Big-project binge fu­eled mo­tor city's melt­down

The Pak Banker - - OPINION - Ed­ward Glaeser

WHEN I hear freespend­ing 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.

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 tremen- dous 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. 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.

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 largescale con­struc­tion projects (an­other arena any­one?) and in­dus­trial pol­icy, such as us­ing em­i­nent do­main, to cre­ate Gen­eral Mo­tors Co. (GM)'s Ham­tramck plant.

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