Tuesday, 5 January 2010

Lessons from Detroit's decline

Paul Sweeney: Progress is not linear. If NAMA goes wrong and if the Deflationary School of Economics (most mainstream economists) wins on policy, Ireland could decline - much further. We have already made a Great Leap Backwards to 2003 national income levels. Lessons can be learned from the remarkable decline of Detroit. Economic geographers can learn a lot from this city’s fall and industrial economists from the US auto industry’s mighty fall, too.

Henry Ford offered his famous $5 a day to work in his car plant in Hamtramck, Detroit from 1914. Black people fled northwards to Detroit for work and better rights. Motown the music city was a by-product. Today Motown, or Motor City, has fallen mightily. It fell as GM, Ford and the other US car makers have fallen. GM was indisputably the world’s greatest company for most of the 20th century. It was the biggest company in the world and the most profitable for many years. It set the standards for management and production for multinationals. Today, GM, Ford and Chrysler - the US auto industry - are on government welfare.

US manufacturing, so dominant since 1890, has shifted offshore. Auto manufacturing had many spin-offs. It was killed because GM, Ford and Chrysler did not make cars people wanted to buy.

In 1955, four out of every five cars in the world were made in the US, half of them by GM. GM's main US rival, Ford, was half its size. The largest foreign carmaker, VW, was only slightly bigger than GM's own German subsidiary, Opel, and it had only had one model - the VW Beetle.

In the 1960s, US firms did not innovate in the design of cars. They made money by increasing the size and weight of their vehicles. They did this by adding extras, like air conditioning, power steering, and new sound systems. It was the European manufacturers who developed disc brakes, rack-and-pinion steering, air-cooled and diesel engines. And Toyota was changing its production system to become leaner and more efficient. It was the oil crisis in the 1970s that first illuminated the problems of US automakers.

After the 1970s Oil Crisis, smaller cars became popular, and US consumers found that cars like the Toyota Corolla were an attractive alternative to big American cars. When oil prices fell in the 1980s, there was a new false dawn for US carmakers – the SUV. Helped by a 25% tariff, and allowed to bypass US fuel efficiency laws, this proved to be a temporary, state-backed respite (like Ireland’s low corporation tax is still believed by most policymakers – especially free marketers – to be a real, rather than a temporary, competitive advantage!).

The tens of thousand of union workers did not just build Cadillacs, some bought them for themselves. Since the 1970s, Japanese carmakers gained market share. By the 1990s, all big Japanese carmakers had transplanted car factories in the South of the US – automated, utilising better production methods, often non-union, and most importantly making cars people wanted to buy.

Detroit’s unemployment is 17%, the highest of large US cities and well ahead of the national figure of 9.8%. It population peaked n the 1950s at over 2 million, but today it is barely 900,000. These are scattered over 138 square miles - “a quarter of which is not just uninhabited, but is utterly empty. No people, no structures – just tall grass bending in the summer breeze, mixed with nodding blue cornflower and Queen Anne’s lace,” according to Fortune (12 October 2009).

But Motown did not just decline because of the decline of the motor industry. It is truly Motor City, where the car is the only way around, dictated by the industry. You won’t find a metro, tramline or commuter train in Motor City. The vast prairie-like wastelands would not have blossomed in the heart of the city and suburbs if they had been linked by public transport systems. The auto industry saw to it that they were never built. Today, even LA and Washington have metros. Dublin does not. And we never had an auto industry.

The average house price in Detroit was $98,000 in 2003. Today it is $15,000. In some areas, like Hamtramck, houses are on sale for $100. One-third of the population is below the US poverty line, and the city lost one quarter of its population since 1990. Some are talking of putting farms into blighted city areas - both agricultural and wind farms.


This and other photos of Detroit’ fall, by Yves Marchand and Romain Meffre, are available here.

Today all US car companies are on corporate welfare. The great hope for Detroit is the hybrid Volt, again well-subsided by Uncle Sam. Indeed, 30 years ago the mayor of Detroit even bulldozed 465 acres of housing businesses to make room for a new automated Cadillac factory at Hamtramck. 4,200 Polish and African Americans were kicked out of their homes to make way for this new, gleaming factory.

Two other plants, employing 18,000, were closed down for the new automated plant. The 6,000 jobs never materialised – 4,000 did but the figures is well below 3,000 today. Now the hope is to make the hybrid, the Volt, in the plant. Taxpayers invested $50bn into GM and now still own 60% of it. $945m in grants and tax breaks are being given to develop alternative vehicles in Detroit.

We can learn from Detroit’s failure. We must learn from the abject failure of the once extraordinary success of the US auto industry which paved the way for all industry in the 20th century. The decline and near collapse (the apex of “free” enterprise - GM, Ford and Chrysler – would be dead and buried had they not been rescued by the reviled state).

Progress is not linear. Visits to great Roman sites should remind us of this. Ireland can quickly revert back to the 1950s standard of living. We are already back at 2003 levels now, thanks to the “success” of the tax-cutting and de-regulation policies of McCreevy and Cowan in a boom. Our policymakers, economists and government failed to take advantage of the great strengths of the real Celtic Tiger period to cut direct taxes less, not to cut indirect taxes at all, to regulate the banks and to use the exploding tax revenues to invest more and better and to save more for this wet, rainy day. The policies currently being pursued are leading us, not to Boston, but to Detroit, to decline.

3 comments:

Michael Burke said...

Paul, a salutary lesson.

National income may have fallen back to 2003 levels but, in the absence of any stimulus measures and against a backdrop of falling demand, the continued plunge in investment continues means it is now back to a level last seen in Q3 1998.

Since investment is the basis of medium-term prosperity,

http://ablog.typepad.com/key_trends_in_the_world_e/2010/01/india-and-china-refute-the-myth-of-overinvestment.html

and in more detail here

http://ablog.typepad.com/key_trends_in_the_world_e/2009/09/the-asian-and-chinese-economic-growth-models-implications-of-modern-findings-on-economic-growth.html

this does not bode well for the future.

James Wickham said...

Nice post Paul, And it shows the difference between Europe and the USA. Compare what's happened in Detroit with the Ruhr, once Germany's industrial heartland. In Europe - and especially in Germany - we don't equate economic development with slash and burn farming, so in the Ruhr there has long been a determined public policy to transform the area, not abandon it. Symbolically, industrial buildings have been re-cycled into cultural and recreational facilities (see for example Duisburg's Landscape Park (http://www.landschaftspark.de/en/derpark/index.html),there has been extensive public investment in retraining, the population has been maintained. The Ruhr still has very high unemployment, but nowhere do you see the despair and dereliction of Detroit. Another example of the folly of naive worship of the American model...

Paul Sweeney said...

I was taken aback at the cut of €1bn in the Public Capital Programme in the Budget, following on from previous cuts in investment under the NDP. Micheal you are correct and we still have a big infrastructural deficit, too many unemployed construction workers with great skills which are withering etc. James, Germany is a good example and I have been to Duisburg, though not the park, and have seen how the social network pulls the place together with good trams buses etc. There is still a big smokestack there - a power station, I think. Ireland's incompetent government which brought the economy down with liberal policies of de-regulation, tax cutting during a boom, etc., is making further major policy mistakes. Paying €11bn in cash, so far, into the banks, while cutting welfare, public services and investment is digging deeper.