“Bankrupt: How Cronyism and Corruption Brought Down Detroit”

February 10

A couple of weeks ago I attended the premiere of the new movie “Bankrupt: How Cronyism and Corruption Brought Down Detroit.”  It is a terrific movie and traces the dual collapse of the American automotive industry and the city of Detroit. Of particular interest is that the filmmaker, Ben Howe, tells the stories of the downfall of GM and Chrysler onthe  one hand and Detroit on the other as being intertwined and deriving from the same causes.

I appear several times in the second half of the film discussing the perils of crony capitalism and Detroit’s downfall and the role of bankruptcy in its recovery.  At one point the film has a screenshot of a printout of my recent essay that I wrote for the Law and Liberty blog, “The Corporatist Legacy of the Auto Bailouts.”

What comes through in the movie is that the bankruptcy of the automakers and Detroit largely arose from the same forces: horribly inept and unaccountable management and insatiable demands by labor interests that drove both the automakers and the city into the ground.  This manifested itself in rising costs and deterioration in quality (cars in one case and city governance in the other, such as failure to supply basic public services).  One of the more poignant moments in the film is the observation by a longtime Detroit resident of the differing fortunes of Chicago and Detroit over the decades of the second half of the 20th Century—two large, otherwise comparable Midwestern cities that experienced very different fortunes over a multi-decade period.  The parallel between Detroit and Chicago’s fortunes is similar American carmakers and the challenge of Japanese and other foreign carmakers beginning in the 1970s is similar.

Another interesting thesis suggested by the movie is that GM’s welfare mentality was a long time in coming, dating back to the noxious Poletown case where GM used its political clout to enlist the public eminent domain power to destroy a longtime ethnic neighborhood in Detroit so that it could build a new factory.  Howe suggests that GM learned an important lesson from that incident: that it could use the levers of crony capitalism when it was easier to do that than to use market processes.  Whether that is the case or not, there is a clear parallel from the Poletown fiasco to the multibillion dollar auto bailouts that have just come to a close.  Indeed, some of GM’s behavior during the auto bailouts is quite startling: Obama car czar Steven Rattner reports, for example, that GM essentially forced the federal government into a bailout by refusing to make plans to file bankruptcy (hence the early emphasis on a “disorderly bankruptcy”).  In essence, GM was brazen about its moral hazard that if the government didn’t bail it out, GM was going to impose exactly the sort of messy bankruptcy that was feared.  Even more amazing, Rattner suggests that the utterly bizarre “cash for clunkers” (remember that?) was essentially a condition that GM demanded for being willing to file bankruptcy eventually (yes, you read that correctly).

Indeed, the parallels between the automakers and Detroit became even closer in the days following the premiere of the film.  Detroit’s bondholders are about to be fleeced for the benefit of Detroit’s politically powerful public employees, suffering the same fate as the bondholders in the auto bailouts at the hands of the United Auto Workers (or as he writes it, Detroit’s bondholders are about to be “GM’ed” for the benefit of public employees).

And in another coincidence, it now appears that Michigan’s politicians are considering a taxpayer bailout of Detroit. As reported by Shikia Dalmia at Reason.com, Michigan’s Republican Governor Rick Snyder is considering pouring taxpayer money into Detroit’s bankruptcy in order to bail out public employees.

 The basic outline of Snyder’s proposal is as follows: The state will divert $350 million of its tobacco settlement money over 20 years to match a grant of roughly equal amount by private philanthropic foundations. The $700 million or so would then be used to pay Detroit’s retirees – whose pension system is unfunded to the tune of $3.5 billion — and keep the Detroit Institute of Arts off the chopping block during bankruptcy.

So with each passing day it appears that the movie’s analogy between the auto bailouts and the city of Detroit is becoming more accurate.

The bottom-line lesson of the movie, I think, is that the distortions of crony capitalism run both ways, corrupting not just the government but breeding a sort of dependency and moral hazard that arises from corporate welfare.  Through incidents such as Poletown, GM’s management and unions bred a culture of dependency on government that it could get what it wants.  Moreover, corporate management, politicians, and public and private employees developed a short-term focus that eventually killed the golden goose.  While GM’s succession of incompetent managers escaped with multimillion dollar compensation packages, Detroit’s mayor ended up in jail.  And while the UAW eventually was bailed out by the federal government, now it appears that Michigan’s state government is considering doing the same thing with Detroit’s city employees, who already might be treated preferentially in bankruptcy.

Overall it is a terrific movie for those who want to understand the causes and legacy of the auto bailouts and Detroit’s decline.  As is generally known, although Detroit is in worse shape than most cities, many municipal governments are facing many of the same pressures as Detroit and so this story is likely to be repeated across the country in coming years.

Update: I meant to draw a parallel with foreign automakers and inadvertently typed Detroit and Chicago twice in my first post.  I’ve marked the changed text by striking through the text.

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