The Real Demon of Detroit (Opinion)

An anti-business mindset is the real reason the Motor City finds itself in bankruptcy court. A federal bailout would be further evidence of its bad bets.

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By Ray Hennessey

Opinions expressed by Entrepreneur contributors are their own.

Imagine a business killed by both customers and employees.

It's hard to fathom, right? Yet, that's how Detroit looks when viewed through a free-enterprise lens.

And it is also why Detroit may never recover in our lifetime.

You can't really judge Detroit, which filed for Chapter 9 bankruptcy protection on Thursday, as a business. After all, it is a creature of state. It is also, though, a fairly good example of how an anti-competitive approach is doomed to failure. One doesn't expect a government to become a business, but many cities, notably Atlanta, Austin and New York, have found a way to inject a sense of public-private partnership to attract and support new businesses.

Not so in Detroit. Much has been made about its over-dependence on the auto industry, but it is interesting to note that just one automaker -- GM -- chose to have its headquarters there. Chrysler and Ford are outside the city limits. True, many citizens worked for the auto industry, but they often found themselves leaving town to go to work.

It didn't have to be that way. A union-driven protectionist bent against foreign carmakers made Detroit in the 1970s and 1980s feel like a keep under siege. Truth was, foreign automakers wanted a home in the U.S. Market forces suggested the Japanese could save money and sell more cars if they made them here. Detroit would have been a natural place to hang their hat, but most chose California instead. Detroit saw that as a victory.

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Even U.S. automakers wanted to motor from the city. The most innovative corporate idea from one of the Big Three in the last 30 years was GM's creation of the Saturn brand, which gave the company a bold new design and changed the way cars were sold and how salespeople were compensated. GM launched that brand not in its own hometown, but in Spring Hill, Tenn., which is about as opposite of Detroit as you can get. (GM, sadly, would later apply Detroit-style mismanagement and ultimately drive the brand into failure.)

Even the music scene didn't help Detroit. With apologies to both Motown and Eminem, the city never found a way to convert that creativity into sustainable dollars at home. Los Angeles and New York have made more money off Detroit's homegrown art.

Why was it this bad? Because Detroit did nothing to change its anti-business mindset. It is, after all, a union town and unions are very good at driving members to the ballot box. They also want to make sure than any big enterprises in town provides union jobs. Is it any wonder why Elon Musk decided not to build the Tesla in Detroit, or that Volkswagen has embraced the South as its American manufacturing hub?
Coddling union membership only drove Detroit deeper into its hole. As protectionism led to a decline in jobs, people fled the city. One of the saddest statistics is the population flight. In 2011, the Census Bureau noted that Detroit saw a 25 percent decline over just a decade, to 713,777. It had about 2 million half a century ago, when it was the fifth-largest city in America.

Citizens are a government's customers, since government derives its revenue from taxation. Most governments rely on corporate taxes to fuel its coffers, but, again, businesses were steering clear. So a smaller population faced an ever-increasing tax bill -- and chose not to pay it. In February, the Detroit News found that roughly half of the city's property owners didn't pay what they owed.

As the customers reduced revenue, city employees fought any reduction in pay or benefits. There is the famous story of the farrier on the Detroit Water and Sewer Department's payroll, to the tune of $56,000 in annual pay and benefits. Farriers change horseshoes, which would otherwise come in handy but that department doesn't have a horse. (Perhaps they kept him for good luck?) Public-employee unions like the teachers, police and municipal workers have all fought givebacks. That approach makes the union leadership look tough, but it also mirrors what happened at Hostess Brands. All that did was put union workers out of work and give America smaller, lower-calorie Twinkies.

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That made Detroit have to borrow heavily, piling up more than $18 billion in debt. This was not borrowing to support future growth, but to just maintain what Detroit had in front of it. Thirty-eight percent of its expenditures went to legacy issues, like pension payments.

So, in business terms, Detroit was sunk when its customers (reduced revenue) and its employees (increased costs) teamed up to destroy it. Bankruptcy protection, though, is exactly that: protection. Bankruptcy proceedings are supposed to give any entity breathing room to negotiate its obligations and get a fresh start. But, so far, the biggest burden is on the shoulders of the creditors, the free-marketeers who took a chance and bought Detroit's bonds, hoping for a large return and letting the city stay afloat. They will be paid pennies on the dollar of what they are owed. Will the unions and pension funds make commensurate changes?

History says no, and that is where Detroit runs the risk of never coming back. If the real pain is felt only in the bond market, it will be harder for the city to have access to debt in the future to fund its renaissance. Detroit will become the municipal equivalent of the brother-in-law who always borrows money and drinks all your beer.

The city will also not learn its lesson. They say everyone is recovered the first day they leave rehab, but many go down the Lohan highway and end up locked away in Malibu again. Detroit could clear its past debts, but failing to address its revenue and cost problems in a meaningful way will only put it back in bankruptcy court. The hard choices of lower salaries, reduced services, trimmed pensions and re-investment need to me made, but it looks like there is little political will to achieve those ends.

Businesses know that bankruptcy is not always the final chapter. In fact, it can be a great springboard for innovation and wealth creation. Phil Anschutz is a billionaire because he saw a way to buy movie theaters out of bankruptcy and make them profitable again. Wilbur Ross revived investment in the U.S. steel industry by buying assets on the cheap out of bankruptcy.

But neither Anschutz nor Ross can rescue Detroit, as much as Libertarians wish there were a mechanism to do so. Instead, it is telling that many of people affected by the bankruptcy are looking for a federal bailout of the city. Looking for a government-driven solution to Detroit's problems is the clearest sign yet that it will never learn.

Related:Clinton Global Initiative Aims to Boost U.S. Economy Through Entrepreneurship

Ray Hennessey

Former Editorial Director at Entrepreneur Media

Ray Hennessey is the former editorial director of Entrepreneur.

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