A Bankrupt Detroit Needs To Reinvent Itself
If nothing else, Detroit's bankruptcy marks the symbolic closure of an era when heavy industry dominated the U.S. economy and, through its factories, the United States dominated the world. We think of our time as a period of wrenching change, but it's not in the same league as the tumultuous transformations of the late 19th and early 20th centuries. In those turbulent decades, the country went from a predominantly rural society of farmers and small businesses to an urban nation of massive enterprises and crowded cities.
In 1870, three-quarters of the population was rural; by 1910, that was barely half. In 1870, there were no cities with more than 1 million people and only two with more than 500,000. By 1910, there were three with more than a million and five between 500,000 and 1 million. The rush to industrialize catapulted Chicago, Cleveland, Buffalo, Pittsburgh and St. Louis into major economic centers as the nation became dotted with steel mills and industrial plants. Detroit was a relative latecomer, emerging as the carmaking hub between 1900 and 1930. Its population exploded from 286,000 to almost 1.6 millionduring that time.
The great irony of Detroit's bankruptcy is that it seems to suggest the obsolescence of central cities when just the opposite is true. As economist Edward Glaeser of Harvard University notes, many cities have undergone a renaissance: Boston, New York, Philadelphia, Seattle, San Francisco and others. All have stubborn concentrations of poverty, but many have benefited from gentrification and stronger job markets. High energy costs, a backlash against commuting, lower crime and cities' vibrancy have renewed their appeal.
In the countless Detroit postmortems, many potential villains have emerged: the ineffectiveness of Coleman Young, mayor from 1974 to 1994; white flight (from 1970 to 2008, the white portion of the city's population fell from 56 percent to 11 percent); costly government workers' pensions. But at bottom, Detroit's failure resulted from its success. It became a prisoner of its dependence on the auto industry.
In the 1950s and '60s, most Americans - not just people in Michigan - took the dominance of the Big Three for granted. General Motors, Ford and Chrysler commanded about 90 percent of the vehicle market. Who could challenge them? The result was a plausible and self-serving business model: high wages, generous fringe benefits, job security (with supplementary unemployment benefits to cover workers during temporary layoffs). The compact generally bought labor peace between the companies and the United Auto Workers. Given their market power, automakers could pass most costs on to consumers.
But what made short-term sense spelled long-term suicide - for companies, workers, Detroit and Michigan. High costs, shoddy quality and mediocre management made the companies vulnerable to foreign competition from imports and nonunionized plants, generally in the South. Employment eroded. Worse, the auto industry's model shaped the state's labor market and policies. By 1978, average hourly earnings in Michigan were 32 percent higher than the national average. Michigan had an anti-business reputation. This frustrated the state in its efforts to diversify its economic base.
"What cities do is transfer information," says Glaeser. They're incubators for new ideas and industries. This describes the Detroit of the early 1900s, when dozens of car companies formed annually (peak year: 1907 at 82). Though it doesn't mirror postwar Detroit, it does suggest what the city and state need to become.
They aren't alone in suffering economic dislocation. In 1971, two Seattle realtors posted this funny-dreary billboard: "Will the last person leaving SEATTLE -- Turn out the lights." Employment at Boeing had plunged from 100,800 in 1967 to 38,690. In the late 1960s and early 1970s, New York City lost more than 300,000 manufacturing jobs, led by the garment industry, reports Glaeser. But the losses weren't fatal. The Seattle area now has Microsoft, Amazon and Starbucks; New York has recovered, led in part by a resurgent (and maligned) financial industry.
In New York, successive mayors were "determined to make the city as attractive as possible to employers," writes Glaeser in his book "Triumph of the City." In Seattle, about half the adults are college graduates, creating a favorable climate for start-up companies. Meanwhile, "Detroit had stifled the diversity and competition that encourage growth," writes Glaeser. Mayor Young favored new construction projects, he adds; these provided short-term jobs without improving the city's economic base.
Can Detroit reinvent itself? It's now caught in a vicious cycle. Dismal city services deter growth. The crime rate is five times the national average. In 2011, Detroit had 344 murders; Cleveland had only 74 and Pittsburgh, 44. But the city can't raise already-high taxes without also threatening growth. By reducing debt and pension payments - though hurting creditors and retirees - bankruptcy might break this cycle. But there's no quick fix. What Detroit teaches is that those who deny economic change often become its victims.
