Fiscal emergency declared in Detroit

An article in the FT today reports that “The governor of Michigan declared a fiscal emergency in Detroit on Friday, clearing the way for the appointment of an outside manager with broad powers to oversee the finances of the debt-ridden city. The emergency manager could recommend a bankruptcy filing if he or she found the city’s fiscal problems were insurmountable. If Detroit took such a step, it would be the largest municipal bankruptcy in US history.”

The article is illustrated by the photograph above, with vacant derelict land and skyscrapers behind. It tells its own story.

The old industries might be finished but the economy of the city still has a momentum. If vacant sites exist alongside others with skyscraper developments, it can be concluded that the land market is dysfunctional. Skyscrapers are an expensive way of providing floor area and nobody would do it if land was not in short supply. The vacant and underdeveloped land in the foreground demonstrates that the land shortage is artificial. This in turn can be ascribed with confidence to speculators who are holding it out of use, hoping to make their killing later. It can also be assumed with confidence that there is no significant amount of tax on vacant land, or the owners would not be acting in this way and the municipality would not be broke.

If Detroit would reform its property tax so that it was levied on current site rental values only, it would soon find that (a) its financial difficulties would be largely solved, and (b) business activity would start to increase. It would not entirely solve the problem because other taxes, including sales taxes and Federal income tax would continue to do their mischief, with their worse effect being on locations which are already in difficulties.