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Ed Glaeser on the Rise and Fall of Detroit

November 6, 2011

The Harvard econ prof in City Journal on how sclerosis motivates firms to pack up shop and leave:

Seeking to reduce costs and fleeing the powerful Michigan unions, auto companies started building factories in lower-cost areas soon after World War II. (Comparing the industrial growth of adjacent counties in states with differing union rules, economist Thomas Holmes has found that between 1947 and 1992, manufacturing grew 23 percent faster on the antiunion side of the state line.) By the late 1970s, the car companies were also struggling to compete with a new set of foreign firms offering attractive prices, quality, and fuel efficiency.

As conditions deteriorated, people voted with their feet:

The scale of Detroit’s decline is breathtaking: a city of 1.85 million residents in 1950 has fewer than 720,000 today.

The skeptic of competitive government would use this as evidence to show how weak exit is as way to improve governance. Detroit, despite losing over half its population, is still in decline. It is now even more in thrall to legislating regulations that thwart entrepreneurs than it used to be. What gives? The pessimistic answer is that these things take time. Eventually conditions will bottom out and only then can the city regroup with better laws amenable to civilization and growth. The more pessimistic answer is that even though living in Detroit became a losing proposition and people fled, company men have called in the feds again and again to buttress dead businesses, keeping moribund institutions intact. Bailouts become lifelines for socialist decadence. This gruel slows the necessary decline down, but had the feds kept their hands tied, it could have proceeded apace. Alas, they did not. Glaeser wonders what might have been:

the Big Three were synonymous with industrial stagnation; for all we know, a dissolution of General Motors would have led to a cluster of smaller, more nimble companies. Some might have failed, but others might have been innovative enough to start adding employment. What we do know is that we haven’t produced a world-beating car industry that will be a future jobs machine. These companies will probably keep sputtering along, making money in good years and requiring more bailouts in bad.


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  4. November 7, 2011 11:56 pm

    “The skeptic of competitive government would use this as evidence to show how weak exit is as way to improve governance.”

    I think this is only true if you view exit as constructive criticism. The real power of exit however lies in creative destruction. From this perspective, exit is working just fine.

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