Detroit; Suicide or Murder?

The lovely Miss Puddy once again accompanied me on another trip.  This time the destination was Detroit.  I wanted to see the famous Detroit Institute of Art before the bankruptcy judge ordered all the pieces to be sold.  There has been a lot of ink spilled on Detroit recently.  While visiting the city I read Charlie LeDuff’s new book, “Detroit, an American Autopsy” which I highly recommend.

Many people feel Detroit did itself in with unions, municipal corruption and incompetent industrial leadership.  In other words, a death by its own hand.  It is comforting to sit at a distance and say Detroit was a suicide and therefore it cannot happen here.  But be careful for as LeDuff writes, “Go ahead and laugh at Detroit.  Because you are laughing at yourself.”

A closer inspection reveals the problem in one small word – JOBS or lack thereof.  The deindustrialization of the country and especially Detroit is really the heart of all its troubles.  Since Detroit was the biggest industrialized city in the country it only makes sense that Detroit was hit hardest and hit first. 

No amount of government bailouts, downtown revitalization, reform governments or bankruptcy courts will fix this problem.  There is only one solution – JOBS.

It seems that they moved the factories overseas or south of the border but forgot to take the workers with them.  Now the city is filled with empty houses and idle hands.  Less than half the adult population works at a steady job.  With joblessness comes the desperate feeling that all hope is lost.

LeDuff talks about the hard dollar and the easy dollar.  No one wanted to work for the hard dollar – those guys were chumps.  Everyone wanted the easy dollar – the hustler.  Detroit was built on the hard work of men that wore white socks, looked at the pictures of their grandchildren and worked “one more day” in horrible conditions for 30+ years.  The new generation wants to hustle for the easy dollar. 

It seems that everyone from the boardroom to city hall to the scrap dealers want to make one last big score on their way out of town because they all realize this is the end of the line.  That is why CEOs of dying corporations get their $10,000,000 bonus checks even when the company is losing money.  Why City Hall is a feeder program for the prison system.  Why the fire department has a strange symbiotic relationship with midnight scrap dealers.  (They scrappers burn the buildings partially to expose the copper wiring and plumbing making it easier to steal.)

Trying to fix Detroit by fixing these problems is like cutting at the branches.  To fix the problem you have to hack at the root – JOBS.  The deindustrialization of the country and Detroit in particular is what has caused this nightmare.

In order for a society to have wealth it must create wealth.  There are only 3 main ways to do this:  manufacturing, mining and farming.  Service industry jobs are great but an economy cannot be built on doing each other’s laundry and cutting each other’s hair.  Someone must make something, grow something or dig something out of the ground.  It is just that simple.  Mining, manufacturing and agriculture are what create wealth.  The service industry is where we spend our wealth.  All “jobs” are not the same.  It is critical that we have more jobs in the wealth creation sector.

Many new economists of the last couple of decades talk of our consumption economy.  Talk about rubbish!  What family ever spent themselves into prosperity?  President GW Bush even mailed out $600 cash to families after 911 to stimulate our economy.  He said to be patriotic and go buy that new SUV.  Well if $600 per family was good for the economy why not $6,000, why not $6,000,000 per family?  Because spending our wealth will not make us prosperous.  Only jobs that lead to the creation of wealth will ultimately raise the standard of living.  The only businesses storefronts that seemed to be open in Detroit are tattoo parlors, liquor stores, hair/nail salons and a few convenience stores with bars on the windows.  These are hardly wealth generating industries. 

Our balance of trade shows that we used to export goods all over the world.  The wealth of the world flowed into our cities as we provided food, manufactured goods and mined products for ourselves and sent the excess to others.  The bottom chart shows that after WWII our trade surplus skyrocketed.  At that time we had virtually the only major economy that was not bombed into oblivion.  As the world rebuilt we still exported our surplus until a funny thing happened.

In 1971 President Nixon took us off the gold standard.  Now we no longer had to balance our books or pay the price of our gold reserves going overseas.  We could just print money at no cost and buy things from around the world.  We could write IOUs and spend them everywhere.  It was good to have the world reserve currency along with the largest military in the world.  After Nixon came the OPEC oil shocks where oil jumped up 70%.  Again in 1979 OPEC hiked prices.  The chart clearly shows that we started importing more and more than we exported.  Our IOU’s made up the difference.  Our national debt, corporate debt and personal debt grew.

The chart below shows the number of manufacturing jobs in the US.  Note that the number peaked around 1979 and has been slowly dropping ever since.   The last time the number of manufacturing jobs was this low was the mid 1940’s.  At that time our population was less than half of its present size so manufacturing jobs as a percentage of the workforce is much worse than this chart reflects. 

There is a slight bump in the numbers at the right hand side of the chart but only because the government BLS has played with the numbers.  Now they consider “building a hamburger” at McDonalds to be “manufacturing”.  It is clear that the number of true manufacturing jobs is going down even while the population is growing.

It is no coincidence that the middle class has been losing ground.  The middle class has lost purchasing power and its standard of living since it peaked in 1979 (the same year that manufacturing jobs peaked).  You just cannot equate a job building a refrigerator with a job serving ice cream.  One creates wealth and the other is a luxury as a result of that wealth.  The jobs are not the same and yet both figure into the employment number the same.

When we drove through Detroit inside the city limits there were places that looked like Beirut after it was bombed.  We saw houses and buildings crying out to be demolished but no money to do so.  Some homeowners have tried to take matters into their own hands and have burned down crack houses and blocked the streets so the fire department could not put them out.  But once outside of the city limits the suburbs looked like most suburbs all around the US.  A surreal contrast to what was going on just a few blocks away.  However, if I am right, those suburbs may not be as safe as they seem now. 

The only thing that can save Detroit and the rest of the country from what is coming is JOBS.  Not just jobs at McDonalds or the dry cleaners but manufacturing jobs, mining jobs and farming jobs.  It is too easy to say that we cannot complete with China or India or whomever because of low wages but what about Germany?  They seem to be exporting more than they import.  We have to have modern factories with the most productive equipment in the world for our workers.  The only way we can pay more to our workers than Chinese workers are paid is to out produce them.  It is going to take a lot of capital to rebuild the US industrial base.  Many factories are just hanging on and not reinvesting in more competitive machines because of fear and uncertainty.  It is going to take real leadership and a realization that things cannot continue as they are now.  We are going to have to look down on the hustler and glorify the worker that actually produces wealth in this country.  But first, we must stop the deindustrialization that is still taking place at a record rate in the US. 

Maybe the best solution for Detroit was proposed by the Free-Man’s Perspective in the following article from July 2013.  In the article the author proposes that the City of Detroit be declared a tax free zone and to close down the government and privatize everything.  Manufacturing inside Detroit would be free of all taxes.

It would be the best way to bring real jobs back into the city that I can imagine.  Of course what if it did work?  Why not extend the solution to all of our troubled cities?  Why stop there?

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Larry sells precious metals at the Silver Trading Company, LLC.  Visit us at www.silvertrading.net .   Worried about storage issues?  Ask us and maybe we can help.