Big-Project Binge Fueled Motor City's Meltdown

When I hear free-spending national leaders call for more infrastructure investment, I think of Detroit’s absurd People Mover monorail gliding above empty streets. That’s unfair, I know. Yet the city’s epic tragedy, which entered a new stage last week when Mayor Dave Bing lost financial control, provides broader perspective on the potential consequences of mixing economic distress with bad policy making.

Here are five somewhat contradictory lessons from the Motor City’s sad history that relate to the larger national debate about America’s future.

Lesson No. 1: Government can do good things. Long before Ford’s Model T’s, Detroit -- the "Straits" -- rose as a great inland port because of large-scale public investment. The economic ecosystem of Great Lakes cities depended on the access to the East Coast created by a farsighted public servant, DeWitt Clinton, who used public funds to dig the Erie Canal.

Detroit’s early entrepreneurs, such as Hiram Walker (who avoided Michigan’s puritanical streak by distilling his Canadian Club Whiskey a few miles across the Canadian border), would never have set up shop without water access to the Atlantic. In the early 19th century, private financial markets weren’t developed enough to finance a great canal.

Erie Canal

The antecedent of the Erie Canal doesn’t refute the People Mover example, but the juxtaposition of the two projects as bookends of Detroit’s history provides necessary nuance. Public infrastructure investment can do much good and much harm. The canal was valuable because it reduced transportation costs along an important route. No new infrastructure today is likely to reproduce that magic; it is much easier to get around the country now than it was in 1820.

The canal’s success also reminds us that financing can determine function. As Adam Smith emphasized 237 years ago, investments such as the Erie Canal that are expected to cover their full costs with user fees are more likely to deliver real value. That lesson seems lost on the authors of the Senate’s proposed budget for 2014, which offers $50 billion more for transportation investment, in keeping with our unhealthy new pattern of funding highways with general tax revenue.

The correct middle path between untrammeled spending and parsimony is to favor robust outlays on projects developed by public-private partnerships that will recoup their expenditures with tolls rather than taxes.

Lesson No. 2: It takes a cluster. There was a dustup last summer when President Barack Obama echoed Senator Elizabeth Warren’s statement that no one ever got rich on their own. The political implication that they seemed to draw -- that the U.S. needs more public spending -- wasn’t logical to me. Nonetheless, the statement carries much truth. Henry Ford bestrides our economic history like a colossus, but he was no solitary actor.

Ford was a protege of Thomas Edison and became deeply embedded in Detroit’s cluster of automotive genius. The Dodge Brothers, the Fisher Brothers, David Dunbar Buick, Ransom Olds and William Durant (in nearby Flint) were some of the automotive innovators connected throughout greater Detroit. These men supplied each other with parts, financing and, above all, ideas. Collectively, they created the affordable automobile: A tremendous gift to America’s far-flung farmers and the nation’s would-be commuters.

No decent idea has ever been created in a vacuum, and Detroit, like Silicon Valley in the 1970s, reminds us that America is great because our metropolitan areas have enabled the collaborative competition of connected entrepreneurs.

Innovative Clusters

This doesn’t imply that local governments can magically create innovative clusters or that we should just increase public spending. But it does suggest that we all depend on the genius of others. Investing intelligently in education, particularly in math and science through charter schools, increases the odds of empowering potential innovators. Opening our borders to talented foreigners by increasing the size of the H-1B visa program is an even easier way to strengthen the talent pool.

Lesson No. 3: Manufacturing is an unreliable source of employment. Detroit’s problems have often been associated with the failures of the automobile industry, but that’s a mistaken view. Detroit’s decline as a city began in the 1950s and ’60s, which were golden years for the Big Three automakers. Its downfall has more to do with the Big Three’s success than their failures.

The industry followed a standard pattern. During an initial phase, small manufacturing startups cluster in cities, but as they come to require larger factories, they move from the urban core to sites such as River Rouge, Michigan. Ultimately, corporate logistics enable production anywhere with fewer and fewer workers. The Big Three are still alive after a century (albeit with federal help), but their endurance doesn’t entail much more employment in the Detroit area. Similarly, the U.S.’s continued strength in manufacturing hasn’t done much to reduce underemployment, because most manufacturing is so highly capital-intensive.

Moreover, manufacturing’s success has a downside. Big corporate structures can crowd out alternative entrepreneurial activities. My work with Bill Kerr and Sari Pekkala Kerr showed that cities that were endowed with valuable mines at the start of the 20th century developed larger mining and manufacturing companies but ended up with less entrepreneurship and growth at the end of the century.

The Big Three sucked in talent and turned a former hub of entrepreneurship into a place defined by large corporate hierarchies.

Urban Renewal

Lesson No. 4: The government can also do foolish things. As Detroit’s job dynamo sputtered, and cars enabled suburbanization, both local and federal governments took action. The federal government sponsored urban-renewal projects that built new structures, often in declining areas that didn’t need them, along with local public-transport projects, such as the People Mover. Detroit’s longtime mayor, Coleman Young, favored large-scale construction projects (another arena anyone?) and industrial policy, such as using eminent domain, to create General Motors Co. (GM)’s Hamtramck plant.

These policies relied on three errors. First, they followed a Potemkin Village strategy that favored visible, physical projects rather than building up the human capital that is the real source of urban success. Second, they accepted the magical thinking that large-scale infrastructure projects will reinvent a place, instead of evaluating each project with careful cost- benefit analysis. Third, these policies assumed that the public sector could figure out long-term job creation. The best policy for local economic development is to attract and train smart people and then get out of their way.

Lesson No. 5: The American dream can go terribly wrong and we aren’t on a good path.

Detroit, like the rest of the country, can only come back if the power of its human capital is unleashed. That can only happen with better education, limited regulations and stricter rule of law. To improve education, Detroit should follow New Orleans and move toward a system that is primarily made up of charter schools.

Bing should take a meat cleaver to the rules that make life difficult for would-be entrepreneurs, such as food-truck operators. My colleagues at the Manhattan Institute are helping Detroit to learn from New York’s safety success, and with luck that will also bear fruit.

The broadest lesson of Detroit is that simple-minded nostrums calling for more or less government are foolish. Government can be helpful --- and absolutely necessary when it comes to helping the most vulnerable -- but also wasteful or worse. To save Detroit, smart government must provide good schools and safe streets, and eschew foolish infrastructure spending and unnecessary regulations.

This piece originally appeared in Bloomberg

This piece originally appeared in Bloomberg