Detroit’s Grand Bargain

Detroit’s bankruptcy and decay are symptoms of a fully-functioning free market, not a new “post-capitalist” order.

Detroit, according to its creditors, is being offered a deal.

The city’s bankruptcy trial will officially begin in mid-August when federal Judge Stephen Rhodes will rule on the Detroit emergency manager Kevyn Orr’s plan of adjustment to restructure the city’s debt — a “grand bargain.” The plan will essentially privatize the Detroit Institute of Arts by spinning it off into a privately managed institution, the savings from which are expected to reduce cuts to monthly retiree pension benefits down to 4.5%.

Responding to the possibility of retirees rejecting the plan out of protest, Orr threatened them by citing the risk of even more severe cuts if the plan does not receive the necessary supermajority approval by retirees and city workers who have until July 11 to cast their ballot. The heads of the city’s largest union AFSCME Local 25, as well as the police and firefighter associations and the local NAACP, have already urged retirees to accept the cuts and vote in favor of the plan.

Such a massive transfer of wealth from the poor to the rich is no “bargain” for anyone, except perhaps for the banks. But proponents of the bankruptcy, such as former mayor Dave Bing, have presented the bankruptcy as an inevitable step toward Detroit’s recovery and prosperity. For a “post-industrial” city trapped by poverty, abandonment, and a lack of financial discipline, the city’s political and business elites say, there is no alternative.

But the public workers and pensioners who are being forced to pay for this recovery did not cause this crisis, despite accusations that the city government has gone on a forty-year spending spree. The usual suspects from Wall Street drove the city into crisis through complex financial deals that virtually guaranteed them an astronomical return at the expense of the city and its workers.

Resisting such extreme austerity measures in a city like Detroit, already characterized by desperation, raises some questions. Decades of urban crisis, abandonment, and impoverishment have led some activists to argue that Detroit has been pushed to the “margins of capitalism,” and the traditional organs of working-class resistance such as trade unions, mass political organizations, and mass protest can no longer play a significant role. Within these abandoned spaces, the foundations of a post-capitalist order can be laid down in the form of projects such as of urban gardens and alternative schools.

But as the bankruptcy and a surge of new urban developments in Detroit reveal, capitalist competition leaves no space untouched — even those it has seemingly abandoned. If any successful fight back is to be mounted, the Left and the working class will have to discover a way to remake the kind of resistance that once made Detroit a center of working class struggle.

As Mayor Bing prepared to leave office in November 2013, he discussed the city’s bankruptcy with the Associated Press, commenting that it was “inevitable” due to the city’s overspending on extravagant pay and benefits of its public-sector workers.

Detroit’s political establishment has gone to great lengths to place responsibility for the crisis onto a supposedly high-on-the-hog workforce. In an interview with the Wall Street Journal, Kevyn Orr explained, “[F]or a long time the city was dumb, lazy, happy, and rich.”

The wealth Detroit had built through the auto industry, he said, led to the expectation that “if you had an eighth grade education, you’ll get thirty years of a good job and a pension and great health care, but you don’t have to worry about what’s going to come.”

And in an interview for CNN, former mayor Bing told viewers, “We’re in an environment . . . of entitlement. We’ve got a lot of people who are city workers, who for years and years, twenty, thirty years, think they are entitled to a job and all that comes with it.”

But while scapegoating Detroit’s public workers may be politically expedient as an attempt to justify austerity, Detroit does not face an overspending problem.

A November 2013 report written by Walter Turbeville for the policy think tank Demos argues that the primary cause of Detroit’s financial crisis is a revenue shortfall, not overspending. In contradiction to the common belief that Detroit’s budget is ballooning due to public worker benefits, the city government slashed its payroll by almost half between 1990 and 2013. In the last six years alone, the city government cut public spending by almost half a billion dollars.

At the same time, however, Detroit has entered into extremely costly financial deals that have cost the city millions in bank service fees — in particular, a 2005 loan taken out by Mayor Kwame Kilpatrick.

The city’s pension fund began to underperform starting in the early 2000s. The fund was deeply invested the dot-com market, and when that bubble burst and the economy slipped into recession, the city’s annual contributions to the fund began to grow. In 2001, the city experienced its first deficit in nearly six years. In 2004, the city had a $95 million shortfall.

Mayor Kilpatrick, closing out his first term and hoping to avoid criticism for mismanaging the city’s retirement fund before his re-election campaign, met with a host of financial and legal experts in 2005, including representatives from Merrill–Lynch and UBS, to engineer a solution to its growing pension obligations.

In the end, they devised a highly complex borrowing scheme in which the city issued $1.4 billion in “certificates of participation” (COPs) — a municipal finance instrument similar to a bond but with fewer legal restrictions — allowing the city to avoid its legal borrowing limit and the need for voter approval.

By issuing COPs, the city intended to reduce the deficit through eliminating annual payments into the pension fund by making one large payment. The certificates would make the pensions appear fully funded. But the city exchanged one form of debt for another. The deal included a swap in which UBS and SBS (backed by Merrill–Lynch) would pay a variable interest rate on the certificates while the city would pay a fixed rate.

The interest paid by the banks, in other words, would fluctuate based on the movements of an average estimated rate of interest (specifically the Libor rate, which was later discovered in 2012 to have been manipulated). The city was essentially making a bet: If the variable rates the banks were paying rose, the city would cash in.

The legal and financial sense of the deal was a questionable move for the city. City Council members blocked the deal for months, arguing the deal was too risky. The Detroit Free Press blasted the members as “heads-in-the-sand politicians” who have become “a threat to the stability of the community.”

The Free Press, on the other hand, called Kilpatrick’s deal sound, saying it was “akin to refinancing a mortgage.” Kilpatrick was praised as a political prodigy and was even invited to Wall Street to accept the “Deal of the Year” award from Bond Buyer, the municipal bond industry’s top trade publication. One Free Press reporter later reminisced that the deal was “the financial equivalent of a Hail Mary pass that was not only intercepted but returned for a touchdown.”

But in 2008, the global financial industry collapsed. The banks had become addicted to highly profitable investments that were severely toxic for the borrowers — not unlike Kilpatrick’s deal with UBS and Merrill would prove to be. When the Fed forced interest rates down to historic new lows, the interest rate the city paid on the COPs remained fixed, and Detroit lost its bet against the banks by paying out more to the banks than it received from them. The city’s golden deal unwound and the city was thrown back into the red.

In 2009, Standard and Poor’s downgraded Detroit’s credit rating, and the banks terminated Mayor Kilpatrick’s deal. When UBS and Bank of America (who acquired Merrill in 2008) demanded immediate payment of $300–400 million, the city pledged its casino tax revenue as collateral to the banks in order to avoid payment.

The banks have since been attempting to collect their winnings from Kilpatrick’s bad bet, at the expense of the livelihoods of tens of thousands of Detroit workers and retirees. At best, the city had been able to delay the payoff in various ways — until city finances were taken over by the state government.

When Republican Rick Snyder was elected as Governor of Michigan in 2010, the state government began to intervene more aggressively in Detroit’s mounting financial crisis. The state sought to take over the city’s finances through its emergency manager law, which allows the governor to declare a municipality to be in a state of financial emergency and remove local control of government finances, replacing democratically elected local governments with a unilaterally appointed financial technocrat.

Activists scored a significant victory in November 2012 when Michigan’s emergency manager law was overturned by a landslide in a statewide ballot initiative. Less then a month later, however, the Republican-dominated state legislature, clearly unswayed by Michiganders’ overwhelming opinion on the subject, drafted and approved an even more draconian version of the same law during a frenzied lame duck session.

At the beginning of 2013, six cities had been taken over, almost all of them with a large or majority African-American population. Three months later, when Gov. Snyder appointed Orr to take control of Detroit’s finances, over half of the state’s black population was denied the ability to elect their local government.

The disregard for democracy was shocking. Emails acquired from a FOIA request reveal that a colleague from Orr’s law firm privately admitted the emergency manager plan “echo[ed] . . . a fascist takeover.” Orr himself was at first hesitant to accept the appointment: “It would just bring in the Demo-Repub polarization on a national scale . . . Obama would have to criticize the trampling of democracy and the Repubs would rail against any further federal bailouts,” he cautioned.

President Obama has done no such thing. Detroit has received little more than lunch money from the federal government through the course of its crisis. Roughly $300 million in combined public and foundation money has been promised to the city — most of which has yet been seen.

This stands in stark contrast to the billions that were given when the US financial and auto industries went into crisis. Bank of America, for instance, received over $45 billion from the Troubled Assets Relief Program. General Motors was nationalized and received $50 billion, while Chrysler (represented by Kevyn Orr during its bankruptcy proceedings) was given $10 billion.

Despite Orr’s predictions, liberal politicians quickly accepted his appointment as financial overseer. Councilwoman Sheila Cockrel (who at one point in her life was a close ally of the Dodge Revolutionary Union Movement), argued that the city’s inability to provide basic services “is a crisis that dwarfs everything else,” including voting rights. Such an appeal to law-and-order authoritarianism might have been convincing, if only the purpose of the financial takeover was to improve city services instead of repaying the banks.

Orr filed for bankruptcy in July 2013. Revealingly, his filing relied heavily on manipulated or wholly inaccurate data. For instance, his $18 billion estimation for long-term debt obligations includes bonds held by the Detroit Water and Sewerage Department, despite the department’s not being a city liability. Orr’s estimates for pension obligations have likewise been called into question as inaccurate and significantly inflated.

Long-term debt obligations, too, are not typically a relevant factor in municipal bankruptcies. Unlike a corporation, a municipality cannot be liquidated and sold off. The much more relevant factor is the city’s $198 million cash-flow shortfall — a far less dramatic and more easily manageable figure.

According to Turbeville, this shortfall only exists because of Wall Street banks and billionaire real estate developers. But Kevyn Orr, the banks, and the mainstream media are demanding that city workers pay for it.

A conservative estimate suggests that an average of $20 million a year is given away by the city to local developers through tax incentives. A recent deal between the city, state, and the owner of the Detroit Red Wings, Mike Illitch, has promised over $260 million in public funds for the construction of a new hockey arena — over $50 million more than the city’s budget shortfall. The city sold a large chunk of land for the arena (forty-five blocks alongside the city’s downtown business district) to Illitch for only a dollar, and required the clearing out of several subsidized housing projects for poor residents and senior citizens.

Eliminating subsidies for developers or shunning the creditors would mean the city would have to oppose the powerful interests they have promised to defend. In a localized version of “trickle-down” economics, policymakers assume that if they can generate a stable climate for businesses and developers, jobs and wealth will eventually come. Any concern in the meantime about growing inequality is simply dismissed as a poor grasp of economics (or perhaps a lack of creative imagination).

And any group that threatens the order of property rights and steady accumulation — unions or the long-term unemployed working in the underground economy, for instance — must be disciplined. Former mayor Dave Bing articulated his clear grasp of these responsibilities when he told the New York Times, “My job . . . is to knock down as many barriers as possible and get out of the way.”

If the bankruptcy was inevitable in any sense, it was only insofar as the political will to prevent it did not exist. The threat of bankruptcy was used as a tool to establish extreme austerity policies, extract massive amounts of wealth from the city’s working class and poor and bring them further under the boot of the market — paving the path for rapid growth, profit, and reinvestment.

Fighting back against Detroit’s extreme austerity regime and regaining lost ground will require a serious discussion about strategy. But the question has been posed by writers and activists such as the veteran revolutionary Grace Lee Boggs whether or not mass movements remain relevant in a “post-industrial” city like Detroit.

Boggs and others have argued that the abandonment and divestment in Detroit create a crack in the capitalist system. Rather than organizing demonstrations or making political demands, activists should instead use abandoned urban space to lay the foundations for a new, post-capitalist society through model experiments such as urban gardens and alternative schools.

“The thousands of vacant lots and abandoned houses provide not only the space to begin anew,” argues Boggs in her book The Next American Revolution: Sustainable Activism for the Twenty-First Century, “but also the incentive to create innovative ways of making our living — ways that nurture our productive, creative selves.”

Making a similar argument in Tidal magazine, the editors referred to Detroit as the “Chiapas of the North.” “As capital and the state have receded from entire swaths of what used to be the city,” the authors argue, “the survivors have remade the scorched earth into a radical laboratory for experiments in non-capitalist living.”

This approach to remaking “the scorched earth” is juxtaposed to building political power to win demands. Writing for National Public Radio’s show On Being in a post titled “Jobs Aren’t the Answer,” Boggs argued that the economic crisis was an opportunity to “go beyond protest organizing for more jobs.” Instead we should imagine work that “lifts our spirits.”

This is a common argument made by Boggs. In her most recent book, she argues, “[I]t becomes clearer every day that organizing or joining massive protests and demanding new policies fail to sufficiently address the crisis we face.” Similarly, when asked a question about the Occupy movement in a 2011 interview, Boggs advised young activists to turn their backs on protest in favor of “visionary organizing.”

Marked by burned down houses and empty lots, Detroit’s landscape may carry the appearance of a city withdrawn from the market. But despite the decimated cityscape, the disciplinary forces of market competition and capitalist accumulation do not simply abandon space.

In fact, far from creating the perfect environment for constructing a new post-capitalist society, Detroit’s abandonment actually creates a perfect environment for new property markets. Compared to other urban markets that carry a far greater risk, Detroit’s tremendously low property values and increasingly generous public subsidies create an almost no-risk environment for private investors.

When local employers created a fund to incentivize moving into Detroit (by offering their workers thousands of dollars to subsidize rent or mortgage payments), they generated a spike in competition in the local housing market that sent rents skyrocketing. In just a few years, occupancy rates in some neighborhoods have grown nearly to full capacity. Over $10 billion in private capital has been invested in the city for new developments.

A successful resistance to austerity can’t rely on simply building a new world on the periphery of the market because markets don’t indefinitely abandon space. Pushed by the potential for profits and growth, investors often return.

While there is a rich tradition of activists organizing to meet urgent needs or provide important services by organizing freedom schools or survival programs, “non-capitalist” institutions left without a guiding analysis of how class power operates, and independent of any form of political or organizational power can quickly accommodate the needs of the market. Urban gardens in once-blighted areas, for example, are now often a popular selling point for real estate developers.

Or take the Boggs Educational Center, an elementary school in Detroit inspired by the ideas of Grace Lee and James Boggs. The Center opened last year as a charter school, even as neoliberal education reformers are the main promoters of charters. The center chose Eastern Michigan University to authorize it, despite the fact that students and faculty at Eastern have protested the school’s administration precisely because of the role that authorizing charter schools plays in undermining public education.

The proliferation of charter schools in Detroit has led to an “exodus” in enrollment from the city’s public school system. Less than half of the city’s students now attend a public school, and city officials have reported twenty-six schools could be closed in 2015. In a city with such an embattled public school system, opening a charter school looks less like “reimagining” education than simply taking a page out of the neoliberal education reformers’ playbook.

Ignoring the determining role of the market and dismissing the need for political power, as Boggs does, misleads activists who sincerely want to combat inequality and austerity. Activists who reject the idea of building mass organizations that can demand things like jobs and relief programs leave themselves disarmed, with little to actually threaten or halt the austerity project.

In fact, the rejection of demands in favor of prefigurative experiments mirrors the logic of austerity by insisting that poor and working class people must make material sacrifices to pay for the crimes of the ruling class. Instead of demanding dignified jobs or other reforms, we’re told, the unemployed should take personal responsibility by living more cheaply and forming neighborhood projects.

Far from outdated or irrelevant, the politics of class struggle are indispensible to mounting a successful resistance against austerity, in Detroit and elsewhere. Looking for shortcuts to revolution may have a certain appeal given the extreme conditions within Detroit or the disorganized state of the Left more generally. But shortcuts will not work to rebuild our side. Activists should instead figure out strategies for rebuilding the power on our side, taking lessons from the exciting developments in teachers’ unions, low wage worker organizing, and electoral campaigns, to name a few possibilities.

Detroit’s financial crisis reveals that there are few limits to the ruling class’s willingness to dispossess the working class and urban poor. The recent announcement by Detroit’s water department that the city plans to cut water off to over 3,000 residents testifies to this fact. Far from an extraordinary event, the financial crisis in Detroit is sure to become a model for cities elsewhere.

The resources exist to fully fund public education; to eliminate the poverty, racism, and segregation that characterizes much of the American urban landscape; and to replace crumbling transportation, water, and other public goods with modern and sustainable public infrastructure. Rather than accept the fatalism inherited by a Left weakened and scattered by almost half a century of ruling class revanchism and limiting ourselves to small community experiments, we should advance a vision of a future socialist city — a city built not for the real estate developers and banks, but for the people who work and live in it.