company offered to relatively unskilled workers were so well-paying that the city of Detroit had to compete by offering very generous wages, pensions, and health benefits. Unlike other struggling Rust Belt cities—Cleveland and Pittsburgh, to name two—Detroit lacked great universities or health-care systems that could serve as ballast when heavy manufacturing declined. (If the University of Michigan had been located 20 miles to the east in Detroit instead of in Ann Arbor, the city’s economy and finances would look much different.) And because Michigan has plentiful, flat land, it was easy for citizens to flee into adjacent Oakland County. So Detroit lost people, and then jobs and companies, and then more people, and then more jobs and companies. Eventually, it lost hope and the capacity to function.
But this is not the story of every large American city. Far from it. In fact, it is comparatively hard to find direct analogues to Detroit in the U.S. Most large cities in the U.S. continue to grow, many are thriving, and most are surviving. No state has lost 10 percent of its population, much less 50 percent. Of course there are jurisdictions with very serious fiscal issues—Illinois comes to mind. And we will have a rolling problem with municipal and state pensions; retirees will likely end up with less than they are entitled to, and less than they deserve. But all the states and the overwhelming majority of cities have the ability to adapt—they can raise taxes, or cut spending, or fire people (state and local governments have axed 1 million jobs over the past few years), or offload costs to the federal government.
The U.S. is not Greece. California is not Greece. Detroit may be Greece. But it’s not America.