Detroit as Greece

The unraveling of Detroit, once a great American city with a thriving auto industry and an innovative middle class has finally gone broke. Today the city is far from its glory days, with an affluent middle class moving to other cities, businesses opting out or moving to Texas and politicians too corrupt to even attempt to fix the unfixable.

Paul Krugman, New York Times columnist and a Nobel-laureate, argues that Detroit, much like Greece, has been the victim of uncontrolled market forces, sweeping away jobs in much of the same fashion as they obliterated the city’s once thriving auto industry. Krugman’s argument is shared by many on the political left, and several pundits have claimed that Detroit is what small government looks like.

However, Detroit’s problems are manifold, starting from the fact that the city owes $15 billion with a budget of $1.1 billion.

How did we get here?

As a response to the claim that Detroit’s failure is a result of GOP’s austerity measures, Charles Krauthammer argued that Detroit’s problems have everything to do with progressive politics of bloated government and out-of-control social welfare spending.

“It’s been run by the Democrats for 60 years, and you can cite all the studies about how bad austerity is, all you have to do is look at Detroit and you get an idea of how bad the absence of austerity is, it’s a city in ruin,” Krauhammer said.

However, Detroit’s misery is a result of many competing reasons. These factors have much to do with poor leadership, petty politics and personal vendetta.

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For instance, two economists Edward Glaeser and Andrei Shleifer claim in a trailblazing new paper The Curley Effect that the city’s difficulties are largely self-inflicted. After an election win in 1973, Detroit’s first black mayor, Coleman Young, amalgamated his power by pushing out white residents, who had opposed him, out of the city by removing services from their areas. Therefore, as Glaeser and Shleifer argue, Detroit became an overwhelmingly black city in the throes of poverty and social problems.

What’s next?

Doing nothing is no longer an option: the city needs leadership and good governance. Preaching free market capitalism to deaf ears is not a solution and will not produce goods, services and growth. To avoid further sinking into the quagmire, Detroit needs to start from scratch. For example, the city could follow Texas’ example by reducing corporate tax and thus effectively doing what Texas did to California. Many businesses moved away from California due to the state’s ridiculous bureaucracy and high corporate taxation.

Detroit filed for bankruptcy and it needs to collectively roll up its sleeves and forget about high-minded business plans and green development projects. Manufacturing cars or building tangible and concrete products for Americans would be welcomed by a country that needs a city to lead it out of the ongoing economic malaise.

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