More on Eminent Domain, Crony Capitalism, and the Decline of Detroit

Building on my post discussing the role of eminent domain abuse and the destruction of property rights in helping to cause the decline of Detroit, economist David Henderson has an interesting discussion of how “urban renewal” condemnations in the 1960s helped cause the massive 1967 race riot that most believe was a major milestone in the city’s deterioration. The use of eminent domain to forcibly uproot poor African-Americans had destroyed previously cohesive communities where social ties could forestall civil disorder or at least limit its scale. Henderson notes that one of the few poor black neighborhoods in Detroit to avoid large-scale rioting was also one that had managed to avoid urban renewal takings in earlier years. Residents of that area had previously banded together to form a a neighborhood block club, which in 1967 played a key role in preventing violence from spreading to the area. Urban renewal takings had undermined such civic society organizations in other parts of Detroit’s inner city.

Meanwhile, Shikha Dalmia discusses the role of Detroit’s deleterious policy of favoring big business interests, while at the same time harrassing and driving away smaller businesses with burdensome regulations:

Every mayor for the last two decades has tried to jump-start Detroit by reviving its crumbling downtown. In the 1990s, Dennis Archer erected stadiums and casinos. His successor, Kwame Kilpatrick (who was convicted on federal extortion and racketeering charges) hosted mega events.

The current mayor, Dave Bing, has been too bogged down in Detroit’s fiscal quagmire to propose anything grand. But a group of rich investors led by Dan Gilbert, owner of Quicken Loans, is spearheading a massive effort to bring businesses, hotels and residents into the city.

Gilbert has pumped close to $1 billion to relocate his headquarters in Detroit and scoop up real estate for stores, hotels and apartment buildings. Whole Foods recently followed suit as did Moosejaw, a retailer for outdoor apparel. But these ventures have been seduced by massive subsidies. Whole Foods’ local partner received $5.8 million in state and local grants as well as sizable tax credits….

[E]ven as Forbes was praising Detroit’s artificial green shoots, city regulations were busy nipping the real ones like Pink FlamInGo, a Latin-fusion food vendor responding to real market demand.

These regulations barred street vendors from selling any hot fare except hotdogs (but without sauerkraut) and that too only in 16 approved locations. Pink FlamInGo built a roaring business by ignoring these rules — until the city shut it down….

But this year Mayor Bing made Pink FlamInGo-style harassment his official policy by launching Operation Compliance.

The program seeks to cure the city’s blight by shutting Detroit’s 1,500 “illegal” businesses — tire shops operating from backyards, second-hand appliance stores perched in abandoned warehouses — if they fail to comply with city regulations. But worrying about blight in a city fast returning to the wild is insanity.

Moreover, University of Buffalo’s urban studies professor Henry Louis Taylor told Black Detroit, a local magazine, these establishments might constitute only about 10 percent of the city’s businesses — but they serve about 70 percent of residents…

A few of them might pose genuine public health issues. But the vast majority are being cited for technical violations like not having the proper zoning clearances or licenses or being behind on their taxes.

So a mayor who pleads he doesn’t have the resources to: provide street lights to half the city or arrange timely trash pickup or control Detroit’s soaring murder rate nevertheless has enough inspectors to unleash on poor residents trying to eke out a living.

“They’re all worried about what’s going on in the front of our stores,” fumed a business owner who found puppy-sized rats in her back alley to Black Detroit. “But the city needs to maintain its own business by keeping the public streets safe and clean….”

A city that showers subsidies on well-connected businesses while thwarting individual entrepreneurs and ignoring basic services is writing its obituary….

Such favoritism for a few influential big business interests at the expense of smaller businesses and the general public is of a piece with the city’s aggressive use of eminent domain, which often forcibly displaced small business and poor residents in order to transfer land to major corporations such as General Motors. As in the case of the subsidies described by Dalmia, the rationale offered for such unfairness was the need to promote “economic development.” In the end, however, Detroit’s crony capitalism produced neither justice nor development. Detroit would have done better to heed the lessons of modern development economics, which emphasizes the importance of secure property rights and maintaining an economy open to a wide range of businesses on an equal basis.

UPDATE: Harvard economist Edward Glaeser, a leading expert on urban development, emphasizes the role of the city’s skewed spending priorities, which focused on impractical construction projects, subsidies for declining industries, and bloated benefits for public employees:

The hallmark of declining cities is that they have more buildings and infrastructure than they need. Yet in the 1960s, under Mayor Jerome Cavanagh, Detroit used public money for urban renewal, building new structures that weren’t necessary. Under Mayor Coleman Young, the city spent hundreds of millions on an absurd monorail system that glides over empty streets. Instead of spending on schools and safety, Young doubled down on automobile employment, using eminent domain and tax subsidies to induce General Motors to build a plant on what had been the Poletown neighborhood.

Despite those missteps, Detroit could still have avoided bankruptcy if its fiscal policies had taken account of its diminishing tax base. Like many of America’s cities, Detroit underfunded its pensions and its retiree health care system, which now represent about half of the city’s debt of over $18 billion. When cities or citizens are getting richer, it occasionally makes sense to borrow. But sensible people don’t incur debts during their peak earning years and then expect to pay the bills when their income starts to fall. Detroit did just that. Detroit’s debt overhang doesn’t just impose overly high costs on the city’s now modest tax base. It also scares off new businesses. What firm wants to own part of that obligation?

Like the policies described by Dalmia and myself, much of the overspending listed by Glaeser also tended to favor powerful interest groups (General Motors, the construction industry, and public employees unions) at the expense of small business and the general public. While Detroit was in part a victim of forces outside its control, such as changes in the world economy that made life difficult for the auto industry, it failed to adjust to those changes in large part because the city government chose to pursue a policy of crony capitalism.