What the heck happened to Detroit?

Detroit population by year.

Detroit was first settled by the French in the 1670s as a fur trading outpost. It was formally established in 1701 by Antoine Laumet de La Mothe, sieur de Cadillac, who constructed a fort to assert French interests against the British (and became the namesake of a famous American luxury car).

Strategically located on a long narrow waterway connecting two of the Great Lakes, Huron and Erie, Detroit is named by the French word for strait, détroit. It is a cruel irony that Detroit is both named by a strait and is, economically, in dire straits. It was a long story, peaked by strength and glory, but ultimately ending in ignominy and bankruptcy.

Detroit became famous for manufacturing automobiles, and that required steel and labor. Both were readily available, with workers flocking to the city from all over the country. Situated within a golden triangle of easily accessible natural resources, Detroit was able to tap into iron ore in Minnesota, coal in Pennsylvania and Ohio, and limestone in Michigan. A network of canals, railroads, and lake shipping made all the components of steel cheap to find and transport.

Not one to depend on the vagaries of supply, Henry Ford built the huge Rouge River complex to manufacture steel and glass, produce electrical power, cast engine blocks, and otherwise keep his Detroit production lines humming. Detroit in the 1950s reached its apex with a population approaching two million and hundreds of thousands employed in the auto industry. The days of “Leave it to Beaver” and the new Ford Thunderbird were idyllic, prosperous, and exciting. But it would never be so good again.

On July 18, 2013, Detroit declared bankruptcy. The city suffered a spectacular failure, with debt estimated as much as $20 billion. From a peak of nearly two million, the New York Times portrayed the city as “home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.” Crime was rampant. The disaster was immense.

PBS Newshour on December 13, 2013, presented an investigation into the causes of Detroit’s collapse. In a program titled “How Detroit Leaders Ignored Causes of Bankruptcy for 65 Years,” economist Dr. Lew Mandell delved into the precipitous decline.

One major factor was the slowness of the Big Three auto makers to respond to the demand for small, fuel efficient cars following the Arab oil embargo in 1973. This created a huge opportunity for upstarts Toyota, Honda, and Datsun (Nissan today). Ford, GM, and Chrysler offered a weak slate of small cars with poor options and not-so-good fuel economy. The die was cast.

But there was a more serious problem. The Big Three were supported by a raft of other small manufacturers. According to Mandell, they became very discontented.  “Manufacturers, other than the big-three, felt so poorly treated by state and local government in terms of high business taxes, oppressive worker’s compensation laws and hostility to business that many were ready to move elsewhere.” And indeed they did.

With the departure of businesses came an inevitable increase in unemployment. Mortgages were foreclosed, houses abandoned. Crime rates soared. Whites escaped to the suburbs. Middle class blacks did as well. Vast sections of Detroit became a wasteland as the tax base evaporated. Huge commitments to public union pensions, with little income to fund them, made bankruptcy inevitable.

A sad story with no redemption except, perhaps, in learning a lesson. Mandell reviewed studies of business climate and found that Detroit and Michigan made employers unwelcome. Onerous regulations and taxes burdened employers to the extent that they simply left. Atlanta and Charlotte and many other cities were the beneficiaries of Detroit’s burdensome policies. While the anti-capitalists among us may hate business, it is clear that Detroit fervently wished it had kept some.

Locally, there is another great example. According to a recent Forbes survey of business climate by state, Massachusetts ranks 13^th while Michigan is 47^th and Rhode Island 48^th.  It is no accident that Massachusetts has an unemployment rate of 6.5%, Michigan 7.7%, and Rhode Island 9.0%. It is fun to hate business, to castigate fat cats, but when they take the jobs away, we all suffer. It’s a lesson that Detroit has learned, and Rhode Island is wrestling with.

Remember that government produces nothing. It is said that taxing our way to prosperity is like a man standing in a bucket, trying to lift himself by the handle. It’s a tough lift.