What Killed Detroit?

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent Gardner“There but for the grace of God go I.” Big city mayors from across the country consider the plight of Detroit’s Mayor Dave Bing and wonder if they’ll be next. What killed Detroit? There must be someone or something we can blame for the staggering decline of a great city.

1. Henry Ford: Harvard economist Ed Glaeser notes that Henry Ford made it possible for workers to earn a middle class wage without a lot of education or training. Ford’s assembly line began manufacturing’s dominance of the national economy. In its heyday, Ford’s River Rouge plant employed 100,000 workers, most with only “on-the-job” training. Detroit, dominated by the auto industry, exemplified an era during which large corporations organized thousands of workers into a living machine.

Although Henry Ford’s innovation made it possible for workers to live the American Dream in the 20th century, it put Detroit at a disadvantage in the knowledge-and-innovation-driven economy of this century. Glaeser notes that in 1970, the share of San Francisco’s adults with a bachelor’s degree or higher was twice the rate of Detroit’s (18% v. 9%). The disparity has only gotten worse over time. By 2011, the share of adults nationwide with a bachelor’s or better was 28%, compared to 13% among Detroiters and 52% in San Francisco.

Mass production also spawned the big corporation, also particularly characteristic of Detroit. Big firms nurtured a risk-averse managerial class (profiled by William Whyte in his 1956 book, Organization Man). Compounding the disadvantage of low educational attainment, the auto industry left a scarcity of risk-taking managers.

2. The Japanese: My fellow Baby Boomers will remember when “Made in Japan” meant “buyer beware.” Early Toyota and Honda auto imports were far inferior to Detroit’s products. That didn’t last long—the Japanese were the first to embrace the quality movement. When oil prices rose 37% from 1973 to 1974 and nearly doubled from 1978 to 1980, small Japanese cars took the nation by storm. It took Detroit’s risk-averse corporate managers a long time to catch up. Big Auto was caught up in a battle for its own survival and had nothing to offer Detroit.

3. The United Auto Workers: The UAW did its job well during the glory days of the American auto business. With a dominant position in the world car market, Detroit’s manufacturers could well afford higher wages and better benefits. The collective bargaining agreements not only enshrined good compensation for workers and retirees, they also shifted a level of management control to the union. Collective bargaining agreements are designed to insulate workers from arbitrary decisions by management. But these agreements also slowed the pace of innovation by management as they attempted to respond to the Japanese threat. When Japanese firms bowed to pressure from Washington and established assembly plants in the U.S., they built these plants far from union power.

The example set by the UAW spilled over into public sector collective bargaining, spawning powerful contracts that promised generous pay and benefits for city workers, promises that are difficult to retract when they are no longer affordable. Kevyn Orr, the Emergency Manager appointed by the State of Michigan to oversee Detroit’s finances, reports that benefits other than pension (mostly health care) represent an estimated $5.7 billion liability.

4. Racism & Isolation: The 1960s were particularly turbulent in Detroit. Riots in July 1967 left 43 dead. Black Detroiters who attempted to move out of the city found white suburbanite resistance, often violent. As Detroit became majority African American, the voters elected Coleman Young as Detroit’s first black mayor. A labor organizer and civil right activist, Young was mayor from 1974 to 1993. Daniel Okrent, in a 2009 Time retrospective, wrote that “Coleman Young was a talented politician who spent much of his 20 years in office devoting his talents to the politics of revenge. . . . Young was at first fairly effective, when he wasn’t insulting suburban political leaders and alienating most of the city’s remaining white residents with a posture that could have been summed up in the phrase ‘Now it’s our turn.’ ” While his perspective was understandable, a legacy of Young’s mayoralty was a city that was even more isolated—both culturally and economically—from its suburbs and the state. Animosity between Detroit and the state’s white political establishment was very much in evidence in the events leading up to the bankruptcy.

One of the lessons from Detroit is that big cities can’t go it alone. Without the power to adjust its borders, Detroit became ringed with suburbs ready to receive firms and residents frustrated with often-dysfunctional city government and the social problems of concentrated poverty. The city’s current problems are beyond its power to correct. Governor Rick Snyder was right to intervene, as all Michiganders have a stake in Detroit’s survival. Despite Snyder’s claims to the contrary, the state’s intervention will likely include money. That said, any investments in Detroit must aim at recreating a viable, independent economy.

Was Detroit’s decline inevitable? Cities do rise and fall as underlying economic conditions shift. In the 13th century, when economic power was based on shipping and trade, Venice was the most powerful city in Europe. While a lovely place to vacation, Venice is no longer an economic powerhouse. While many of its wounds are self-inflicted, Detroit’s economy was certainly in the wrong place at the wrong time.

That said, the policy response to Detroit’s problems has been ineffective, even counterproductive. As Ed Glaeser grumbles, many of Detroit’s most visible efforts at renewal focused on building things—Coleman Young’s People Mover monorail, for example—rather than building people. The Detroit Free Press estimated in 2011 that the People Mover cost the city $3.50 per rider, adding to an annual budget deficit running at $100 million. Detroit’s estimated $18 billion debt burden can be partly attributed to debt on capital construction and partly to ongoing operating deficits like these.

Can Detroit recover? There are signs of life downtown. The state’s economy is in better shape than it has been in years, partly because the auto firms are healthy again. Bankruptcy will permit the city to walk away from some of its obligations. But Detroit needs some serious shrinking. Low-density, gap-toothed neighborhoods are crime-ridden and unappealing, while costly for the city to service. Recovery will be slow in coming.

Detroit’s bankruptcy sets a troubling precedent for the nation. The municipal bond market has long behaved as though public sector bankruptcy would never really happen, leading to a lower cost of borrowing for the public sector. Along with Stockton and San Bernardino, Detroit belies that notion. What to do? Cash injections from the state and federal governments can only be a stopgap. Cities need functioning economies. And while building things is nice, building people is the only lasting solution:

  • We’re back to the hard work of improving public education, one school at a time, one child at a time. Charter schools play an important role in Detroit, educating 46% of Detroit’s 122,000 school children. Training for adults goes hand-in-hand with effective K-12 education.
  • Entrepreneurs must be empowered. El Guapo, a food truck operator, finally secured a permit in 2011 and blazed a trail for others, City Council should seek ways to spur other small business development. Housing rehab might be spurred by relaxing building codes and permitting requirements.