Potomac Fever: Detroit: An Example of Unintended Consequences?

Tuesday, March 29, 2011

Detroit: An Example of Unintended Consequences?

26 comments:

PBM said...: "government continued to grow while city services—e.g., police and fire protection—continued to decline"

How does that work?

Also, this reminds me of your article about how welfare makes black fathers leave their children. The authors make an argument and then don't defend it, or at least don't defend it very well. I understand that life in Detroit sucks, but I don't see the connection between that and "liberal politics" and "expansion of government," and the author doesn't clarify. Instead, he bases his writing on the fact that conservatives who agree with him are going to read it, which means he doesn't have to explain anything, he just has to use conservative flash points like "big government" and "liberalism" to describe Detroit's decline, and the WSJ's readers will agree with him.; March 29, 2011 at 1:01 PM
Megan said...: Well would you argue that the liberal, entitlement, big-government policies were a success in Detroit?; March 29, 2011 at 1:16 PM
PBM said...: I don't know what policies you are talking about. Your using talking points again and avoiding reality. To someone like you, those policies are everywhere in the US. Name specific policies that were enacted in Detroit and then talk about their consequences. Don't just come in here with "big government," "liberal policies," and "entitlements" expecting to change anyone's mind. Actual policy debate involves specifics not talking points.; March 29, 2011 at 1:23 PM
PL said...: I’m not going to say that this casual story could never be true, or that government action never has unintended consequences. However, I have to agree with Peter on this one- the WSJ article did not actually make a case for why government action may explain Detroit's decline. He just stated it as a fact.

This is unfortunate, because the obvious story of Detroit’s decline is well-known and definitely not government-related. Detroit was heavily dependent on the manufacturing sector- but those jobs left the U.S. all over the country. That shift of jobs overseas is a macroeconomic trend that has very little to do with the size of U.S. or Detroit government, or liberal politics or policies. It's just economically hard to have so many manufacturing jobs in a rich country like the U.S., where even something as stingy as a minimal wage still looks excessive compared to the labor costs businesses face in other countries. The U.S. in the last two decades has had some success in stemming the flow of manufacturing jobs overseas, but even the conservative success story of the South’s auto industry is really quite minor when you look at the American manufacturing sector broadly. It’s just not possible for the U.S., or Detroit, using any conceivable labor market and government subsidization effort (which the U.S. like other countries already does to some degree), to maintain enough of a manufacturing sector for what Detroit had grown dependent on. The U.S. is too rich of a country to be able to match the economies of the manufacturing sector, which is an industry that requires lots of labor but only modest levels of human capital and education. There’s no way to maintain that much of a manufacturing sector in a rich country like the U.S., and so when it left the country Detroit didn’t adapt well. A large part of that failure to adapt is because the problems were so huge for Detroit- its economy just wasn’t diversified enough to prevent it being devastated by a single, unfortunate economic change.

Caveat: I am aware the economies of the manufacturing sector are changing to the U.S.’ favor- capital is growing more important relative to labor, and human capital requirements for the labor force are also increasing. However, that is a recent trend which comes after the decades in which Detroit was devastated. It’s also not enough to ever allow the U.S. manufacturing sector to return to anything like what the U.S. and Detroit used to depend on.

This macroeconomic change, unrelated to government programs, is why you get the result “What's left is the city so embarrassingly exposed by the census figures, a place that people are fleeing as fast as they can. Think of all the dysfunctional measures you can: poverty rates, unemployment, crime, failing public schools, falling home values. Detroit has them all, and most of its indicators rank among the worst in the nation.”

The only way to avoid that result (all measures of economic stagnation) was better adaptation by the Detroit community. This is where you would have to make an argument about government being the problem. You’d have to argue government somehow inhibited the local economy from adapting rapidly and strongly enough to the decline of the manufacturing sector. I don’t buy that explanation in this instance.; March 29, 2011 at 1:48 PM
PL said...: In fact, most of these problems seem more attributable to government INaction. As you know from our Economics of Poverty class Megan, job-training and support programs have dramatically declined in this country from past levels- which would be a problem in a place like Detroit where there were massive losses in middle-class, low-skill (i.e. college degree not required) jobs held by middle-aged residents. A superior government job-training sector, or community college-like education system, would have been invaluable in a place like Detroit for helping middle-aged people adapt to macroeconomic changes. Both of those things are underfunded in the U.S. in a comparative sense to our European peers- who have realized these essential public investments are important in an increasingly dynamic world economy. But the nature of these needs (job-training, community colleges, or similar programs) can only be performed by the government- the economics make it hard for any successfully private alternative. People can’t predict what jobs will become outmoded overnight, so they can’t attempt to set up any private-based insurance system to cover them in case it’s their industry which dies. Without money, the private sector can’t meet the need- but people who just lost their jobs can’t be paying for the entire cost of acquiring a new education or skill-set. Private programs would always be inadequate for the need.

Similarly, all human investment efforts are notoriously problematic for the private sector to manage. There are huge positive externalities to human capital investments (children do better, community’s economy does better, long-term positive effects, etc.), but private markets don’t capture these impacts. So for the private sector, these kinds of programs have lower benefits per their costs than the benefits the public sector can realize. That’s another reason why the public sector is the only appropriate sector to adequately handle these needs, and why it’s so unfortunate the U.S. skimps on these essential government functions. If the U.S. government had stronger support systems in-place, Detroit might have adapted better to the manufacturing sector’s collapse.; March 29, 2011 at 1:48 PM
Megan said...: http://www.mackinac.org/10743

Provides some of the actual policies and their harmful consequences. Other states with one type of industry have recovered. I'm sure liberal policies are not the only reason for the demise of Detroit, but they certainly were not the savior.; March 29, 2011 at 2:03 PM
TJE said...: http://www.nytimes.com/2006/12/05/business/05cities.html

Article is from 2006 but does a good job of describing movement of auto manufacturing southward. I agree with Mr. L that reasons for this change are complex. But Mr. L, do you really believe that what Detroit needed most was more government job training programs? If so, I have another bridge to sell you.; March 29, 2011 at 2:17 PM
TJE said...: More grist for MC's mill. I offer without comment or endorsement:

http://blogs.the-american-interest.com/wrm/; March 29, 2011 at 2:18 PM
PBM said...: I'm not trying to wade into the actual policy debate, and the author and Megan could be right here, I'm just criticizing the matter-of-fact tone the author used when he just recycled right-wing talking points to make a case that can be easily disputed.; March 29, 2011 at 2:27 PM
Megan said...: I'll agree that the was, perhaps a little lazy, but I still hold my position that liberal policies (Detroit has had liberal governors since 1961) have ultimately been harmful to the city.; March 29, 2011 at 2:37 PM
PBM said...: Do you mean mayors? Most cities tend to have liberal mayors. I don't constantly site Mississippi having all GOP reps, govs, and Senators for that state sucking at everything.; March 29, 2011 at 2:42 PM
Megan said...: Woops yes I meant mayors!; March 29, 2011 at 2:45 PM
TJE said...: Lots of sassiness. I like.; March 29, 2011 at 2:49 PM
PL said...: I’ve realized I shouldn’t spend so much time on these issues while at work, so I’ll just quickly respond.

To Megan’s article from the Mackinac Institute article- there are lots of problems and qualifications with the broad and sweeping arguments it makes.

First of all, the research on the impact of living wage ordinances is surprisingly mixed. While economic theory would suggest that it would be very harmful in several ways, the actual empirical literature just doesn’t find huge or consistent effects. I’m not saying it’s my preferred policy approach, but it’s not something I’d necessarily discount or toss aside as being a BAD government intervention. The evidence doesn’t lead us to that conclusion. Note that all the Mackinac article cites is theory- because they know they can’t cite empirical literature with a straight face.

Second, the school system spends about 15% over the national per-pupil according to the calculations I pulled from the documents Mackinac cited. The 15% variation is actually quite tiny- it’s certainly above the national average, but the per-pupil spending distribution around the average is actually quite large so Detroit could certainly not be categorized as an unusually heavy-spender. Plus, it makes sense for Detroit to spend more money on average per-pupil because its student population is vastly poorer and more economically and learning-disadvantaged than the national average. While the policy literature doesn’t show increased spending having a consistent improvement in academic outcomes, there are certainly no signs that more spending actually worsens outcomes. There’s just massive variation in effectiveness of school systems. While more per-pupil spending hasn’t been shown to improve outcomes, it’s certainly not holding Detroit back.

Third, Mackinac says “A tax system that aggressively redistributes income from businesses and the wealthy to the poor and to government bureaucracies.” But both Detroit and Michigan have flat income tax systems. If you include deductions and other tax policy adjustments, you’ll find that the effective individual income tax system is progressive- but it’s essentially flat for those making over $45,000 {see http://www.michigan.gov/documents/treasury/IIT_2008_329111_7.pdf p. 13 (21)}. In fact, Michigan’s corporate and individual tax systems put it below the national average. It actually has unusually high sales, excise, and property taxes (i.e. regressive). Research I found from left and right think tanks suggests that Michigan is in fact less redistributive than other states, and Detroit’s system is similar in that it uses flat income taxes and regressive other tax sources. There’s not much more you can do Detroit’s and Michigan’s tax system without making it very regressive in every way you’d slice it.; March 29, 2011 at 3:34 PM
PL said...: Detroit and Michigan surely aren’t shining examples of best-governance- but their problems are related to the incredible economic shock of having large portions of their economy being non-relevant to the modern economy in a matter of years. I don’t think their extreme situation is comparable to “Other states with one type of industry” who “have recovered.” (quoting from you). The literature on the rust-belt and economic recovery is still very fledgling in its results- there is no consensus about what works, so there certainly isn’t consensus that government intervention hurts. And Detroit’s scenario is unusually harsh.

And don’t worry Professor Eismeier- I won’t be buying THAT bridge from you (about “Mr L., do you really believe that what Detroit needed most was more government job training program?”). I’m personally not a huge fun of job-training programs and community college systems as they exist now- their record isn’t great, though increases in spending at the margin do appear to be cost-effective. However, I don’t think their sufficient to deal with all of Detroit’s problems- and they are certainly not the most important thing Detroit could have done. However, I would consider them as part of the solution though, in conjunction with a variety of other public and private initiatives.

Also, the Census data is just showing that those few black people who do get ahead are mimicking the past generations of “white flight” and fleeing the inner cities. Is anyone surprised? I absolutely agree that the American inner-cities have been a complete failure- though I think it’s in spite of government intervention as opposed to because of government intervention. Don’t worry- I think a lot of the government programs done in these areas over the past few decades are awful- I just don’t think many are actually grossly destructive to either the community, black family, or private economy. Fixing inner-cities requires a similar approach to the one we need in education (or health care)- the solution is “all of the above simultaneously.” And that includes private actions beyond just government intervention.

In conclusion, I disagree with you Megan when you say “I still hold my position that liberal policies (Detroit has had liberal governors since 1961) have ultimately been harmful to the city.” I don’t think government policies have helped in the aggregate (though I suspect they’ve helped to mitigate all the other factors worsening conditions in cities like Detroit). There are some “liberal” policies I, and a lot of others, would like to toss. But there are others which have very strong positive impacts. It’s a matter of improving our approach, not throwing out the baby with the bathwater. I’m not necessarily arguing for more money to be spent on these initiatives, but I’m certainly not in favor of cutting spending on these efforts. There are huge positive externalities to be had if we can just solve the inner-city problem. There have been some successes- we just have to work on recreating them.; March 29, 2011 at 3:34 PM
TJE said...: Just sayin, with no endorsement:

http://online.wsj.com/article/SB122126282034130461.html?mod=opinion_main_commentaries; March 29, 2011 at 3:56 PM
PL said...: I know you're not endorsing it, but it's quickly apparent from just looking over the factors the ALEC Competitiveness Index takes into account that it's a very flawed methodology. Essentially, it has several outcome variables which it tries to explain with 15 variables. Unfortunately, all of those 15 variables would be classified as variables of interest- there is no attempt to control for confounding factors. They only look at things they ideologically believe would have an impact- taxes, regulations, debt, and public workers as a share of pop. (which is a particularly poor variable choice, even for what they're trying to capture with it). There is no attempt to control for a wide-variety of confounding factors a serious economic study would consider.

I'd be very open and interested in a serious academic study of the issue- I wouldn't be surprised if you found that some of these government variables did have a negative impact (though not many, since taxes pay for important public goods like infrastructure, education, health care, and public safety- just to name a few). One might consider the negative effects a price to pay for the valuable public services the government provide. However, this index would never fly in an academic setting- the lack of any attempt to control for confounding factors is an unforgivable sin.; March 29, 2011 at 4:15 PM
PL said...: The study has a marginally better level of rigor than me trying to explain the economy's growth with Michael Jackson's record sales or something. But that's not saying much...; March 29, 2011 at 4:19 PM
Ross Perot said...: We climbed out of a recession after Thriller hit the shelves.

#justsayin; March 29, 2011 at 4:24 PM
PL said...: Professor Eismeier, you were smart not to endorse the WSJ-cited ALEC study. I just realized it's not even a regresison analysis- they just weight the 15 factors they are interested in EQUALLY to come up with an economic outlook index. They don't provide any empirical evidence as to why those factors might matter, let alone why they matter equally.

Plus, with their past economic performance rankings, they just look at 3 measures- personal income per capita growth, domestic migration, and non-farm employment growth. The first concern that jumps into my mind is that there is no attempt to control for any "catch-up effects." While the differences in scale are much different, this approach would be similar to comparing the economic growth rates of the U.S. and China. More developed countries, or states, are already so much higher that if you only look at a moment in time, it's going to look like the developing ones are zooming on by when really they're just trying to catch-up.; March 29, 2011 at 4:29 PM
TJE said...: Mr. L, no matter how you try to slice and dice, there has been a dramatic shift in automobile manufacturing jobs from the rustbelt to the sunbelt. Can you explain with no reference to government policies, including right to work laws?; March 29, 2011 at 4:49 PM
TJE said...: http://www.newsweek.com/2008/12/12/southern-comfort.html; March 29, 2011 at 5:00 PM
PL said...: There are a number of other factors you’d also want to consider besides just labor costs: cost of health insurance in the region (in the south you might be able to provide the same benefits and care at lower cost than you could in the Midwest- that wouldn’t be attributable to autoworkers’ negotiating practices), cost of land, quality of school system, transportation infrastructure, access to developing markets, etc. when considering business movement. So not even considering the actual economics of the auto industry, I would never jump to the conclusion that labor costs (impacted by “right-to-work” laws) would have a significant impact.

Labor costs only make up about 10% of the cost of manufacturing cars (hat tip David Leonhardt). The differences in labor costs between Detroit and companies in the South are significant, but in the range of 20 to 25% from the figures I found. So multiply, say 22.5% (difference in labor cost from South vs. Detroit) times 10% (labor cost as share of total cost of car production) and you’ll find that adjusting for labor costs alone (assuming that difference in cost is entirely attributable to “right-to-work” laws in the South- an extremely dubious proposition) means that the cost of producing a car in the South versus in Detroit would be only be about 2.25% lower. I’ll be generous and I attribute nearly all of the reduced labor costs in the South to their right-to-work laws (ignoring living standard differences and a variety of other relevant factors). That would leave us with “right-to-work” laws, assuming nothing else is changed, reducing business costs in the automobile sector by 2%. That’s a big number for business decision-making, but that assumes nothing else is changed. I’m sure there are lots of other factors, some favoring Detroit and others favoring the South, which businesses also take into account when deciding where to locate.

Also, that ignores the relative effectiveness of businesses no matter where they locate. Costs might be cheaper in one geographic area, but if your production and marketing process is superior, it’s quite easy to extract a quality premium from a market. i.e. how price-sensitive are car consumers really? What other factors do car buyers take into account when making their decisions? Clearly cost is the not the only answer- Asian car companies developed a much superior reputation for quality and safety over the years. Basically I’m making the point that Detroit car companies had a lot of other problems besides their labor costs in explain why their business model failed so miserably for several decades.

Now- would I want to tell an economic narrative without including right-to-work laws? Obviously not- when you weaken the hand of labor, labor costs will go down and overall business expenses will decline. However, I don’t know enough about the detailed economics of the industry to be certain whether that’s a primary factor explain the auto industry’s mild revival in the South. But I wouldn’t be surprised if it was.

However, even if you think that right-to-work laws do decrease labor costs and make your state in the near-term look more attractive to businesses, that’s a separate question from whether you think it’s a smart policy decision. Is the improvement in one industry enough to outweigh the costs of signing the death warrant for organized labor in your state? Are we certain that the American middle-class and less advantaged members of society will continue to prosper without organized labor to increase the bargaining power and compensation of all laborers?; March 29, 2011 at 5:35 PM
TJE said...: Mr. L, I mentioned right to work laws as only one example of government policies and did not endorse. You seem to be avoiding the 500 pound gorilla in the room: what caused this profound change?

BTW, unionization may affect not just wages but also the flexibility of work rules.; March 29, 2011 at 5:52 PM
PL said...: What caused this profound change?

Well, I spent some time reading a couple articles and reports and I found a few points of note.

The most important factor appears to be that the auto industry is a sector which benefits enourmously from minimizing supply-chain costs, which means that the industry is likely to cluster no matter where it settles. It also means they move to stay close to their markets. Foreign automakers moved into the South (which still remains significantly smaller than the Detroit sector)as it experienced a demographic boom.

Additional factors to note- states in the South gave very different financial incentives to plants than northerns states did. Also, health care costs are generally lower in the South.; March 29, 2011 at 9:51 PM
TJE said...: http://www.csmonitor.com/Business/2008/1205/p01s04-usec.html; March 30, 2011 at 4:58 AM

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Tuesday, March 29, 2011

Detroit: An Example of Unintended Consequences?

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