'Detroitification' Happens to States and Nations, Too

The term "Detroitification" — which I first coined in 2007 to describe the process by which the private sector is hollowed out to prop up an unsustainable government establishment — has been catching on in various places around the country.

The term generally implicates government employee unions that use their political muscle to keep the loot flowing to members in the form of outsized compensation and benefits, and to bitterly resist reforms like privatization. In the term's namesake city it also refers to patronage and corruption, with members of the local political class funneling boodle to their friends, relatives and key campaign supporters.

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The broader concept can apply just as much at the state and national level, where the private sector hollowing may be accelerated by the related phenomena of "crony capitalism" and "industrial policy" (or "economic development"), a form of government picking winners and losers that slows economic growth by draining and causing misallocations of private sector resources.

Michigan is rife with such harmful policies. To cite just two, we have a film producer subsidy program, and a raft of corporate welfare subsidies that hand over hundreds of millions of taxpayer dollars to so-called "green jobs" firms. In both cases, wealth is transferred from potentially more economically efficient enterprises to politically "sexy" and influential industries and players.

We also see incumbent firms in heavily regulated industries like health insurance and electricity generation using their clout to protect their market share and extract larger "rents," as the term is used by economists (denoting profits that a business garners not by providing greater value in the marketplace, but by obtaining special government protections and privileges from compliant legislators).

A package of bills passed by the Michigan Legislature in late 2008 provides a "two-fer" example of both crony capitalist rent-seeking and politically imposed resource misallocation in the energy field. One of the bills mostly repealed a limited electricity competition law passed in the final term of the Engler administration, essentially returning to Detroit Edison and Consumers Power companies the guaranteed regional monopolies they had enjoyed for most of the past century.

Another bill imposed a new "renewable energy" mandate on electricity producers, requiring that 10 percent of the power they generate by 2015 come from faddish "alternatives" such as windmills (but not nuclear or hydroelectric plants). Both bills were "tie-barred," meaning that neither could become law unless the other did.

Thus, Michigan's political class simultaneously weakened private sector firms here vis a vis competitors in other states by causing them to pay more for electricity, protected the bottom line of electric monopolies - politically powerful members of an old-guard corporate "establishment" - and buffed-up the "green" credentials of its careerist politicians with a bit of economically destructive posturing on behalf of trendy "alternative" energy sources.

A regulatory postscript to this debacle occurred last fall, when the Michigan Public Service Commission used the new powers it received under the "renewables" mandate law to stop or postpone construction of a new coal generating plant, killing jobs, and accelerating the economic sclerosis that's hollowing out of the state's private sector economy - a.k.a. "Detroitification."