Over-regulation was not the problem.

Photographer: Jeff Haynes/AFP/Getty Images

Trump's Fairy Tale About the Fall of Detroit

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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Donald Trump all but claims the economic policies of President Barack Obama and Hillary Clinton caused Detroit's 2013 bankruptcy. In a Monday speech in the Motor City, the Republican nominee said he'd cut taxes, eliminate regulations and negotiate more advantageous trade deals to revive Detroit and help other struggling cities.

But Trump got both the diagnosis and the prescriptions wrong. Even the United Auto Workers, the union that has seen its ranks decimated because of industry job cuts and foreign competition, seems to agree: It organized protests outside the hall where Trump spoke.

"Detroit" can mean the U.S. auto industry or it can mean the city. Trump conflated the two in his address, even if he barely mentioned automaking. "The city of Detroit is the living, breathing example of my opponent's failed economic agenda," he said, after reeling off statistics on the city's high rates of poverty, crime and unemployment. 

QuickTake Detroit Isn't Motor City

The city and the industry are, of course, intertwined, but most analysts long ago concluded that Detroit's 2013 bankruptcy was only partly connected to the auto industry's plight.

The city collapsed mostly because it overpromised what it could deliver to public employees and others, then borrowed too much to try to make good on those deals. All of that, plus a combination of a rapidly declining tax base -- the city has lost 1 million residents since the 1950s -- overreliance on a single industry, a failing education system and municipal corruption meant it couldn't pay off its debts.

Trump promised that Detroit would come roaring back under his plans to lower corporate income taxes. His revival plans also include cuts in regulation, especially environmental rules, and a rewrite of the North American Free Trade Agreement.

So let's break it down, starting with Obama's role. Rather than blame, the president gets credit from most analysts for rescuing General Motors and Chrysler. True, it was painful and costly for investors and taxpayers. He forced the companies to restructure, via quickie bankruptcies, in exchange for federal money. The companies closed plants, laid off workers, cut ties with dealers and shed obligations for retiree health care, transferring the costs (and a big chunk of stock and cash) to a union-dominated trust fund. Stockholders were wiped out, and creditors were forced to take cents on the dollar.

Today, however, the companies are profitable and competitive, even if record-high sales are slowing down a bit and the industry is still over-reliant on SUVs. As my Bloomberg View colleague, Matt Winkler, has written, the Big Three -- GM, Chrysler and Ford -- are selling more cars and trucks and are more profitable now than in 1994, when their market shares were twice today's size.

A mix of technology and poor decisions by management and labor unions dating back decades were what caused the industry's downfall, all detailed in writer Paul Ingrassia's "Crash Course: The American Automobile Industry's Road from Glory to Disaster." One example: a General Motors agreement in the 1970s to allow union workers to retire with full pensions after working for 30 years. That meant those who had started at age 18 could retire at 48 and collect pensions and other benefits for decades.

Another lame-brained idea was the jobs bank, in which workers who were sidelined because of technology or plant closures were paid not to work. All of this was expensive, but the companies simply transferred the costs to consumers, and eventually priced their cars out of the market.

If high taxes and over-regulation didn't cause Detroit's decline, what about Nafta? Economists disagree on the net effect the trade deal with Mexico and Canada had on auto industry employment, but it probably was a wash

Nafta certainly hastened job losses, but much of that would have happened eventually as robots and other technologies supplanted humans. Once the trade deal took effect in 1993, automakers quickly took advantage of it by moving production to lower-cost Mexico. Nafta also made it possible for them to make parts more cheaply, then ship them back over the border for final assembly. Many of those jobs have disappeared and won't come back, even if the U.S. borders were suddenly closed to imported cars and parts.

The one area where Trump seems to be on the right track is in his call for infrastructure spending. He said he would spend generously -- double the $275 billion that Clinton has proposed -- on roads, bridges and other public-works projects.

With interest rates at historical lows, this spending is a three-fer: Not only would it improve the nation's transportation network, it would also lure blue-collar workers back into the labor force and provide a fiscal stimulus to boost growth.

But this is an empty promise coming from a candidate whose fiscal policies would slash federal revenue, weaken the government's financial health and cause a recession.

It's true that "Detroit was once the economic envy of the world," as Trump noted. But his proposed tax cuts, reworked trade deals and deregulation are hardly going to turn around an industry and a city whose declines began in the 1970s, when Barack Obama was in grade school and Hillary Clinton was living in Arkansas.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net