Authors

Economics

Motown breaks down

The 2,500 seat Eastown Theatre hosted The Who and The Kinks. The Cass Tech High School taught Diana Ross and John DeLorean. Michigan Central Station, almost 100 feet long, 230 feet wide, and graced with 14 grand marble pillars, once had Franklin Roosevelt, Charlie Chaplin, and Thomas Edison pass along its platforms.

Nowadays these buildings are just three of the 78,000 abandoned and blighted structures in Detroit. Reminders of a bygone golden age, the authorities can’t afford to demolish them.

The decline and fall of Detroit, which recently filed for bankruptcy, is a staggering tale. In 1950 Detroit was home to 1,849,568 people, hundreds of thousands of them working in the booming motor industry. In 1955 80% of the planet’s cars were made in America, 40% by Detroit-based General Motors alone. GM’s German subsidiary, Opel, was only a little smaller than the largest non-American car maker, Volkswagen. And Toyota only built 23,000 cars that year compared to GM’s 4 million. In the 1950s the Detroit area had the highest median income and highest rate of home ownership of any major American city.

But as they grew together, so they died together. Between 1955 and 2000 global car production increased by 273% but the US motor industry saw little of that action, increasing its output by just 39%. Even at home, despite a hastily erected wall of tariffs and quotas, US car companies lost market share; between 1970 and 2000 Japanese car companies’ share of sales in the US rose from less than 5% to 30%. In the same period the share of US car manufacturers fell from 86% to a little over 50%.

The reason was productivity. In 2005 the average Toyota worker produced 16% more cars than the average GM worker and a staggering 128% more than the average worker at Daimler/Chrysler. Toyota made a profit of $12.5 billion, GM a loss of $10.9 billion.

In part as a result of the demise of the motor industry, less than half of Detroit’s over 16s are now employed. And as the jobs disappeared so did the workforce. In 2010 the population was down to 713,777, a fall of 61% in 60 years.

But the city’s government was left with the spending commitments and liabilities it had incurred in the not-so-bad times. One half of Detroit’s $18 billion debt is made up of pension and healthcare spending commitments to city employees. The share of city revenues being spent on debt servicing, pensions, and retiree healthcare has risen from 30% in 2010 to 40% today. It is forecast to rise to 65% by 2017.

The city tried to fund these commitments with higher taxes. Detroit imposes a per capita tax burden on its residents 80% higher than neighbouring Dearborn even though its residents have a per capita income 33% lower. Detroit residents face the highest property tax rates of any similarly sized city in Michigan, but with 3 bed, all brick, colonial houses on the market for under $10,000 many don’t bother paying. Nearly a third of property tax owed in Detroit went uncollected in 2011.

So Detroit slashed spending, even on ‘core’ functions of government. 40% of streetlights don’t work and aren’t being repaired. Last winter just 10 to 14 of the city’s 36 ambulances were in service at any time, some with enough miles on the clock to have circled the planet 10 times. In February, Detroit fire fighters were told not to use hydraulic ladders unless there is an “immediate threat to life” because they hadn’t been inspected in years.

But even with this, spending commitments without the tax base necessary to fund them have caused Detroit to add $700 million to its debt in the last seven years and brought it to bankruptcy. This is a real American horror story.

Is the death of Detroit “just one of those things” as Paul Krugman wrote on Monday? Or are there lessons to be drawn for the rest of us?

The essential problem of Detroit, that for decades its leaders have been writing cheques their tax base can’t cash, is true now to varying degrees of all western governments facing ageing populations. As I wrote elsewhere late last year

America’s unfunded liabilities (including Medicare, Medicaid and Social Security), rose by $11 trillion last year to $222 trillion. To put that in context, the entire US economy is just $15 trillion, of which $3 trillion a year is paid in tax. If you expropriated all the wealth of the richest 400 Americans…the $1.7 trillion you would get wouldn’t make a dent.

In Britain the Office of Budget Responsibility reported last week that with zero migration the costs of an ageing population would push government debt up to 174% of GDP by 2062. To hold it where it is Britain would need, the OBR estimates, immigration of 260,000 people a year.

Like the ruins described by Shelley’s “traveller from an antique land” the ruins of Detroit are a warning of hubris and complacency, of the belief that it’ll never happen to us. We should heed the warning.

5 comments to Motown breaks down

  • chuck martel

    As long as, in the bizarre democratic-republics, public employees and the employees of contractors that serve the government are allowed to vote, success stories like Detroit are inevitable.

  • I’m sure there is something in what you say, but there’s something else going on and as follows.

    The laws of comparative advantage dictate that free trade is desirable because it brings a net increase in world GDP. However those laws (as I understand them) do not guarantee that any particular individual or firm or city will gain: indeed they may very well lose out.

    In the case of America’s relatively free trade with the far east over recent decades, the result has been huge gains for the far east (e.g. China’s output per head has skyrocketed). But the gains for America have been more questionable. According to some, real wages for the bottom third in the US have not increased in the last 20 years or so: that bottom third now effectively competes with Chinese citizens paid a quarter as much. And Detroit is just an extreme case of that phenomenon.

    So what to do? America could in theory have implemented smarter trade agreements. But that’s very tricky. My hunch is that free trade is the least bad option even if it results in the odd Detroit or two.

  • Paul Marks

    Detroit was chosen (some 50 years ago) as the poster child for leftist policy (both government spending and government planning) it was to be the example for the rest of America (indeed the rest of the Western world) to follow. Or course union power had already been established (by the Wagner Act and other government legislation – and by the failure of Michigan to counter this with a Right-To-Work law, a failure the State Legislature in Michigan has now acted upon, more than half a century too late…..

    The decline of Detroit has nothing to do with free trade. Even if the rest of the world did not exist, production of goods and services would still have moved out of Detroit (to other parts of the United States) for the above reasons.

  • Craig Howard

    America could in theory have implemented smarter trade agreements. But that’s very tricky. My hunch is that free trade is the least bad option even if it results in the odd Detroit or two.

    America’s problems seemingly resulting from free trade are a result of ever-increasing taxes and regulation. It’s true that some American industries would have shifted overseas, but in a healthy economic climate, the capital freed up would have been invested in other industries the Americans excel at.

    Instead, that capital has largely headed overseas as well. It’s our own damned fault, but no one will admit it. Easier to blame free trade. In fact, on one conservative discussion board, I’m often labeled a “free traitor” for my efforts to convince others of its merits.

  • Paul Marks

    Yes Mr Howard.

    As I said – even if the rest of the world did not exist, Detroit would still have gone bankrupt.

    As production (and productive people) would have moved to other parts of the United States.

Leave a Reply

 

 

 

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Please leave an intelligent and civil reply in your own name.