Most people writing about the shrinkage and bankruptcy of Detroit have highlighted the obvious cause of the problem: political and fiscal promises that the city could not afford. One of the best is by Mark Steyn:
Detroit was the industrial powerhouse of America, the “arsenal of democracy,” and in 1960 the city with the highest per capita income in the land. Half a century on, Detroit’s population has fallen by two-thirds, and in terms of “per capita income,” many of the shrunken pool of capita have no income at all beyond EBT cards. The recent HBO series Hung recorded the adventures of a financially struggling Detroit school basketball coach forced to moonlight as a gigolo. It would be heartening to think the rest of the bloated public-sector work force, whose unsustainable pensions and benefits have brought Detroit to its present sorry state (and account for $9 billion of its $11 billion in unsecured loans), could be persuaded to follow its protagonist and branch out into the private sector, but this would probably be more gigolos than the market could bear, even allowing for an uptick in tourism from Windsor.
If Detroit had continued to grow, if the auto industry had expanded, the city probably could have supported the growth in bureaucracy with a growing tax base. There would have been less desolation, with fewer unemployed persons drawing on public service, and there would have been a more tax revenues to cover the expenditures.
What I am saying is, it wasn't just the liberal policies of raising the height of the social safety net and creating a bloated bureaucracy that sent Detroit spiraling downhill into de facto bankruptcy. It is too glib to blame just those folks and just those policies.
In 1960, when the big 3 automakers reigned supreme and Detroit was flying high, the automakers were under constant threat of anti-trust indictment for monopolizing the market for automobiles. They were making money hand-over-fist. Many economists saw the industry as a near-perpetual monopoly with insurmountable barriers to entry.
Understandably, to keep these high profits flowing, the auto companies sought labour peace with the unions and offered excellent compensation, along with solid benefits packages. The unions were successful because the auto firms had rosy outlooks with an expected long-term stream of high profits.
It couldn't last. Excessive profits provide a signal for other firms to enter an industry. The process was slow at first, and was not from potential domestic automakers; rather it was from foreign automakers, like Volkswagon, Morris, Cooper, Opel, and later Toyota and others.
The real change came, though, as North America faced sudden, sharp gasoline price increases in 1973 and again in 1979. The Big 3 automakers, although they had each brought out smaller, fuel efficient cars in the 1960s, were unprepared for the change. They were out-competed by Toyota, Honda, Datsun, Volkswagon, and later Hyundai.
But they were out-competed not just on the product and marketing side. They were also out-competed on the labour side. The newcomers set up plants in North America, paying less in overall labour compensation than the Big 3 paid. And that was the beginning of the end. The UAW and the CAW (auto worker unions) continued the good fight for higher wages and better benefits, while the big 3 were steadily losing market share to the new competition.
So as the Big 3 lost market share and scaled back production, Detroit got sick. Auto parts production was out-sourced. The newer companies built newer, more efficient plant and equipment. The exodus from Detroit continued, and it was not just an exodus from the city to the suburbs. It was an exodus from Michigan and the rust belt to other locations.
As the exodus proceded, the tax base in Detroit shriveled. And as the exodus proceded, the social safety net in place was called upon to serve increasing numbers of people. And as the exodus proceded, desolation, crime, dereliction, and declining public safety led to further exodus.
"What ifs" are always difficult. At the same time, though, the counterfactual can help shed some light on economic history, a lesson taught me by Bob Fogel.
- What if the Big 3 had not had so much market power in the 1950s and 1960s? And specifically, what if there had been no international trade barriers to importing automobiles? The auto industry would have been more competitive, automakers would have been less profitable, and they would have negotiated less-lucrative contracts with their unions.
- What if the unions and management had been able to be more flexible (though I have no idea how this might have happened, realistically speaking)? Would Detroit's auto business have been able to adjust more quickly and facilely to changing market conditions?
Had the auto industry faced more competition in the 50s and 60s and been more flexible in the 70s onward, one can readily imagine several outcomes:
- The exodus from Detroit would have been slower.
- The rigidities built into labour contracts and political structures would have been different and likely less encumbering.
- Detroit might not be bankrupt today.
All this is not to say that there wasn't idiocy leading up to the bankruptcy. Cities cannot expect to promise pensions and benefits that are escalating while their tax base is eroding, and most people saw this coming for years, if not decades. Cities cannot expect their state governments or the federal government to bail them out when they can no longer pay their bills. And municipal bond purchasers cannot always expect to receive 100 cents on the dollar for their bonds when they buy bonds issued by cities like Detroit.
But look back farther in time than the past 20-30 years, and you will see some of the seeds of Detroit's destruction.