Dancin' in the Suites?
By Roger Bybee
In 1964, “Dancin’ in the Streets”—Martha and the Vandellas slyly subversive hit recorded at Detroit’s Motown Records—topped the charts and Detroit was known as the Paris of the Midwest. After serving as America’s Arsenal of Democracy during WWII with its auto plants converted into turning out vast amounts of tanks and weaponry, postwar Detroit symbolized the ascent of unionized working people moving from poverty to security.
Detroit boasted America’s fourth largest population of nearly two million people, built on the prosperity that the United Auto Workers were winning for working families. The UAW’s massive membership included African-American migrants from the Jim Crow South who, with newly-discovered dignity, were now assertively marching for their rights as full human beings, a cause supported strongly by the union.
But in 2013, there has been no dancin in the streets in Detroit following Governor Rick Snyder’s declaration of bankruptcy on July 18. Snyder’s move—while much legal wrangling is sure to ensue—is more likely to touch off “dancin’ in the suites” by financiers, as they gain protection from the consequences of their risky investments in Detroit municipal bonds.
Meanwhile, city workers’ contracts and union representation, retirees’ pensions, and treasured public assets are all at risk.
At this moment, Detroit’s bankruptcy may signal the most dramatic introduction of an austerity regime in the U.S. The bankruptcy is the culmination of long-term corporate decisions that have turned Detroit into a dystopia unimaginable to those who saw the city flourishing.
Over several decades, Detroit has seen the flight of auto production and related auto-parts jobs, most recently to China and Mexico (labeled Detroit South in a famous Business Week cover). The forces lined up against Detroit include:
· Financiers—asset managers, insurers, and bankers—who want a public shield from their profitable but risky investments
· Republican leaders eager to exert control over Detroit and destroy public unions in Detroit and across Michigan
· An ongoing stream of fruitless city and state incentives aimed at luring corporate investment but actually merely drain Detroit and Michigan of badly-needed revenues
Obama’s unwillingness to intervene on behalf of Detroit workers, pensioners, and public institutions exposed to extraordinary peril because of Michigan’s unique and thoroughly undemocratic Emergency Financial Manager Act
The continuing absence of an industrial policy by the federal government to retain, increase, and reinvigorate the nation’s base of family-sustaining jobs in manufacturing.
Major financial interests—including the “asset-management” firms who hold the lion’s share of Detroit’s $18.5 billion debt in high-interest, tax-free municipal bonds—are demanding that state and local officials shield them from risk and extract their payback from city workers whose contracts can be negated and their unions decimated, and city retirees’ pensions slashed. If need be, the sale of public assets could be part of covering payments to the bondholders. The public properties being contemplated for sale include Belle Isle Park, museum paintings, water and sewage utilities, and the zoo.
Further, if the Detroit bankruptcy unfolds like the New York crisis of the 1970s, the creation of a panel of bankers and other financiers to help rule the city is a likely outcome. The city is already being run by Kevyn Orr, a former Chrysler bankruptcy attorney, whose post of Emergency Financial Manager endows him with the power to override decisions by democratically-elected city officials. “Whenever financiers want their money back from the cities, they go after the democratic process and impose a financial dictatorship,” warns William K. Tabb, whose book The Long Default: New York and The Urban Fiscal Crisis outlined the enthronement of banking interests during New York’s crisis at the expense of democratic rule.
Detroit’s largest bondholders are “asset-management” firms that buy municipal bonds as part of the portfolios that they manage for their wealthy clients. Like all municipal bonds, Detroit’s are tax-free, a major attraction for investors. But Detroit, because of its long-standing fiscal problems, has been forced to add the sweetener of exceptionally high returns, hitting 16.3 percent earlier this year, an extraordinary reward for investors. The biggest bondholders include:
· Franklin Resources, based in San Mateo, California, which holds $232 million in Detroit bonds. Franklin manages a total of $815 billion and has earned a profit of $552.3 million in the most recent quarter, and its successes triggered a 3-for-1 stock split
· CEO Gregory Johnson raked in $12.3 million in 2012. Nuveen Assets Management, which manages a total of $224 billion, holds $62 million in Detroit bonds
· Berkshire Hathaway Assurance Corp., another big bondholder, which, according to its annual report, holds $901 million in Detroit bonds. The Berkshire conglomerate, owned by billionaire Warren Buffett, saw its assets climb by 14.4 percent, “giving Berkshire $73 billion of free money to invest”
Clearly, these bondholders have immense resources that would cushion them if Detroit were unable to repay them dollar for dollar. However, they have little inclination to make any sacrifices, as Steve Kreisman, bargaining director for the public employee AFSMCE union notes: the bondholders “claim their brilliance justifies their ample financial rewards, which, of course, should never be taxed. But when the risks turn sour, they are quick to point a finger, demand a bailout.”
Spokespeople for the leading mutual funds that hold the lion’s share of the $18.5 billion in city debt, along with leading business publications, have expressed confidence that they will be fully repaid. This sentiment is bolstered by the state’s unpopular Emergency Financial Manager Act. The Act, often used by Snyder to assume dictatorial control over black-run city governments like Benton Harbor’s, ignited such massive opposition that it was repealed by voters in November 2012. But the lame-duck Republican-dominated legislature ignored the public will and promptly reinstated it in December.
The Emergency Financial Manager Act explicitly states that emergency financial measures must insure “payment in full of the scheduled debt service requirements on all bonds, notes, and municipal securities of the local government.” But public employees—whose contracts can be voided given the dictatorial powers afforded Orr under the Emergency Finance Act—and retirees’ pensions could be vulnerable. “Upholding Michigan’s requirement that bondholders be repaid in full would put all the burden of cutting a city’s debt onto its employees,” a bankruptcy attorney expert told Crain’s Detroit Business Journal.
Workers’ pensions are supposed to be protected by the Michigan Constitution. But these protections—initially backed by Michigan’s attorney general and a judge who issued an initial injunction against cutting pensions—are subject to challenges based on both the Emergency Financial Management Act and federal bankruptcy law, which typically is found to supersede state-level measures. The final resolution of the conflicting laws may produce a lengthy court battle, during which Snyder—if he holds true to form—will act as though no legal measure restrains him.
State and national Republican officials are eager to use Detroit’s bankruptcy as a means of (1) showing the GOP’s hard line against tax-funded bailouts (except when applied to banks, favored corporations, and Southern coastline areas subject to frequent national disasters) and (2) striking another blow against public-employee unions, who remain the strongest remaining vestige of U.S. labor following decades of what Business Week had already characterized in 1994 as “one of the most successful antiunion wars ever, illegally firing thousands of workers for exercising their rights to organize.”
Escalating the Anti-Union War
In the past two decades, the antiunion war has sharply escalated, with the illegal firings of union supporters exceeding 31,000 in 2005. Moreover, Wisconsin Governor Scott Walker, relying on undemocratic maneuvers, deprived public employees of union rights. Moreover, Michigan, and Indiana both adopted anti-union “right-to-work” laws with almost no opportunity for democratic consideration. “The point is to smash public unions in Michigan and nationally, to kill pensions and convert them into defined-contribution plans like the private sector,” observes Tabb. Not only will the crisis result in severe pain for city workers—whose median pay is $42,000 after a 10 percent pay cut in 2012—and retirees who average $18,275 in annual benefits, but it will also severely cripple unions’ ability to provide organizational skill and financial contributions to the Democratic Party. “Without union resources, the liberal democrats are history,” says Tabb.
Governor Snyder—like fellow Midwestern governors Scott Walker and Ohio’s John Kasich—is driven by an intense faith in what might be called “free-market fundamentalism,” relying on “the market”—in reality, the power of politically-connected major corporations trumps all other values. Snyder—described in the Guardian by Mark Binelli as “a helmet-haired certified public accountant (and venture capitalist)…who bankrolled his own campaign to the tune of $6 million”—is willing and even eager to toss fundamental democratic processes overboard in his zeal to serve corporate and banking interests.
These tendencies make blocking financial aid to Detroit a priority for Republicans—even for those ardent free-market fundamentalists who voted for the $17.5 trillion bailout of the banking industry. Five Republican senators are reportedly ready to introduce legislation blocking any bailout of any American city, except in case of natural disaster.
Meanwhile, Democratic President Barack Obama—who repeatedly excoriated Mitt Romney’s indifference to the plight of Detroit expressed through the Republican’s opposition to the bailouts of GM and Chrysler in the 2012 presidential campaign—stunningly shows little inclination to propose a bailout to protect Detroit and its workers, despite their uniquely precarious position. For all of Obama’s heated rhetoric during the campaign about the necessity of saving Detroit, he has effectively limited his definition of “Detroit” to only General Motors and Chrysler as corporate entities.
But while Obama has adopted a stronger populist tone recently, stressing the disparate fates of CEOs averaging pay hikes of nearly 40 percent since 2009, while median household income has fallen from $54,000 in 2008 to $51,558 this year. However, Obama’s Treasury Secretary Jack Lew has indicated that the Administration has little interest in intervening in Detroit, despite the undemocratic methods endangering worker contracts and pensioners’ benefits.
No Push For Industrial Policy
President Obama has claimed, with virtually no evidence, that American manufacturing is benefiting from an “insourcing” trend as Chinese workers demand higher wages. In reality, suggests Mary Frederickson in her bookLooking South, manufacturers have shifted jobs from China to lower-wage nations like Vietnam and Bangladesh.
Instead of adopting measures to reward firms for retaining jobs in the U.S. and rebuilding U.S. manufacturing, Democratic presidents Clinton and Obama have instituted a set of “free-trade” policies that provide incentives and protections for the shift of jobs to low-wage nations like Mexico and China. The North American Free Trade Agreement cost an estimated 1 million U.S. jobs, with Michigan losing 43,500 jobs, based on Economic Policy Institute (EPI) figures. Free trade with China has cost an estimated 2.7 million jobs, with Michigan again absorbing the biggest hit, suffering a loss of 79,500 jobs.
President Obama, although running on an anti-free trade platform in 2008, turned around and crafted new deals with South Korea, Colombia, and Panama. His Administration is currently working on a Trans-Pacific Partnership deal that has been denounced as “NAFTA on steroids” for its strong safeguards for corporate power against government efforts to protect workers and consumers.
To aid Detroit and other ailing cities, the U.S. needs to turn away from counter-productive policies that foster the export of U.S. jobs and, instead, unify government agencies in inducing U.S.-based corporations to build advanced manufacturing facilities in the U.S., according to economist Jeff Faux, author of The Global Class War.
Without such an overarching economic strategy, cities like Detroit and the U.S. as a whole have no means of overcoming the mismanagement of the Big 3 auto companies headquartered around Detroit. While the United Auto Workers made impressive quantitative gains which helped to lift up wages and conditions for the entire U.S. working class and an often-unappreciative class of professionals, the union shied away from challenging GM, Chrysler, and Ford on their unilateral decision-making over issues like relocating jobs, as Thomas Sugrue lays out in The Roots of the Urban Crisis.
Acting on their own, “The key decision-makers—major shareholders in General Motors, Ford, Chrysler, etc., and the boards of directors they selected—made many disastrous decisions,” explains economist Richard Wolff writing in theGuardian. They failed in competition with European and Japanese automobile capitalists, and so lost market share to them, and they responded too slowly and inadequately to the need to develop new fuel-saving technologies. “And, perhaps most tellingly, they responded to their own failures by deciding to move production out of Detroit so they could pay other workers lower wages.”
General Motors thus became Mexico’s “number one” employer in the 1990s, taking advantage of labor costs at about 10 percent of U.S. levels. GM provided more private-sector jobs than any other firm until being supplanted by Wal-Mart. GM is expanding in other low-wage nations like China and India, squeezing the latter for a major package of incentives.
Ford Motors conducts 62 percent of its production overseas and has cut nearly 50 percent of its U.S. workforce in recent years. In 1995, the Ford’s CEO outlined the firms guiding philosophy: “Ford isn’t even an American company, strictly speaking. We’re global. We’re investing all over the world…. Our managers are multinational. We teach them to think and act globally.”
Chrysler has also been expanding internationally to low-wage, high-repression nations like Mexico and China to produce vehicles for importing back into the U.S. market. With the Obama administration unwilling to impose any conditions on the auto bailouts to maximize U.S. employment, Chrysler felt free to close down its Kenosha, Wisconsin engine plant and move the jobs to a low-wage plant in Silao, Mexico.
Contrary to the oft-stated beliefs of liberals who wish to avoid confronting the issue of corporations unilaterally deciding to abandon U.S. workers and communities, technology has played almost no role in the huge loss of auto-related jobs in the U.S., according to Dan Luria, economist and research director for a Michigan institute on manufacturing. While the size of some auto plants has decreased, this has been due to the outsourcing of work to autoparts suppliers. As the auto firms have moved to Mexico and China, the autoparts makers have tended to follow them, he said.
The flight of the auto industry and related autoparts operations to low-wage regions and nations has devastated the city’s employment and tax bases. Indicators of the city’s parlous condition include:
· The city has lost two-thirds of its population since 1950, with a sharp 25 percent drop just since 2000
· Detroit is so emptied out that it has an estimated 74,000 vacant homes, with countless blocks containing just one or two occupied houses. Detroit has been particularly hard-hit by the sub-prime housing crisis and home foreclosures. United Auto Workers Local 600 has been an important force in fighting foreclosures
· Fully one-third of Detroiters live in poverty, including a majority of children
· More than half its parks have been shut down
· An estimated 40 percent of street light are not working
The skeletal police force is able to offer a response time of an agonizing 58 minutes (national average is 11 minutes) to desperate citizens seeking help in dealing with the highest crime rate of any major city. Yet the city has been systematically starved of funds because of the city and state’s embrace of “pro-market” tax incentives granted to corporations, including a new program of $1.7 billion in corporate tax breaks, despite a history of such programs failing to promote economic development.
The glaring contrast between public officials’ willingness to shower projects which benefit the affluent while neglecting public institutions and facilities serving poor and working Detroiters was dramatized by the legislature’s granting of $450 million in bonds for a new Detroit Red Wings hockey stadium in Detroit. Municipal grants of taxpayer dollars for sports facilities have a consistent record of fostering no new development or jobs. The Red Wings stadium project is especially egregious because the team is owned by billionaires Michael and Marian Ilitch, who also own the Detroit Tigers baseball team and the Little Caesar’s chain of pizzerias.
Detroit has consistently come out on the losing end of incentive packages provided to the major automakers and other corporations, with huge amounts of taxpayer dollars given away regardless of whether the firms were rolling in profits or in financial trouble. For example, to encourage the building of a new Chrysler plant on Jefferson Avenue in Detroit, the city repeatedly shelled out $42 million to a reputed mafia boss for a property he had purchased for $300,000. The new Chrysler plant provided a sharp reduction in the number of jobs, despite the subsidies, slashing the workforce from about 4,000 to 2,500.
Adding up the pressures, it is apparent that Detroit’s present condition is emblematic of fundamental, long-term changes in the capitalist economy that have created traumatic changes in the lives of working Americans and for U.S. communities that have relied on manufacturing for generations. Detroit, because of its unique dependence on the auto industry, is simply the largest and most extreme example of a once-thriving industrial center being gutted of family-supporting jobs and transformed into an abandoned “sacrifice zone,” to use Christopher Hedges’ illuminating term inDays of Destruction, Days of Revolt.
Detroit—on a much larger scale than Camden, New Jersey whose pitiful plight as a city ravaged by industrial plight was detailed by Hedges—embodies what he called “the poster child of post-industrial decay (and) a warning of what huge pockets of the United State could turn into.”
Indeed, the intensified poverty and economic insecurity so evident in Detroit is bound to become more widespread given the dominant outlook of top U.S. CEOs, as typified by Caterpillar CEO Douglas Oberhelmer. Caterpillar, which has 27 plants, earned a record $5.7 billion last year, which amounts to $45,000 for each employee. Oberhelmer, whose pay has soared by 80 percent over the past 2 years, hauled in $16.9 million in 2012.
But Oberhelmer, whose huge firm has a major influence in setting trends in wages and labor-management and seven other facilities in China, has been relentlessly pushing for extended wage freezes, as in Joliet, Illinois, and South Milwaukee, Wisconsin and is adamant about driving down wages in order to enlarge profits. “I always try to communicate to our people that we can never make enough money,” he declared to Bloomberg BusinessWeek. “We can never make enough profit.”
This mentality is certain to produce more Detroits.
Roger Bybee is a freelance writer and University of Illinois visiting lecturer in Labor Education. His work has appeared inDollars & Sense, The Progressive, Progressive Populist, Huffington Post, The American Prospect, Yes! and Foreign Policy in Focus.