Detroit has hosted the Super Bowl twice. Once in 1982, and once in 2000. Each time there was the routine commentary about how free-spending attendees would lift the Motor City’s economy. Except that there was no boost to speak of. That there wasn’t was a statement of the obvious, unless you were a consumption-focused economist; something that describes nearly every economist.
You see, in the real world of economic activity consumption is always and everywhere the consequence of actual economic growth. Production is the catalyst for all consumption, which is something non-economists know intuitively. For those not part of the insular world of charts, equations and theories, consumption is the reward for production. Consumption follows the investment in people and processes that enables abundant production in the first place.
The above truth speaks to why Detroit wasn’t revived by what was nothing more than a helicopter drop of money. No doubt wildly well-to-do people came into town to spend with abandon, but no business is going to expand and add workers for the long-term based on one weekend of feverish consumption. Basically voluminous cash was dropped into Detroit, business owners gladly exchanged goods and services for it, only for those owners to bank or invest the proceeds of a big weekend on the way to the funds rapidly exiting Detroit to far more productive locales well outside the city.
The simple truth is that money is a consequence of productive economic activity. Money naturally migrates to where there’s abundant production to finance, along with the financing of the movement of the production to higher uses. That all this money didn’t remain in Detroit is a waste of words. Money migrates to talent and productivity, yet what was Silicon Valley before Silicon Valley has been bleeding talent for decades. Money never stays put where talent is flowing out.
All of this and much more came to mind while reading Christopher Leonard’s wholly confused new book, The Lords of Easy Money: How the Federal Reserve Broke the American Economy. Leonard promotes the comical falsehood throughout his book (from now on titled, The Lords) that “the Fed’s one superpower is its ability to create new dollars and pump them into the banking system.” All of which is utterly meaningless and economically inconsequential without production. If the latter is scarce, the money serves no purpose. It exits, and without the stimulus that Leonard imagines. See Detroit yet again. A prosperous, Silicon Valley-like past isn’t a lure for return-seeking capital in the present.
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