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How Detroit leaders ignored causes of bankruptcy for 65 years

The signs of Detroit’s decline have been well-recognized for 65 years. Photo courtesy of Spencer Platt/Getty Images.

For the past few months, Lew Mandell, author of “What to Do When I Get Stupid,” has been our retirement finance guru. He’s addressed multiple ways to close the retirement income gap, encouraging boomers to plan ahead before they lose their financial faculties to old age. The best retirement deal, he thinks, is the one that guarantees an 8.3 percent return — for life: Single Payment Immediate Annuities.

But Mandell’s expertise is vast. When on a teaching stint in Singapore, he explained for Business Desk readers how Singapore runs the state through incentives. And he returns now to offer his up-close view of Detroit’s decline. Forty years ago, the city of Detroit commissioned the young economist to study their economic problems. What Mandell discovered then wasn’t new, and what’s happened to the city now, he argues, could have been predicted by state and local leaders — if only they had paid attention to their own commissioned studies. Making Sense has done extensive reporting on Detroit, both the city’s declines and hopes. See our photo essay “Desolate Detroit: Forsaken City” below and watch our 2011 segment about hopes for the Chevy Volt at the bottom of this post.

Lew Mandell: Detroit has just been allowed to enter the largest municipal bankruptcy in U.S. history. While the world focuses on the latest turn in the saga of this once-great manufacturing city, it turns out that the causes of the city’s decline have been well-recognized for nearly 65 years. In fact, Detroit’s leaders commissioned studies investigating the city’s financial woes as far back ago as the end of World War II. Study after study delivered the same results, which were largely ignored.

The economic malaise began with the exodus of non-automotive manufacturing jobs from Detroit, just after the Second World War. At first, jobs went to other North Central States, then to the South, and then overseas, culminating with the overall decline in manufacturing in the U.S. Throughout much of this time, Detroit-based manufacturers saw their location become less and less advantageous and perceived little or no interest from local or state governments in keeping manufacturing jobs from moving away.

Unpopular government policies included relatively high business taxes and what employers perceived as “unbalanced” worker’s compensation laws. There was an overall feeling that government was hostile toward business. By the 1970s, rising crime rates helped contribute to the perception that the quality of life in the Detroit area had fallen behind most other, similar metropolitan areas.

In 1972, I was a young economist commissioned by the city of Detroit to study these problems and come up with recommendations. In a year when the nation as a whole was enjoying economic prosperity and automobile sales were at an all-time high, a sizable proportion of Detroit area residents (10.1 percent) was without jobs. Ominously, fully 60 percent of the manufacturing labor force in the Detroit metropolitan area worked directly for one of the big three automobile manufacturers. Non-automotive employment was scarce and appeared to be getting scarcer as firms closed their Detroit operations to locate elsewhere. This substantial and growing dependence of an entire metropolitan area on the fortunes of a single industry was viewed with great apprehension by nearly all elements of the Detroit community.

To my surprise, this problem was not new to Detroit or to my employer, the University of Michigan’s Institute for Social Research. In fact, my colleagues at the Institute had been asked to do a similar study more than 11 years earlier, the results of which were published in the 1961 book “Location Decisions and Industrial Mobility.” But even that wasn’t the first. Nearly a quarter century before, my predecessors at the Institute had been asked to do a nearly identical study in the late 1940s, the results of which were published in the 1950 book “Industrial Mobility in Michigan.”

Relocation out of Detroit

By the time of my study in 1972, the employment situation in Detroit was acute. Manufacturers were so unhappy about their treatment by state and local government that many were threatening to leave the area. As I concluded in my own 1974 book on the situation, “Industrial Location Decisions,” many Detroit-area employers wanted out. Employers representing 28 percent of Detroit manufacturing workers (excluding those from the big three auto manufacturers) reported that a move out of the area was probable within the next five years, and an even bigger percentage — 55 percent — felt that moving was “not out of the question.”

A majority of manufacturers who felt in 1972 that a move from Detroit was not out of the question said that if they did move, it would be out of state. This differed from earlier studies when Detroit employers — if they were contemplating a move — most often contemplated a move out of the Detroit area to another part of Michigan.

Contributing to the overall loss of manufacturing jobs was the unwillingness of those who remained in Detroit to expand. While economic growth nationally was robust during this period, employers representing 70 percent of Detroit manufacturing workers said they had no plans for the expansion of plant facilities in the next five years, and a great majority anticipated no expansion of plant facilities over the next decade.

The results found in 1972 Detroit, where employers representing 28 percent of manufacturing workers felt that a move out of the area was probable, had been building slowly over more than two decades. This should not have been news to Detroit leaders. In 1950, employers representing 13 percent of manufacturing workers said that such exodus was somewhat probable. And 11 years later — but still another 11 years before my study — those considering a near-term exodus from Detroit “very probable” was up to 8 percent.

When asked in 1961, if starting from scratch, where they would locate, employers representing 65 percent of Detroit manufacturing employees said they would locate in the same area as the plant. But by 1972, only 38 percent said that they would remain in the same area. As a harbinger of things to come, 2 percent said they would locate to a foreign country.

Importance of Wage Rates

So why would employers want to leave Detroit? For many years, they grumbled about state and local business taxes. In 1950, manufacturing employers cited these tax rates as the most burdensome factor. What manufacturers had to pay their employees — wage rates — was further down on their list of concerns — as far down as seventh, to be precise. A decade later, wage rates were growing in importance, coming in as third on employers’ ratings. But the attitude of the city toward industry and taxes still outweighed wages as manufacturers’ primary concerns.

Fast-forward to 1972, however, and a majority of Detroit area manufacturers cited wage rates as the most important factor determining their ideal location. State and local business taxes were still a factor for many too. But employers complained about the high cost of labor particularly in light of their perception of low labor productivity and skills. Business taxes and workman’s compensation plans remained a concern, but wage rates had now risen to the number one disadvantage employers associated with Detroit. Indeed, those who indicated they would probably leave the Detroit area cited the enticements of lower labor costs, followed by better taxes or worker’s compensation plans, and other labor advantages such as productivity and skills.

By 1972, as a result of the lack of manufacturing diversification in the Detroit area, almost the only advantage of being located in that area was proximity to the big-three auto companies. In fact, firms representing 85 percent of non-big-three manufacturing employees sold at least some of their products to the big three.

And most of what employers found problematic about Detroit’s inhospitality to business stemmed from the powerful unions and government, who appeared to be intertwined. Employers representing nearly three-quarters of non-big-three manufacturing workers said that Michigan’s legal climate toward industry was worse than other states’, and not one said it was more favorable. Employers also balked at workman’s compensation policies and environmental requirements coming from the state. They perceived Michigan taxes and ordinances to be far more oppressive than those of other states.

Quality of Life

Contributing to Detroit’s woes has been the continued downfall in the perception of the city’s quality of life. When asked in 1972 whether the quality of life in the Detroit metropolitan area had become better or worse over the past 10 years, employers representing 69 percent of non-big-three Detroit area manufacturing workers said it had become worse while only 21 percent said that it had gotten better.

This wasn’t symptomatic of general urban decay. In Atlanta, for instance, manufacturing employers reported the opposite: businesses representing 78 percent of manufacturing workers said the quality of life had improved and only 10 percent said that it had gotten worse. When asked to contrast quality of life in Detroit with other metropolitan areas in the United States, just 8 percent of employers said that the quality of life was better in Detroit than elsewhere while 23 percent felt that it was worse. In Atlanta, 95 percent thought the quality of life was better in their area. More surprising was that Chicago employers representing 48 percent of manufacturing employees said that quality of life in that cold, windy city with urban problems similar to those of Detroit was better than in other metropolitan areas.

Many Detroit-area employers blamed increased crime for the declining quality of life, but whatever the cause, these perceptions fueled desires to get out of the city. Of those who felt that the quality of life in Detroit was no worse than 10 years before, only 3 percent said that it was very probable that they would leave the area in the next five years. This contrasted strongly with those who felt that the quality of life had deteriorated over the past decade, 18 percent of whom said that was very probable that they would relocate in the next five years.

Any Lessons?

Many factors contributed to the decline of Detroit. The fact that “Motown” literally owned the U.S. auto industry for a time, created a happy post-war, “what me worry?” boom for manufacturers, workers, residents and politicians. The economic strength of the big-three oligopoly began to crumble after the 1973 “Yom Kippur” war in the Middle East when spiking gasoline prices stimulated demand for more fuel-efficient foreign cars. The slow response of the big-three manufacturers and their unions to the new competitive pressures surely hastened the decline of manufacturing employment in the area, as did a failure to retain industrial diversification.

What looking at these studies, which range in age from 42 to 65 years old, tells us — and Detroit — is that the seeds of the city’s decline were known and were of great concern, at least to some, way back at the end of World War II. Manufacturers, other than the big-three, felt so poorly treated by state and local government in terms of high business taxes, oppressive worker’s compensation laws and hostility to business that many were ready to move elsewhere. It now appears that local and state leaders paid little attention to the expensive studies that they, themselves kept commissioning, and which kept coming up with the same results, reminding us of the famous definition of insanity attributed to Einstein. Hindsight, it is said, is 20/20, and much has been gratuitously offered to explain the tragedy of Detroit. However, in this case, the real sin was ignoring two-thirds of a century of foresight.

In 2011, Paul Solman visited Detroit to hear about the hopes pinned on electric cars.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions

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