Recession


The ultimate blow to the city came through the 2008 recession. As though like dominos, Detroit’s mayor left office after pleading guilty to obstruction of justice charges, the city’s credit ratings entered the junk category, the population dropped 25%, Chrysler and GM declared bankruptcy, and the city’s debt reached $18.5 billion. As the city faces an uncertain future, let's take a closer look at the events that escalated its downfall.

The
Great
Recession

By The Economic Policy Institute

2008 Stock Market Crash Reaction
Reuters

The Great Recession—which officially lasted from December 2007 to June 2009—began with the bursting of an 8 trillion dollar housing bubble. The resulting loss of wealth led to sharp cutbacks in consumer spending. This loss of consumption, combined with the financial market chaos triggered by the bursting of the bubble, also led to a collapse in business investment. As consumer spending and business investment dried up, massive job loss followed. In 2008 and 2009, the U.S. labor market lost 8.4 million jobs, or 6.1% of all payroll employment. This was the most dramatic employment contraction (by far) of any recession since the Great Depression. By comparison, in the deep recession that began in 1981, job loss was 3.1%, or only about half as severe.

Even after the economy stopped contracting in the summer of 2009, its growth has not been nearly strong enough to create the jobs needed simply to keep pace with normal population growth, let alone put back to work the backlog of workers who lost their jobs during the collapse. In the post-World War II recessions before the early 1990s, it took an average of 10 months for the economy to regain the jobs it had lost during the recession. But after the early 1990s recession, it took nearly two years, and after the early 2000s recession, it took over three-and-a-half years. Unfortunately, the recovery from the Great Recession is following the sluggish pattern of these last two recoveries, but likely with an even longer timeline. In October 2010, 16 months after the official end of the recession, the economy still had 5.4% fewer jobs than it did before the recession started. Thus, the Great Recession has brought the worst of both worlds: extraordinarily severe job loss, combined with an extremely sluggish recovery.

The job loss during the Great Recession has meant that family incomes have dropped, poverty has risen, and adults as well as children have lost health insurance. The bursting of the housing bubble and the drop in the stock market has meant that family wealth has dropped dramatically, as well. This feature highlights the impact of the Great Recession on the labor market and on working families.

The expansion of the auto industry nearly a century ago fueled a growth spurt that made Detroit the fourth largest city in the country. By 1950, the population peaked at almost 1.85 million as people moved to Detroit to work at the Big Three auto companies: Ford, General Motors and Chrysler. But it was at the height of this prosperity that the manufacturers began to restructure, and the risks of the city's reliance on a single industry became apparent, according to Thomas J. Sugrue's essay "Motor City: The Story of Detroit."

First, there was decentralization. Strikes, inspired by union negotiations and a refusal by blacks and whites to work side by side, were halting progress, according to "Detroit, Race and Uneven Development," co-written by Joe T. Darden. Factories were built in the suburbs and in neighboring states so that if there was a protest in one factory, work could still continue elsewhere. But as the factories spread out, so too did the job opportunities.

When the industry then experimented with automation, replacing assembly-line jobs with machinery, tens of thousands of jobs were lost. The industry shrank even more during the energy crisis in the 1970s and the economic recession in the 1980s. And foreign competition caused profits to plummet.

As auto jobs moved elsewhere and the region aged, Detroit’s labor costs — retiree health care costs, especially — increased substantially.

Though other cities experienced their own booms and busts, Detroit suffered more because it didn't diversify, said Kevin Boyle, a Detroit historian who has written extensively about his native city. Places such as Chicago and Pittsburgh relied on other areas – like banking or education – beyond the industries that started their success.

The auto industry "was like Silicon Valley in the 1980s," Mr. Boyle said. It was doing so well, he said, that Detroit officials didn’t see a need to do anything differently.

Detroit’s
Reliance
on a
Single
Industry

By Amy Padnani

Detroit Assembly Line 1967
A workman adjusted a Ford Mustang at the final assembly line in a Detroit-area factory on Nov. 6, 1967. Preston Stroup/Associated Press

The
Automotive
Industry
Collapse

October 24, 2008

GM begins talks with Cerberus, Chrysler's owner, about a possible merger.

October 25, 2008

Chrysler announces plan to slash 25%, or 5,000 people, from its salaried workforce.

November 17, 2008

GM sells a 3% stake in Suzuki Motor Corp. for $230 million.

November 19, 2008

GM Chairman Rick Wagoner testifies to the US House to request a bailout "bridge" loan.

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Ford President Alan Mulally testifies to the US House to request a bailout "bridge" loan.

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Chrysler Chairman Robert Nardelli testifies to the US House to request a bailout "bridge" loan.

December 4, 2008

GM sells a 3% stake in Suzuki Motor Corp. for $230 million.

December 19, 2008

The U.S. announces a $17.4 billion lifeline to Detroit carmakers from the $700 billion Troubled Asset Relief (TARP) program. GM is to receive $13.4 billion and Chrysler $4 billion. Ford says it does not need a loan.

January 20, 2009

Fiat and Chrysler strike a deal giving the Italian manufacturer a 35 percent stake in exchange for access to technology and overseas markets.

February 17, 2009

GM and Chrysler request nearly $22 billion in additional U.S. government loans.

March 4, 2009

Ford announces it hopes to eliminate $10 billion in debt by giving cash and stock to debt holders.

March 19, 2009

The U.S. Treasury pledges $5 billion to aid auto suppliers crucial to the survival of the industry.

Mar. 30, 2009

The Obama Administration releases its determination that GM has not met viability conditions laid out in the Dec. 31, 2008 loan agreement.

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Rick Wagoner announces that he will honor the Obama Administration's request to "step aside" as the CEO of GM

April 23, 2009

U.S. industry-wide retail auto sales decline about 33 percent in the first 16 days of April compared to a year ago, J.D. Power and Associates says.

April 24, 2009

GM draws another $2 billion in government aid.

April 27, 2009

GM offers its final plan to reorganize outside bankruptcy by slashing bond debt, cutting a further 21,000-plus U.S. jobs and emerging as a nationalized automaker under majority control of the U.S. government.

April 30, 2009

Chrysler files for federal bankruptcy protection with a plan to allow the United Auto Workers (UAW) to take control. Automaker Fiat and the US would be junior partners.

June 1, 2009

GM files for bankruptcy, declaring that it had $172 billion in debt. GM's bankruptcy is the second largest industrial bankruptcy in history behind WorldCom's 2002 filing.

June 10, 2009

As part of bankruptcy restructuring, an alliance forms between Chrysler and Fiat. The deal established a new company, Chrysler Group LLC, which is 55% owned by the United Auto Workers (UAW), 20%-35% owned by Fiat, and 8% and 2% owned by the US and Canadian governments respectively.

July 10, 2009

GM emerges from a 40-day bankruptcy protection after closing a deal to sell key operations to a new company that is 60% owned by the US Treasury.