Thursday, July 25, 2013


I've seen a lot of columns on the failure of Detroit but none of them really discuss the real problems. I'm not an expert on the subject but there are a lot of obvious holes in the current analysis.

Something that is almost never mentions is that the population of the Greater Detroit Metro Area is stable. People are leaving Detroit proper but not the area. Paul Krugman refers to Detroit as a market failure without explanation but this is what he means.

Detroit is in trouble because its population and tax base have been shrinking while its liabilities stay the same. One of its biggest liabilities is its retirement system. A proper retirement system invests workers funds during their tenure and pays the retirement out of the profits from those investments. That means that retired workers would continue to receive their checks, even if Detroit were to go bankrupt. Detroit didn't do that. It opted for a pay-as-you-go system where today's retirement checks are paid for from today's taxes. This is manageable as long as the tax base is stable or growing. With a shrinking tax base, it becomes untenable. This is the same problem that the Detroit automakers face.

Since the retirement checks and other fixed expenses have to be paid, cuts have to be made in services. That is why the streetlights dont' work and it takes an hour for the police to arrive in an emergency.

Detroit could have survived the bad pension plan if it had a stable tax base but it does not. It has been hemorrhaging residents. Liberals chalk this up to White Flight. If whites had only stayed put after the race riots in the 1960s, Detroit would be fine.

This is simplistic. There were many factors that led to the population loss. Ironically, the automobile and the rise of the suburbs are a big factor in Detroit. Unlike many cities, Detroit is on flat land which encourages urban sprawl. As the metro area expands, it drains people from the center. This has been a problem for most US cities to some degree or another. Decades of corruption and mismanagement are another factor. The process was also self-sustaining. As the population left Detroit proper, city services were reduced and crime increased. This encouraged more people to leave which fed the cycle. Even black families gave up on their old neighborhoods as crime rose. Businesses followed the population or took advantage of undeveloped land on the outskirts of the metro area.

This is the market failure that Krugman referred to. When given a choice between Detroit proper and other cities in the metro area, the population overwhelmingly chose to leave Detroit.

What can we learn from this? One lesson is the one Krugman wants to downplay - that underfunded pension systems can drag down cities. Another is that you can't mismanage a city indefinitely. Detroit may be unique but many of the factors that brought it down exist in other cities.

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