Archived Story

Detroit and Troy: A cautionary tale

Published 11:00pm Wednesday, May 22, 2013

Detroit, Mich., is a city that doesn’t seem like it has much in common with Troy, Ala…until you think about it a little more…

Like Detroit, small southern towns like Troy have been hit hard by the decline in manufacturing and the shifting of low-skilled jobs overseas. Like Detroit, small post-industrial towns like Troy are constantly fighting against “brain drain,” which occurs when a city’s best and brightest leave and go elsewhere for better jobs, more fun, etc. And, like Detroit, everything has to be going right on the policy front for small towns like Troy to really experience economic booms.

Though there are similarities between towns like Troy and Detroit, we are not Detroit. (Thank God!). Detroit’s balance sheet is showing a negative cash flow of $162 million as of April 26; in other words, the city no longer has enough money to keep paying the bills. Their annual budget deficit could close in on $400 million by July, and they’ve accumulated more than $14 billion in debt.

Many economists have provided commentary on Detroit’s problems. According to Veronique de Rugy, Detroit’s taxes are ninth-highest for large American cities. Harvard economist, Ed Glaeser, says some of Detroit’s problems are due to investments in infrastructure and big white elephants, instead of investing in people. Others attribute Detroit’s decline to corruption, unionization, and a clinging to America’s declining automobile industry for way too long.

Though there’s disagreement over what caused Detroit’s decline, we can all agree that it’s a story worth paying attention to because there are similarities between Detroit’s decline and the declines occurring in many other American cities. The difference between Detroit and places like Buffalo, NY, Cleveland, OH, and Troy is mainly one of scale—poverty and decrepit neighborhoods are present in all these places…there’s just a lot more of these problems in Detroit.

Declining cities tend to have in common the following characteristics:

(1) A general inability to respond nimbly to an economic crisis. When inefficiencies occur in the private sector, streamlining and downsizing tend to occur. To a large extent, municipalities lack the same kind of dynamism;

(2) A tendency to go big with projects at a time when going small is more crucial than ever. Municipalities are often cursed with “If you build it, they will come” thinking. Major public projects like sports stadiums, museums, and mass transit are leveraged up as “job creators” at a time when the city is broke and should be scaling back services and projects. The returns on big municipal investments—even when “social” or “community” warm feelings from the project are accounted for—are overestimated by planners and often end up being negative;

(3) Municipalities react to declining revenues by going in the wrong direction with policy. Rather than figure out how to be more competitive at attracting residents, commissioners fuss about the suburbs and unincorporated county sucking tax dollars away. They then respond by raising taxes in the urban core and sometimes push for annexation when, in fact, the city should be downsizing and splintering into smaller units. They missed out on a key economic principle: lower tax rates can often lead to more tax revenue;

(4) Most important of all, and the most consistent theme one finds when they look at cities in decline, is a complete lack of freedom, property rights, and incentives to be entrepreneurial. Turning around blighted urban housing projects probably requires letting people own the run-down public housing and then getting out of the way; municipalities instead try to keep doing the same (and sometimes more) with less resources. Getting entrepreneurs back to a place like Detroit requires radical tax reform and simplification, favorable zoning laws, and credible commitments by municipal governments to protect investors against future predation. City planners, instead of being entrepreneurial with policy and potential investors, think of the short-term money there for the taking if someone can be coaxed into coming to their city;

The formula for economic development at the city level is pretty straightforward: keep taxes low, keep public spending under control, and stay out of the way of entrepreneurs. Though the secret is pretty easy to understand, the fact run-down places like Detroit exist and persist means it’s a formula those of us in the policy world must repeat to people again and again and again with the hope that it eventually sinks in.

Scott Beaulier is Director of the Manuel H. Johnson Center for Political Economy at Troy University.

 

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