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I'd been to Gary, Indiana before. In April 2009, when the Obama fiscal stimulus had just begun, the city's mayor had told me that all the city needed was $400m of stimulus money in order to "fly like an eagle and make our country proud".

To put this in context you have to know that Gary, home to what is still US Steel Corp's biggest plant, is suffering from one of the most advanced cases of urban blight in the developed world. Its city centre is near-deserted by day. The texture of the urban landscape is cracked stone, grass, crumbled brick and buddleia.

Gary is one third poor, 84% African American, and has seen its population halve over the past three decades. If crime, as the official figures suggest, has recently dropped off then - say the critics - that is because population flight from the city is bigger than the census figures show.

Gary in the end got $266m of stimulus money and has, according to the federal "recipient reported data" created a grand total of 327 jobs. That's $800,000 per job.

I went back determined to find out how the stimulus dollars had been spent; to get beyond the ideology and recriminations and see why President Barack Obama's stimulus has failed to turn the country around.

Because - if anywhere needs a stimulus it is Gary. If there were ever an easy win to be gained from state spending you would think it might be here.

David Tribby, professional photographer and son of a local steelworker, specialises in exploring urban decay. I persuaded Mr Tribby to take me into some of Gary's wrecked architectural masterpieces.

The striking thing is that they are all structurally dangerous and yet totally accessible. I did not have to cross a single piece of wire, tape or fencing to get in, nor did I encounter a security guard or dog patrol. The city seems to have given up even securing these ruins.

Urban dereliction

We toured the City Methodist Church - built in the 1920s with local stone. We stood on the once-sprung floor of the ballet studio in the Methodist School. We tramped through the remains of the post office, opened by Henry Morgenthau in 1936 as a New Deal reconstruction project, its wood-block floor coming apart; the peep-holes in the overhead walkway showing where Depression-era managers would check on the work-rate of the postal workers below.

I sat on the back row of the Seaman Hall, its seats creaking dustily, and imagined the young steelworkers and their girlfriends in the 1950s, playing Big Daddy and Maggie the Cat in an am-dram production of Cat On A Hot Tin Roof, whose playbill is still peeling off the stage door amid the crumbling stonework of the proscenium arch.

I stood where Frank Sinatra stood on the day he came to Gary in 1945.

It was a feisty occasion because hundreds of white Gary school kids had gone on strike against the right of black kids to swim one day a week in the same swimming pool, and share the instruments in the band room.

Ol' Blue Eyes cancelled a $10,000 gig, rushed to the Gary Memorial Auditorium, told the audience this was the most shameful event in the history of education, warned them he could "lick any S.O.B in the room" and then sang.

He did not, as in this 1945 propaganda film accuse them of being no better than a bunch of Nazis, but he did sing the song from that film - "The House I Live In" - a schmaltzy paean to what were then seen as core American values: religious tolerance and anti-racism. It was a film that would win Sinatra an Oscar, shortly followed, as the political climate changed, by a hounding from Senator Joe McCarthy.

What Sinatra fought against, three decades of industrial decline managed to complete. There has been "white flight" from Gary. More precisely there has been "middle class flight" - ie the salariat, including many of the steelworkers, has moved out, or moved into landscaped and patrolled communities on the edge of town.

Brink of bankruptcy?

So what's the story with Gary and the stimulus? The mayor believes the city is "last in line" when it comes to federal money - because the money is dispensed via the state of Indiana, which is Republican controlled. Mayor Rudy Clay tells me:

"I guess they thought, well, Gary voted in large numbers for the president, enabling him to take the state of Indiana, so he will look after them."

But it is more complex - Gary's public finances are a mess. It owes tens of millions of dollars to other entities. Its great get-out-of-jail card - tax revenue from casinos - turned out to be a busted flush. Its convention centre is dark most of the time. The one-time Sheraton Hotel, right next to the City Hall, is derelict.

With no ability to raise a local income tax it is reliant on property tax. But the State of Indiana passed laws capping tax raising powers, so by 2012 Gary's tax income from property will halve.

At that point, according to the fiscal monitor appointed by the city, it will lack the revenue to fund even its police, fire and ambulance services. The monitor calls for much of the rest of Gary's services to be privatised - but as city officials point out, once privatised they cannot enforce job guarantees that allow the city to employ local people. Says the monitor, bluntly:

"The city will simply have to give up some long-standing - and often important - services that are the responsibility of other governments, even when it is likely that those governments will not provide the same level of service."



In summary, Gary is about two years away from bankruptcy and is being forced to cut taxes and cut spending even as the federal government tries to pump money through.

In this context, with the stimulus money not available to fix the core financial problem, the results were always going to be patchy.

In the event the stimulus dollars have mainly gone to a one-off schools re-organisation project - you can see some of the results of that in my report tonight - and to street renovation, and beefing up the arsenal of the local police. Gary's police have to combine The Wire style policing with a kind of armed social work amid a Gary's night-time chaos of "recreational shooting" and domestic disputes.

Philosophical divide

When I speak to the Republican governor of Indiana, Mitch Daniels, about Gary's plight, he is blunt. He blames Congress for micromanagement of where the stimulus could be spent. Could nothing more have been done?

"If there been more flexibility about the funds [from the US Congress], it could have, but I think it's important to be charitable here - Gary has been a disaster for many, many years. It is a tragedy what has occurred there and in some other cities here in the US. There wasn't going to be an immediate turn around, no matter how many borrowed dollars you showered on the place. "



But, how can you enforce fiscal austerity on a place like Gary, at the same time as the official policy of the federal government is to reflate the economy? Surely, I ask Mr Daniels, something has to give? He says:

"Gary's the most extreme case that you could find in our state, but there are many others that are a lesser version of that same story, and as I say to those communities - their leaders - all the time: people aren't leaving here because you didn't tax them enough, because you didn't spend enough money on this or that public service - they left because you taxed them too much or you simply did not create the conditions for a private sector to flourish."



And that brings you right back up against the philosophical divide in American politics.

Large parts of the Indiana population believe all taxpayer dollars spent on Gary are wasted. Some Republican candidates in the 2 November election are standing on the explicit message that there has been no positive impact at all from the stimulus.

Whereas in Europe, and even parts of Asia, the national government would have taken charge of vectoring regeneration money to a place like Gary, the US does not seem in a mood to do public regeneration.

Uncertain future

Gary's city officials are well aware that there are templates for resurrecting their city, and they've got the basic first steps defined - demolishing 3,000 derelict homes, installing new street lights. The stimulus money applied for in each case has been slow in coming and less than asked for. Beyond the ideology, the American public sector seems very poorly geared to spending money, full stop, despite being in charge of quite a lot of it.

Gary's uncertain future fascinates economists and urban planning experts - along with cities like Detroit and Flint in Michigan it is in danger of just being reclaimed by nature. One of the black community leaders I met in Gary was passionately advocating that they simply raze whole blocks to the ground and set up urban farms.

When you go into the wreck of the Palace Theatre on Gary's Broadway - just across from the wreck of VJ Records, which released the Beatles' first ever single in the US - you get a sense of the splendour of an industrial community at its height.

When it opened, the theatre - like so much of Gary's architecture, built in the "Mission Revival" style - contained blue fountains and crushed velvet, each seat arm moulded into a Moroccan-style arch.

In the orchestra pit there is a squashed grand piano, made in Chicago by Adam Schaff, surely the original one installed there in 1927. I banged its grime encrusted keys and discovered to my astonishment that, amid the clunks and groans, a clear D-sharp three octaves above Middle C.

It took just a single century for Gary to rise and fall. Its people still carry that relaxed pride you find in black communities across the industrial mid-West. It's a developed and quite mature urban culture - where everybody seems to know each other, an edgy community but not really a broken one, despite the night-time drug and gun antics of some young men. Go into the schools and you can feel that its spirit is not broken. What is broken is the landscape.

If it is ever one day fixed we will know that America has found a way to cope with the urban collapse that comes with industrial decline. Conversely Gary may be just the first leafy oasis of a post-industrial dystopia that awaits, maybe a century down the line.



Watch my report from Gary on Newsnight at 2230 on Tuesday 12 October 2010. Or catch it afterwards on the BBC iPlayer. On Wednesday I explore the new penury of America's middle class - and the political discontent it is stoking up.