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Houston, We Have a Solution
From the September 19, 2011, issue of NR


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There was a time when Detroit’s problems were those of the auto industry, but the city is far past that now. Detroit has become the country’s capital of vagrancy and delinquency, and the most basic problem now is the breakdown of the black family. A staggering 80 percent of the city’s children were born to unwed mothers, a statistic that leads directly to the school system’s predictably high dropout rates. Detroit today has a functional-illiteracy rate (reading level below sixth-grade average) of nearly half, a level of illiteracy more characteristic of the Third World than of the First.

Detroit has entered the 21st century with perhaps the most deeply uneducated city labor force in the developed world. The results are predictable: Michigan’s statewide unemployment rate of 10.9 percent is among the highest in the country, and Detroit’s is even higher: It approached 30 percent during the depths of the recession. According to Bill Johnson, a reporter at the Detroit News, the city has become “an assembly line for criminals.”

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The auto industry is much reduced. Part of the reason that Detroit’s powerhouse failed to meet the competition from Japan and Germany head-on in the 1970s and 1980s was its high degree of consolidation, which gave the Big Three and their unions enormous political leverage.

They used that leverage to extract protection from the free competition that might have saved both them and the city by forcing them to abandon failed business models and seek out new ones.

The automakers prevailed on President Reagan to strong-arm Japan into accepting “voluntary” export quotas, on the theory that Detroit needed only a few years to adjust to the new competitive climate. In truth, the Big Three were morbidly bloated and uncompetitive, and making poor-quality cars to boot: Open competition was the best thing that could have happened to them. Instead, their consolidated oligarchy and the political influence that went with it produced a form of state capitalism, and they continue to abuse their power to this day.

The Chrysler bailout in 1980 was prologue to the bailouts of both Chrysler and General Motors in 2009. Over the course of several decades, the unions had managed to extract enormous pensions and health benefits for their retirees. The funds to back up these liabilities were fractional — that is, at any given time, the pension funds were required to hold funds equal to only a fraction of their liabilities. Even when competitive pressure finally forced the companies to learn how to produce cars as cheaply as their Japanese and German competitors, retiree obligations ensured that they still could not compete on price. They were soon insolvent.

On top of the retiree benefits, the United Auto Workers of America extracted enormous wage concessions during the boom years and refused to give them up when the industry faced withering competition. Supplemental unemployment benefits of 95 percent of wages are only one example of how the UAW strangled Detroit’s economy, and it is not the only union doing the strangling. A few years ago, the Detroit public-school teachers’ union went on strike to prevent the city from accepting a private gift of $200 million to build 15 charter schools. The city now faces a shortfall of more than $300 million, and schools are closing by the dozen.

The state has made things worse. Michigan’s approach to economic development involves heavy government intervention. For example, in the early 1980s, Detroit condemned 1,300 houses, 140 businesses, six churches, and a hospital to make way for a new General Motors plant.

Beyond that, the Michigan Economic Development Corporation offers a variety of incentives and tax credits to favored projects. In tax credits alone, the state has spent $3.3 billion over 15 years, invariably distorting the efficient allocation of the human and material resources that the state — and Detroit in particular — desperately need to be put to genuinely productive use.



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