I recall a statement by Mr. Paul Traub, Chief Economist at the Detroit branch of the Federal Reserve, from when we visited. For the sake of refraining from digressing into a politically discussing rather than a discussion of economics, Mr. Traub did not harp on the subject too much, but I found something he said interesting. Mr. Traub mentioned that, at the onset of the Detroit financial crisis, the government may have contracted too much. From my very basic understanding of macroeconomics, I can see what Mr. Traub may have meant. When I examine the components of GDP, two of which are government spending and investment, it seems rational that a local or state government would attempt to stimulate these components rather than contract.
Further, after witnessing the infrastructure of Detroit first hand, a number of opportunities for government spending and investment come to my mind. I remember Mr. Traub saying, “growth in labor plus growth in productivity equals growth in GDP.” There are clearly many other elements involved that complicate this simplification, not the least of which is inflation, but I am eager to hear other opinions in the comments.
The problem is that Detroit has no money. The Detroit government owes money to more than 100,000 creditors and it is facing a huge amount of debt and unfund liabilities (I’d say about $20 billion). Looking at the gdp equation, Detroit people has no consumption power, nobody wants to invest in Detroit for now, and the government has no money to spend(net export is negligible since it is domestic). I personally think it is very difficult to solve the problem this way.
I wonder if the state or federal governments have given any money to Detroit or if that would even be worth considering for them.
I think that must be what Mr. Traub was talking about in response to Moody. Its like we learned in macro theory, sometimes you just have to spend your way out of a recession. The increased money flow from the jobs provided from the state and federal investments were only go so far with the issues Detroit was having with legacy costs and whatnot. There can be so many jobs but it doesn’t help the city at all if there is no one there to fill them.
Two issues. One, government does provide services, typically ones that “free” markets do not because they are “public goods” (hard to charge for) or intangibles (hard to attach a value to because of the lack of free and perfect information). Different societies have adopted different mechanisms (local vs regional vs national) for providing services, and funding is not always aligned with operations.
Second, fiscal policy best operates as stimulus at the national level: if somehow by itself Detroit were to increase expenditures on roads, many of the jobs would go to people outside the city, the rentals of specialized road-buidling equipment might be entirely to non-local firms, and even when Detroit residents got jobs, nothing restricts them to shopping inside the city (no malls inside city boundaries, probably zero departments stores or even Walmarts). Some local governments around the world do try to mandate that employees live within the relevant political boundaries, but that doesn’t work well, certainly not in the US.