General Motors Company (GM), Ford Motor Company (F): What a Bankrupt Detroit Teaches Us About Investing

In 1948, Secretary of Commerce Charles Sawyer called Detroit’s automobile industry “a symbol of the way in which the American economy could best provide the average American with a steadily increasing abundance of the things he wants and needs.”

Two weeks ago, Detroit filed for bankruptcy.

Pundits this week pointed fingers at a city that promised too much, spent with abandon, and relied heavily on a single industry. They cite a poorly run government, myopic city planners, and even fraud. In most cases, they are right.

But the largest driver of Detroit’s demise is a simple, startling fact: The city’s population declined 65% in the last six decades. No city can survive such an exodus. It’s actually amazing Detroit’s finances lasted this long.

The Motor City was home to 1.9 million people in 1950, at the time nearly identical in size to Los Angeles. Today, 700,000 inhabit Detroit, or less than a fifth the size of L.A. That works out to 2.2 people leaving Detroit every hour, 24 hours a day, for the last 63 years. If the number of people who left Detroit in the last 60 years formed their own city, it would be the nation’s ninth largest, ahead of Dallas, Texas.

The financial woes linked to Detroit’s shrinking population have been known for decades. A 1991 article in the Times-News was prescient: “Detroit’s population loss could be financial disaster,” it wrote.

And Detroit tried to avoid its fate. Total city spending was cut by more than $1 billion, or 33%, between 2006 and 2010, including a 77% reduction in “recreation & culture” spending, a 72% cut in capital outlays, a 41% reduction in spending on roads, and a 44% cut in “health & welfare” spending.

But the city made pension promises during a period when its taxpayer base was more than twice the size it is today. With an unemployment rate of 16% — more than double the nationwide average — there is a shrinking base of workers left to tax. With a median income of $27,000, or about half the nationwide average, those who are employed have little income to tax. According to Detroit News, nearly half the city’s 305,000 properties didn’t pay their tax bill last year. Seventy-seven city blocks had only one owner who paid property taxes in 2012. You cannot run a city like this.

What Detroit’s fall means for investors may be more symbolic than direct.