Ilya Somin makes a great point on the Detroit bankruptcy:
Detroit’s sixty year decline, culminating in its recent bankruptcy, has many causes. But one that should not be ignored is the city’s extensive use of eminent domain to transfer property to politically influential private interests. For many years, Detroit aggressively used eminent domain to promote “economic development” and “urban renewal.” The most notorious example was the 1981 Poletown case, in which some 4000 people lost their homes, and numerous businesses were forced to move in order to make way for a General Motors factory. As I explained in this article, the Poletown takings – like many other similar condemnations – ended up destroying far more development than they ever created. In his prescient dissent in Poletown, Michigan Supreme Court Justice James Ryan warned that there was no real reason to expect that the project would produce the growth promised by GM and noted that Detroit and the court had “subordinated a constitutional right to private corporate interests.”
Eminent domain abuse certainly wasn’t the only cause of Detroit’s troubles. But the city’s record is a strong argument against oft-heard claims that the use of eminent domain to transfer property to private economic interests is the key to revitalizing economically troubled cities. In addition to the immediate destruction and dislocation caused by such takings, they also tend to deter investment by undermining confidence in the security of property rights. One of the main findings of recent scholarship in development economics is that secure property rights are an important factor in promoting long-term economic growth. As economists Daron Acemoglu and James Robinson put it in their much-praised recent book Why Nations Fail, “secure private property rights are central [to development], since only those with such rights will be willing to invest and increase productivity” (pg. 75). Detroit is an abject example of what happens when policymakers ignore this reality.
Always remember: the lot that the Supreme Court let New London boot Suzette Kelo out of ended up vacant. And the specialized tax breaks New London gave Pfizer left Pfizer packing the second they expired. These “big deals” to bring in businesses never work because if locating a business there was such a hot idea, the businesses wouldn’t need eminent domain, special tax breaks and subsidies.
But pay close attention to Somin’s second paragraph about how eminent domain and other attempts to “promote” businesses undermine the very basis of the economic system. In that respect, this is just another form of crony capitalism. Connor Friersorf today discussed this in a different context. He references an NYT article about how Goldman moves around giant piles of aluminum to take advantage of government regulations on the price. It nets Goldman billions while harming the economy by making aluminum artificially more expensive. There are innumerable ways in which this is happening — private industries using government loopholes and regulations to become rich without actually doing anything.
Preventing this sort of thing ought to be a high priority for anyone who wants to see free-market capitalism succeed in America. So long as our economic system resembles what Adam Smith described — the profit motive benefiting everyone, as if by an invisible hand — much of the American public can be counted on to support politicians who campaign as unapologetic capitalists, even if people are rewarded unequally, based on the value their labor is producing.
But if “capitalism” starts to be associated in the public mind with Wall Street profiting by deliberately slowing down industrial productivity (or with Mitt Romney making millions by buying companies and gaming the tax implications of shuttering them), Americans are not going to support capitalism. They’re going to regard it as a rigged system that only profits wealthy insiders.
In the short term, Republicans and Democrats alike benefit by allying themselves with the wealthy insiders. Like the GOP, President Obama has benefited from Wall Street money. But in the longer term, enough stories like this New York Times scoop will destroy Republicans, because rhetorically, they’re the ones insisting that the market is beneficial and more or less fair, even as a transparently corrupt financial sector consumes a larger percentage of the overall economy.
Crony capitalism is the antithesis of free-market capitalism. It is similar to what Adam Smith was writing against.
But, as Detroit shows, it doesn’t even have an economic benefit. Detroit, like New London, ended up with nothing for all their seizures, subsidies and graft. Is that the model we want for America? Because it’s certainly the model we’re pushing.
Post Scriptum: Now if you want to see someone get it totally wrong on Detroit, enjoy.