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Reasons behind Detroit bankruptcy

Updated: 2013-12-05 18:11

On Tuesday, a federal judge ruled that the US city of Detroit is eligible for bankruptcy protection. Such a ruling is not only an economic or legal consequence, but is also an outcome led by its own long-term political system, says an article in Excerpts:

Detroit's bankruptcy is not surprising news and, in fact, the city went bankrupt a long time ago, as its public construction was bogged down and its public services had been largely shrunk for a while.

As a world-famous automobile manufacturing base, Detroit is the headquarters of three biggest auto manufacturers in US. Although the auto industry is not a sunrise industry, the annual output of those three automakers is still sizable both in the domestic and overseas markets. Normally, such large auto firms can easily support the local public finance to avoid bankruptcy.

However, the city filed for the largest municipal bankruptcy in American history. The root reason is the high welfare costs for the labor force compared to foreign competitors. Take Japanese automakers for example - American autos perform as strongly as Japanese brands in technology, productivity and even in market share, but industrial analysis in 2007 showed that US automakers to pay more than $1,000 on each car just for welfare costs negotiated by the powerful auto workers union. Therefore, the profits earned by American automakers are only around $10 per car, and such small earnings can hardly support its huge auto industry.

Moreover, because the auto issue involves laborers' welfare, saving the automobile industry became one of the toughest issues in both the Bush and Obama Administrations. When autoworkers' welfare is closely related to public welfare policy in a city, it can easily influence votes. The citizens need to accept the consequences of their own choices.

Therefore, such a bankruptcy is not only a result of a changing industry and moving economic belt, but it is more a consequence of failing public policy and management. Although it protected debtors from unlimited liability for damage, it only avoids the worst consequences.