With shrinking tax revenues, industrial decline and a political stand-off, the town is a symbol of a nation's crisis – some of it self-inflicted. Paul Harris reports

Scranton is the setting for the hit American version of the sitcom The Office. Not many people in this beleaguered city are laughing any more.

A former industrial town of 76,000 citizens, nestling amid the rolling wooded coal country hills of north-eastern Pennsylvania, Scranton is in crisis.

Its political system is deadlocked. The city coffers are virtually empty and its debts are huge. Last week the pay packets of all its municipal workers – including firemen, police and the mayor – were slashed to the minimum wage of $7.25 (£4.70) an hour. That effectively equates a life-saving Scranton fire chief with a burger-flipper elsewhere in the US. Not surprisingly, many expect Scranton to go bankrupt soon.

And Scranton is far from the only American community to face this dismal prospect. In the past month three Californian cities – San Bernardino, Stockton and Mammoth Lakes – have all gone bankrupt. Some experts have warned that a wave of municipal bankruptcies is set to sweep the United States as towns, cities and counties plunge into a fiscal black hole, collapsing under the weight of huge debts and reduced revenues. Last week Michael Coleman, a fiscal policy adviser to the League of California Cities, warned in the Los Angeles Times that some smaller cities in his state "may cease to exist".

That sort of scary talk does not convince everyone. But it certainly rings a bell with proud Scrantonian Gary Lewis, 26. The financial consultant, whose family are fifth-generation Scranton residents, saw his city as a harbinger of a crisis to come elsewhere in America.

"Give it a couple of months. This is the first domino. This is the leak that indicates the dam is breaking," he told the Observer. Lewis runs a respected financial blog on Scranton's fiscal crisis. He has calculated that on 5 July the city had just $5,000 cash in hand. "If this city was a private company, they would be liquidating," he said.

Scranton is a symbol for an age of economic crisis in America. There is not one simple factor that has caused Scranton's problems, but it has instead been hit by a perfect storm of issues that are facing many similar communities.

The most obvious is industrial decline. Along with many once proud factory towns, Scranton has been hit by jobs going abroad and a collapse in manufacturing. Dubbed "the Electric City" by hopeful city marketers – it had the first electric trams in America – Scranton has seen its population almost halve since 1940. Critics say the city government has not adjusted to its reduced size, keeping up wage, retirement and healthcare commitments that it no longer has the revenue to pay off. At the same time, debts have racked up and policy mistakes have been made that have wasted millions. Yet, like so many politicians across the US, many on the city council have refused to approve the raising of taxes that would stave off fiscal catastrophe.

In the era of the anti-government Tea Party, talking about tax rises in America remains politically dangerous, even in the face of bankruptcy.

So Scranton finds itself in a fiscal mess with a dysfunctional and squabbling political system that is struggling to find an answer: a miniature version of what many believe has happened to America as a whole. Mayor Chris Doherty no longer attends council meetings, so bad are relations with the city council. He slashed wages to the minimum despite a judge ruling that he could not do so. But his action prompted the municipal unions to sue in court. He is desperate to raise taxes. The city council refuses.

Whatever the rights and wrongs, it hardly presents a picture of unity in the face of adversity. "It seems like they can't just sit down together and work out a compromise," said JoAnn Fremiotti, a supply teacher, as she drank coffee in Scranton's grand main square. The newspaper she was reading bore the headline "We failed". The reference was to a local college child abuse scandal but it was not much of a stretch to read it as expressing a more general despair. Some of Scranton's problems have been farcical and self-inflicted. For example, a key part of a recent Doherty recovery plan for the city centred on the $5.4m sale of the city's stormwater pipes. Yet, as the sale was being readied, it was discovered that the city had not actually owned them since the 1960s.

Not all experts are pessimists, however. In the aftermath of the recession, many American cities have reacted by desperately trying to get their fiscal houses in order. Richard Ciccarone, managing director of McDonnell Investments, is a specialist in tracking the finances of distressed American cities. He maintains a powerful – and lucrative – database that details their debts. He expects more city bankruptcies in the coming months, but nothing that will threaten the economy. "I don't think we are going to see this become a systemic risk," he said.

Ciccarone believes that most American cities are on a sounder financial footing now than two years ago because they have been building cash reserves to stave off the sort of crisis moments that Scranton, San Bernardino, Stockton and Mammoth Lakes have been caught up in. "Many cities have built up their cash reserves and cut their budgets," he said.

But there is a devil in that detail that is already playing out in Scranton: cutting budgets. Slashing wages and services and government budgets might save you from bankruptcy but it comes at a social cost.

In Scranton, fire service and police bosses have complained that their members have had to cancel holidays and go on food stamps while their mortgages are at risk of going unpaid because of slashed wages. Fremiotti sees it too: in the struggling education system where she teaches and the judicial service where she volunteers. She has also noticed a more obvious impact in the shape of potholes that can seriously damage a car. "Last winter I lost four tyres," she said.

The same is true elsewhere in America. In Detroit, which is hit by a deep crisis but has staved off bankruptcy, the city government is shutting schools, razing abandoned areas and even turning off streets lights in whole neighbourhoods in a desperate bid to save cash. In Camden, New Jersey, which is one of the most blighted cities in America, almost half the police and a third of firefighters have been laid off. No one who has seen Camden's rows of burnt-out houses and walked its dangerous streets can imagine that it is a city that can socially afford such drastic measures.

Those sorts of figures add to a growing sense of American economic decline and worries over a political system unable to cope with growing inequality, vast debts and an inability to generate more revenue. Fremiotti sees the debate in Scranton as being one the whole country needs to have about what people are willing to pay for and that they must face up to the idea of either accepting higher taxes or a lower level of help and services. "It is much broader than just Scranton. It is the whole of America. It is a global issue," she said.

That may be true. But there is little sign of a political endgame in sight, for either Scranton or America. Instead, recovering from an era of huge borrowing by cities and citizens alike, and the bursting of one of the biggest bubbles in economic history, it seems easier to find people to blame rather than face up to some solutions.

Fremiotti simply feels everyone had their part to play. "Nobody coming in from a foreign country could have sabotaged our systems as well as we did ourselves," the teacher said.

© Guardian News and Media 2012

[A welcome sign at the Pennsylvania state line, via Shutterstock.com.]