Here’s a good liberal’s plan for saving Detroit: Deregulate Drastically. (Sorry, I have a penchant for pointless alliteration). We generally consider expectations in the context of monetary policy; but it has crucial implications for capital inflows as well. Imagine the Federal Government – in concert with Detroit – stipulated the following rule:
Until Detroit’s per capita income reaches 85% of the national level, all local and federal regulations governing labor and capital transactions are suspended.
These include, but are not limited to – minimum wages, severance, Fair Labor Standards, and all immigration restrictions. (That is, if an employer located in the City of Detroit can vouch two years of employment for any immigrant, they will not need to operate under all the crazy guest worker provisions).
The only regulation will require Detroit to hire two unemployed residents of the City or long-term unemployed American for each immigrant. This institutes a de facto wage floor against prevailing global wages which is necessary to increase the per capita income of the city. While a long stream of poor labor will always make everyone better off – it will after a point decrease per capita wages of each country even if increasing the average of both.
However, unlike Adam Ozimek at Modeled Behavior, I don’t think immigration should be the centerpiece of any plan to save Detroit, when there are better regional options at the ready. If firms are given a Federal credit to relocate distally long-term unemployed, Detroit has a large group of people that have atrophied skills, poor social habits (not of their fault), and extremely low marginal value to a scaled firm.
Now, in general I don’t think regulations are killing the American economy, I support reasonable increases in the minimum wage, and genuinely believe work and child safety laws have made the country a better place. But if Detroit is the only locality to benefit (or suffer) from relaxed regulations, the benefit comes from the difference in cost of production in Detroit vs. elsewhere. This is usually a Prisoner’s Dilemma-esque race to the bottom for the poor (to the extent we’re talking about sensible regulations), but in tight and rare situations provides a deficit-free way of giving Detroit breathing space.
All sorts of firms will want to capitalize this opportunity which will both repopulate Detroit and cap long-term national unemployment. But much of the recovery will take place without the law taking effect. Let’s say we stipulate a mass deregulation that begins in exactly one year. Once we’ve credibly convinced the market towards this commitment, firms will today begin shifting operations significantly increasing employment and wage expectations by the time the law takes effect. The argument against minimum wage goes that it prevents people who want to work for less from doing so, curtailing personal liberty and decreasing employment. Just by virtue of mutating expectations, there’s a case to be made that even if today many are willing to work below minimum wage, after accounting for expectations of future growth aggregate demand will rise sufficiently that by the time deregulation occurs few will want to make use of it.
There are two possibilities: either this works (increases employment and incomes) or it doesn’t. Shocker, I know. Anti-deregulation Pro-regulation liberals should be happy either way. If it doesn’t work we learn that the costs of deregulation are not all that high, and lends further support for a broader program of sensible, national regulations. If it does work, many of Detroit’s poorest are brought out of poverty, repopulation saves pensioners, and employment soars.
In fact, if the Federal Government credibly convinces the market of such a move – and guarantees long-term unemployment credits – there’s a non-negligible chance that by the time of deregulation the “rule” already requires re-regulation. Let’s say I want to produce cheap shoes, and learn about this program. I will begin preparatory operations today increasing both employment and wages.
This is unfair for all the other cities that must abide by Federal law, but that’s the point. We wish to give an “unfair advantage” to the poor. The only other viable option, that does not include a complete shutdown, requires massive Federal stimulus which will hurt the rest of America far more than a distorted regulatory code.
In fact, capitalizing on distortions should become a key lever of interregional stabilization. One great way to save Detroit – and the environment – at the same time would be to institute a rigorous cap-and-trade program, and providing Detroit a disproportionately high number of permits (distributed from the rest of the country). Each of these solve a key efficiency gap that is lost through simple fiscal stimulus which can be ineffective because of bureaucratic concerns.
Furthermore, regulatory policies often effect the young more than the old – minimum wages are a great example. The best way to repopulate a dying city is with fresh, young talent. A mix of deregulation and supply-side stimulus including good public education and retraining programs might once again make Detroit a model city. A model for dying cities across the rich world.
This is Ashok. 