Skip to main content

Detroit, Greece and debt crises

The big news this week is that Detroit filed, or tried to, for bankruptcy. Some have compared the Motor City crisis to the European, and in particular Greek, crisis. And in the essential that is fine. Detroit is, like Greece has become, a sub-unit of a larger entity and does not control monetary policy. But the analogy does not help much in understanding the difficulties in Detroit.

There is an important difference that has always been part of the discussion of the European crisis, and that is that if you are unemployed in Michigan you get Federal unemployment insurance, and a series of other federal funds support the less privileged. Fiscal transfers are relatively large, and certainly larger than intra-European transfers. According to the Tax Foundation in 2011, federal aid corresponded to 36.4% of the Michigan revenues [not the highest, by the way, which was Mississippi with 49%].

So, if it is far from clear that the European crisis [and in my view that includes the Greek crisis] was a fiscal crisis, then there is even less straightforward that the Detroit crisis is a fiscal one. In general debt crises are not fiscal, with the ones in countries for the most part being related to balance of payments problems [which can be aggravated by monetary arrangements, as in the case of the monetary union in Europe, or like Convertibility in Argentina back in 2001/2] or in the case of cities having demographic causes and the changing structure of production [Krugman noted this here, and I dealt with the case of Detroit before here].

In this sense, the deep causes of debt crises are associated to the patterns of productive specialization, which imply that they don't have enough resources to pay for essential imports (countries) and to provide for indispensable social services (cities). The important thing to note is that often there is a political objective that drives the debt crises. In the case of the Latin American debt crises of the 1980s was the push to open up the markets and force the so-called Washington Consensus policies.

In the case of Detroit there might be good reasons to think that austerians want to use the need to cut Detroit's employee pensions as an example for a future cut in benefits and privatization of Social Security. As much as the New York crisis of the mid-1970s was a harbinger of the conservative assault on the New Deal institutions brought by Reagan the Conservative Revolution, the Detroit crisis might signal things to come.


  1. I am still positive that the unemployment rate will drop from time to time. Reforms are on their way for sure. having a safety net like a bill protection insurance is good as far as protection is concerned but striking the main culprit should be a top priority.


Post a Comment

Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…