Illustration by Tom Bachtell

If you were to visit the Detroit Institute of Arts, home to Diego Rivera’s magnificent murals depicting scenes at the Ford Motor Company in the early nineteen-thirties, and then take a stroll through the surrounding streets, you might be surprised at what you would find: coffee shops frequented by young hipsters; old warehouses being converted to lofts; bike racks; houses undergoing renovation; a new Whole Foods supermarket. After decades of white flight, black flight, and urban decay, Detroit is being spoken of, in some circles, as “the new Portland,” or “the new Brooklyn.”

This gentrification extends only to a relatively small area, but it is worth keeping in mind when reading about the city’s bankruptcy filing—by far the biggest municipal-bankruptcy case in U.S. history. Detroit, as everyone knows, has a lot of problems. Great swaths of the city have been left to crumble, or return to pasture. There are some sixty thousand parcels of vacant land and seventy thousand empty buildings, including the majestic Michigan Central Station, a cousin to Grand Central. Detroit’s seven hundred thousand inhabitants—more than eighty per cent of whom are African-American—are plagued by crime and deprived of many basic services. Nearly forty per cent live in poverty.

Detroit is broke—it can’t even afford batteries for its parking meters—and broken. But other industrial cities, such as Pittsburgh, have come back from near-death experiences. What is needed is a comprehensive and adequately funded plan to stabilize the city’s finances, repair its public infrastructure—almost half the street lights don’t work—and raze its semi-abandoned neighborhoods, consolidating its population into a smaller, more manageable area. (At the moment, Detroit sprawls across a hundred and thirty-nine square miles, more than Boston and San Francisco combined.)

Rick Snyder, Michigan’s Republican governor, foisted the bankruptcy proceeding on the city. But the federal bankruptcy judge on the case, Steven Rhodes, can’t solve Detroit’s crisis alone. (Last week, he stayed efforts by city unions and pension-fund managers to block the proceeding.) Neither can Kevyn Orr, an attorney who represented Chrysler during the auto bailout, and whom Snyder appointed last year as the city’s emergency financial manager. The post carries near-dictatorial powers, and the overwhelmingly Democratic citizens of Detroit opposed it in a referendum last November. As things stand now, the proceeding could degenerate into an exercise in privatization, union busting, and the imposition of further sanctions: Orr proposed that the unfunded portion of the city’s health-care and pension benefits be cut by up to ninety per cent.

Contrary to what some commentators have been arguing, however, Detroit’s troubles can’t be traced simply to bloated payrolls and intransigent public-sector unions: decades of deindustrialization are the main culprit. The population peaked in 1950, at 1.85 million. Since then, as the auto industry declined, and almost all the city’s white residents moved to the suburbs, the population has dropped by about sixty per cent. The city’s payroll has fallen even faster. In 1951, Detroit employed nearly thirty thousand people. Today, it employs about ten thousand five hundred people, and their salaries and their benefits are hardly extravagant. Since 2010, through furloughs and other measures, the city has cut its employees’ wages by close to twenty per cent. The average municipal pension is nineteen thousand dollars a year.

As the city spiralled down, real-estate prices collapsed, decimating the property-tax base. The Great Recession of 2008 was the final blow. Today, the median price of a house in Detroit is less than ten thousand dollars, and the taxable value of the entire city is less than eight billion dollars. Like many other cities, Detroit is also facing sharply rising costs for providing its employees with health care, which it has been funding by issuing more debt. The city’s outstanding liabilities currently amount to eighteen billion dollars. The bankruptcy proceeding, by reducing the city’s heavy debt burden, could eventually play a constructive role in a broader rebuilding effort. Meanwhile, under the direction of Judge Rhodes, all the city’s stakeholders—including the bondholders and the pension funds—will be forced to take more financial hits, and some of the city’s assets, such as the zoo and the hockey arena, could be sold off. But shouldn’t one of America’s iconic cities be rebuilt, rather than picked apart? If so, it is going to require the leadership, and the financial support, of the federal government.

Earlier this month, in the Times, Steven Rattner, who was the Obama Administration’s point man on the auto bailout, noted that people living in Detroit are no more responsible for their woes than are people who live in parts of the country devastated by Hurricane Sandy, areas that were awarded tens of billions of dollars in federal aid. A formal bailout is unlikely. Congress was persuaded to rescue the banking system because of the threat of the crisis spreading to other parts of the economy. Detroit, unlike Citigroup and the Bank of America, has not been deemed too big to fail. Still, the Administration can do more than just shrug and say, as it did last week, that “this is an issue that has to be resolved between Michigan and Detroit and the creditors.” That stance amounts to ceding the initiative to Governor Snyder and his conservative supporters, some of whom see the bankruptcy as a template for showdowns with public-sector unions across the country.

President Obama should stress the necessity of shared sacrifice, and push the state of Michigan to take on more of the city’s fiscal responsibilities, perhaps by offering it more federal aid. Once all the parties come to an agreement, the federal government could also help with the tasks of downsizing and of rebuilding roads and schools, and taking other measures to attract businesses and families. Congressional Republicans will almost certainly refuse to coöperate, in which case the Administration could pursue means to use existing budget sources, the way it—and the Bush Administration—used TARP funds to finance the auto bailout.

Last week, the President, in laying out his economic agenda, talked about the need to repair the country’s infrastructure. Where better to start than in Detroit? By the standards of the banking and auto bailouts, the sums involved are small: the banks received seven hundred billion dollars; the auto companies eighty billion. Already, there are hopeful signs. The auto industry has turned a profit and repaid much of the federal monies. And hipsters and artisans aren’t the only ones moving in: firms such as Blue Cross/Blue Shield; Quicken Loans, an online-mortgage lender; GalaxE.Solutions, a tech firm; and the insurance company Title Source have also recently arrived. Americans of all ages are increasingly eager to live in urban environments: a smaller, rebuilt Detroit could eventually thrive. “I speak of new cities and new people,” Obama said last week, quoting Carl Sandburg. Here’s an opportunity to turn words into deeds. ♦