WHAT'S WRONG WITH DETROIT ... AND AMERICA

Contrary to what you've heard, the fiscal problems of Detroit, and the challenges that confront America, are not so simple, or the result of unions. The 79,500 Michigan jobs/workers that were displaced or shipped to China between 2001 and 2007 didn't happen because of mysterious "magic of the market" forces. Nor did Detroit's tax base suddenly disappear because of incompetent political leadership (though the incompetence didn't help).

Michigan's jobs and manufacturing picture worsened - as did the nation's - because of policies taken by the federal government over the past 30 years. These policies rewarded companies for shifting manufacturing jobs around the world.

When jobs leave so does the tax base. Pretty simple.

Now, someone reading this might be screaming at their screen right now that unions priced the American worker out of the global labor pool by demanding too much. Think again.

Germany produces twice as many cars as the United States. Their unionized auto industry pays workers significantly more than what the U.S. auto industry pays. Indeed, when you take out what it costs for health care (Germany has universal health care) we find that German auto workers make about two times what their U.S. counterparts earn, while benefits for German workers are substantially more rewarding (8 weeks paid vacation, free day care, etc.).

So, the big question is if German auto workers make far more than their U.S. counterparts, why is it that Germany hasn't experienced collapsing industrial cities like Detroit? Why is it that Germany - with its higher salaried auto workers - is seen as the key to Europe's economic stability, while the U.S. is still languishing in a 2008-induced market zombie walk?

SO, WHAT HAPPENED TO DETROIT?
While I could write about the government escorted financialization of America's economy - which is a big problem - for our purposes there are three other developments that help us understand what's happened to Detroit's, and America's, manufacturing base.

The first development is pretty simple. For the longest time no one wanted to buy U.S. automobiles. Beginning in the early 1970s America's auto makers began producing crap. Remember the Gremlin? The Corvair? The Pinto? The Chrysler Imperial LeBaron Two Door? The AMC Pacer? The Chevy Chevette? This wasn't the workers fault. This one is on management. When auto manufacturers in America were forced to shut their doors jobs disappeared too.

The second answer is a bit more complex, but still relatively simple too.

Germany's constitution and social culture embrace unions, worker councils, and the right to strike. This helps shape Germany's union-management relations so that they are collaborative, as opposed to being adversarial (the case in the United States). It's the primary reason that Germany didn't experience wholesale layoffs in the auto industry after the 2008 market collapse (offering "extended vacations" instead). Unions and management worked together to keep people employed.

Finally, apart from producing crummy automobiles and going after unions, the United States has gone out of its way to encourage its auto industry and manufacturing base to leave, while doing little to protect American workers. Think about the following.

As I noted above, between 2001 and 2007 Michigan lost 79,500 auto jobs to China. This happened because of specific government policies, both here and in China.

1. Free Trade Agreements: The U.S. has entered into numerous trade agreements that facilitate moving manufacturing jobs overseas, especially to low paying regions of the world.
2. Currency Manipulation: China has been allowed to manipulate its currency, which enables it sell more goods in the United States.
3. Labor Rights Abused: China regularly suppressed labor rights, which lowers manufacturing wages by as much as 47% to 86%, and attracts manufacturers from the U.S. 

Throw in generous U.S. tax credits for business expenses - which include credits for shipping jobs overseas - and it's easy to understand why almost 3 million jobs in the United States were outsourced or were displaced by government policies between 2001 and 2007 (the German government, on the other hand, appears to have had a role in saving VW from a hostile takeover in 2008 by orchestrating the largest hedge fund loss in history).

By sending taxpayer funded trade representatives to negotiate trade deals, while ignoring currency and labor abuses, the U.S. government has effectively told Detroit and America's industrial base - and the middle class - we don't care about you. The end result is that millions of American jobs have been sent to countries all over the world.

Overseas profits and executive pay in the United States has climbed, but workers and America's middle class are left scrambling for what's left.

WHAT AMERICA'S WORKERS ARE COMPETING WITH
The interesting thing about these developments is that while negotiating trade agreements the private sector has been adamant about protecting proprietary rights and corporate patents. Forcing governments around the world to go after street vendors and protect intellectual property rights is part of our larger free trade negotiating position.

Worker rights, however, are an entirely different matter.

Forced or slave labor? No problem, send the products here. Child labor? No problem, send the products here. Unsafe working conditions? No problem, send the products here. All of this has made it easier to go after labor here in the United States.

To be sure, there's no doubt that German auto makers produce cars in China. But they don't do so as part of a larger policy goal of driving down wages in Germany. The idea that we're all in this together is rooted in Germany's historic approach to economics, and is not simply a shop floor poster in Germany.

Forcing the American worker to compete with laborers who have few protections and can't defend themselves undermines the moral justification of capitalism (the idea that you can work hard and get ahead). It also defeats the spirit of democracy that we fought two wars in the 20th century to promote.

At the end of the day, as I wrote three months ago, if we wanted to demand global labor rights we could. But we don't. This encourages firms in the United States to go abroad, which helps explain what's happened to Detroit and in America.

- Mark

UPDATE (Aug. 2, 2013): And let's not forget that some of the largest economic subsidies and tax breaks -  which erodes a states tax base - were given out by Michigan ($7.1 billion) ...

UPDATE, II (Nov. 4, 2013): This review from the Detroit Free Press is an impressive work that helps us understand the managerial incompetence in Detroit that made the impact of American-led globalization and outsourcing worse than they should have been ...  http://www.freep.com/interactive/article/20130915/NEWS01/130801004/Detroit-Bankruptcy-history-1950-debt-pension-revenue