NR Digital

Houston, We Have a Solution

by Mario Loyola
A tale of two cities

On a warm Saturday evening in June 1943, crowds were relaxing on Belle Isle, a retreat slightly larger than New York’s Central Park nestled in the Detroit River, which separates Canada and the United States. Belle Isle’s landscapes and structures were a showcase of great American architecture: Frederick Law Olmsted, Albert Kahn, and Cass Gilbert all were represented. Its botanical garden, yacht club, memorial fountain, golf course, and opulent marble lighthouse offered a serene testament to the grandeur of Detroit.

Exactly what started the riots that night, we’ll never know for sure. There seems to have been a confrontation between a white sailor’s girlfriend and a black man, which led to a brawl. As contradictory rumors raced through the city, the conflagration spread. By the time federal forces intervened to impose law and order three days later, dozens of people had been killed, mostly blacks, and millions of dollars of property destroyed, mostly in the poor, black, inner-city neighborhood of Paradise Valley.

Detroit’s fall can be traced to the race riots of 1943, though many decades of prosperity and achievement still lay ahead. The rise and fall of Detroit is history on an epic scale: Favored by fortune at first, then plowed under its wheel, the city has had a lot of bad luck. But as Oscar Wilde lamented as he languished in Reading Gaol near the end of his life: “I must say to myself that I ruined myself, and that nobody great or small can be ruined except by his own hand. . . . Terrible as was what the world did to me, what I did to myself was far more terrible still.”

Houston had suffered race riots, too, during World War I, but fortune would smile on it for most of the 20th century. And when oil prices collapsed in the mid-1980s, sending the city into a depression, it bounced back as if suspended from a bungee cord — even though the oil bust lasted nearly two decades. What Houston did for itself is not merely a model for any city facing the danger of sudden economic decline: The policies that Houston and Texas have followed are proof of concept for the conservative vision of government, which is, essentially, to keep the government off the people’s backs and let a free society find its own way to prosperity. 

Detroit, conversely, is proof of concept for the liberal vision of government, which seeks to solve every problem through government, to shape economic development through government, to redress grievances through government, to attain social justice through government, and, finally, to insinuate government into every aspect of our lives. The problems Detroit faced in the latter half of the 20th century would have been enormously challenging no matter what policies it embraced. But it embraced the worst ones and so plunged recklessly down the slope of decline.

Each city has offered a nearly pure exposition of a particular philosophy of government and a vivid demonstration of the results. In the degree of collusion between business and government, in the power of labor unions, in the method of economic development, in the burden of taxation and regulation, in the tolerance for diversity — in all these ways and more, the two cities stand as diametric opposites in the choices a society can make.

By 1943, it was clear that both Detroit and Houston were having a great war. Detroit’s massive car factories had all been converted to war production, and it was churning out tanks, jeeps, and bombers at a dizzying pace. The demand for wartime labor drew more than 300,000 migrants to Detroit, mostly from Appalachia and the South. In 1943, the population was approaching 2 million, and it seemed to be growing with no end in sight. But the race riots had revealed a sore festering beneath the surface, and there were others.

As early as the middle of the 19th century, Detroit had emerged as a leader in the Great Lakes maritime trade. It was perfectly positioned to capitalize on the Industrial Revolution, and soon was home to major industries producing machine tools, maritime steam engines, and horse carriages — the business in which William Durant, founder of General Motors, made his first fortune. Standardization of parts meant that many were interchangeable and could be used for a variety of things. When the gasoline engine was developed, Henry Ford put together his first automobiles largely from readily available components.

The rise of the machines led to an explosion of industry and a huge demand for unskilled labor. Between 1900 and 1930, Detroit was the fastest-growing city in the world. But soon, especially in the years after World War II, machines began to replace a lot of that unskilled labor. The ranks of the unemployed swelled — especially among blacks. In the 1950s and 1960s, large populations of idle young black men became a mainstay of neighborhoods such as Paradise Valley. Crime quickly became epidemic.

Race relations deteriorated, until they finally exploded in the riots of 1967. This time the trouble started with a police raid on an unlicensed after-hours bar that was packed with nearly 100 people. The police tried to arrest all of them, and a crowd gathered outside the establishment to protest. Most of those arrested were black, and the mostly black crowd became enraged and began looting. With all the velocity of sudden combustion, the violence turned into one of the worst riots in American history. 

White flight began in earnest soon after and never abated. Court-ordered public-school desegregation encouraged the trend, and those who moved took the tax base with them. In 1973, Detroit elected its first black mayor, Coleman Young, an unabashed grievance-driven liberal who thrived on stoking the very tensions of race, class, and politics that were pulling Detroit apart. His highest priority seems to have been to show that he was the “m –  –  –  –  — r in charge,” as he would quaintly call himself: “M.F.I.C.” became his semi-official nickname.

Young’s administration bore more than a passing resemblance to Barack Obama’s in this sense: He used the machinery of government to attack the economic interests of his political opposition and extract benefits for his own supporters. As these policies drove his opponents’ political base out of the city, his own political base expanded proportionately. He apparently believed that increasing the political power of Detroit’s blacks was worth impoverishing the whole city.

Detroit’s transition to a majority-black city (the population is now more than 80 percent black) occurred just as the welfare programs of the Great Society started to destroy the black family. The Great Society was not merely an enormous disincentive to competition and self-reliance; it also disincentivized marriage by supplying the income that mothers used to depend on their husbands to provide.

Mayor Young presided over this disaster for 20 years. The city he left behind is a disheartening relic of its past. Of its 350,000 homes, more than 80,000 stand vacant, and the business-vacancy rate is 62 percent. As if that were not bad enough, many Detroiters enjoy whiling away the empty hours by setting empty houses on fire. Devil’s Night is a local tradition of vandalism and arson on a massive scale around Halloween. It was vigorously celebrated under Coleman Young, when it was common to have as many as 800 fires in the last days of October. Last year, there were more than 160 fires around Halloween, the drop due at least in part to the fact that the city has lost about a third of its population since 1993. City Hall is full of calls to tear down empty buildings, but there is no money even for demolition.

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.”

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.

Both the state of Michigan and the city of Detroit impose an income tax on top of the city’s property taxes. The state imposes a 4.95 percent income tax on businesses as well as a gross-receipts tax of nearly 1 percent. It is no wonder that when Japanese and German carmakers started opening plants in the United States, they avoided Michigan and settled mostly in the right-to-work South — including Texas.

The launch of Ford Motor Company in 1903 came two years after a drilling rig called Spindletop struck oil north of Houston, sending a sustained gusher of black gold hundreds of feet into the air. Nobody had ever seen anything like it, and it quickly became by far the most productive oil well in the world. Discoveries soon spread throughout Texas, and Houston’s position as a port city on the Gulf of Mexico ensured its emergence as the world’s energy capital by the late 1930s, fueling a general boom in heavy industry.

During World War II, Detroit was called “the Arsenal of Democracy,” but Houston was hardly less critical. It contributed ships, airplanes, and, of course, oil to the war effort. While Detroit suffered from the consolidated nature of its core industry, Houston thrived on its diversity. The land from which the precious resource was extracted was owned by thousands of private citizens. The oil was extracted by hundreds of independent drillers and operators. Huge multinational corporations eventually aggregated in Houston, but their interests were not entirely coincident with those of the independents, which limited the ability of all parties to seek political favors.

The Texas oil boom continued for most of the 20th century. During the 1970s, the Houston Chronicle became widely distributed in Detroit, chiefly for its help-wanted ads. By the early 1980s, “black taggers” — cars bearing the black Michigan license plate — were a common sight in Houston. In the second half of the century, the size of the two cities’ population positions flipped. In the 1950s, Detroit had 2 million residents, Houston only about 700,000. Today, Houston has far more than 2 million residents, Detroit just over 700,000.

But Houston would suffer its own bad luck. In 1985 the Saudis abandoned their position as “swing producer” in OPEC and dramatically ramped up production, from 2 million barrels per day to 5 million barrels, in a matter of months. The price of a barrel of oil fell from an average of nearly $30 in 1985 to around $20 in January 1986 and then nosedived to under $10 by midyear.

For Houston, “it was a bloodbath,” recalls one former Shell executive. Profit margins had already been in the single digits, and businesses rapidly went bust left and right. In a matter of months, massive layoffs rocked the city. Real-estate values plunged, and Texas was sucked into the savings-and-loan crisis. The unemployment rate for the state as a whole jumped from 6.1 percent in September 1984 to 9.3 percent just two years later.

As soon as oil prices fell, the independent oil producers cried out for protection, much as Detroit’s Big Three had done just a few years before. But the largely Houston-based oil giants were international traders, so they fought against tariffs. Beset by these conflicting appeals from the oil sector, the government was paralyzed in its response — and, happily, did nothing. Unemployment rates in the city dropped quickly, reaching 5 percent in 1990.

More recently, Houston has benefited from a spike in oil prices, and for that Texans can thank Washington liberals more than Lone Star conservatives. Obama’s policies, and those of congressional Democrats, have significantly constricted the domestic production of oil, creating upward price pressure. These policies don’t benefit the environment a whit; the chief beneficiaries are the oil companies, which see windfall profits as the value of their reserves rises.

Texas likes to brag that it is “business friendly,” but it would be more accurate to say that it is, by both philosophy and force of circumstances, “competition friendly.” Like most states, Texas has an economic-development fund, but it’s a small one: Since it was created, the Texas Enterprise Fund has disbursed slightly less than $363 million. That’s one-tenth the amount Michigan has spent on economic development in recent years, and Texas has almost three times the population. In other words, the government of Texas spends about one-thirtieth as much per person on corporate-development projects as Michigan.

Texas has prospered from the fact that it is a right-to-work state. This is not to say that Texas is anti-labor, or even that it is anti-union. Many refineries in Texas are unionized. But Texas seeks to reward labor through the free market. In the words of one former Shell executive, “If you’ve got good management, people aren’t going to want to get unionized. And management has gotten smarter and smarter over time. That’s why the unions are in trouble.”

Houston weathered the storm nicely, in  large part through a rapid reallocation of human and material resources. Diversification was the key. Before the bust, the energy sector accounted for about 80 percent of Houston’s economy; now it’s barely 50 percent. Of the 51 Texas companies on the Fortune 500 list, there are computer makers, airlines, retailers, gas-and-electrical utilities, food-and-grocery companies, construction companies, and a telecommunications company. The Texas Medical Center in Houston is the world’s largest, employing nearly 100,000 people and receiving nearly 6 million patients per year.

The diversification of Houston’s economy has been particularly potent in heavy industry. For the state as a whole, employment in the oil-and-gas sector increased by 5.1 percent between June 2010 and June 2011, largely because of natural-gas projects made possible by “fracking.” Employment in heavy construction and civil-engineering construction, by contrast, increased 10.6 percent in the same period; in primary metal manufacturing, 6.6 percent; in fabricated metal products, 8.2 percent; and in machinery manufacturing, 11.9 percent. Meanwhile, the government work force contracted 1 percent.

Tolerance of cultural diversity has become a hallmark of Houston’s ascent, despite the state’s checkered history of race relations. Texans take individual freedom and individual responsibility very seriously, so meritocracy comes naturally to them. In the words of George Strake, one of Houston’s most venerated oilmen, “Everyone’s welcome here, so long as you’re willing to pull the wagon and not just sit in it.” That is perhaps why anti-immigrant feeling is not nearly as pronounced in Texas as it is in other parts of the Southwest. Like Detroit, Houston is minority white, but more diverse: Blacks make up 25 percent of the population, Hispanics 37 percent, and Asians (chiefly Vietnamese and Chinese) more than 5 percent.

Texas has managed to preserve something very essential about America, namely the frontier mentality, what the great Texas historian T. R. Fehrenbach described as the “cult of courage.” Or, in the words of Mr. Strake, “Give me wide open spaces. Let me enjoy the good times, and don’t feel sorry for me in bad times.” Naturally, this leads to a certain vision of government: Defend our shores, deliver the mail, and get the hell out of the way.

Gov. Rick Perry has been true to that vision. When recession created enormous gaps in the state budget, as in 2003 and 2011, Perry resisted pressure to raise taxes or raid the state’s “rainy day fund,” and managed to balance the budget mostly through spending cuts. (The state still has no personal-income tax.) Perry’s signature tort reforms essentially broke the power of the trial bar and have drawn thousands of doctors and substantial business investment to Texas. The state’s environmental health has improved dramatically as state regulators worked to meet national air-quality standards in cost-effective ways without imposing needless burdens on business. Houston, home of the world’s largest petrochemical industrial complex, satisfied federal ozone standards in 2009 and 2010, after massive investments by the private sector. Perry can justly run on a record of keeping government off people’s backs and letting the free market innovate its way out of recession. The Lone Star State is now the industrial engine of the American economy, singlehandedly responsible for half of the country’s job growth in recent years.

James Madison believed that one purpose of government was “to reward the best and punish the worst.” In Detroit, the best were punished until they finally left, and under Obama, the country is marching down that very same slope. That’s the significance of losing half our deepwater drilling rigs to other shores, of forcing corporations to relocate to Europe in order to avoid stifling corporate tax rates, of shutting down coal plants regardless of recent retrofits and other emissions improvements.

As the next election looms, Americans should consider how rapidly we could unleash the power of American industry and bounce out of this recession, if instead of taking our cue from Detroit, we follow Houston.

– Mr. Loyola is director of the Center for Tenth Amendment Studies at the Texas Public Policy Foundation.

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