Detroit’s Road to Recovery

Even as General Motors is undergoing bankruptcy proceedings in hopes of reinventing itself with a viable business model and saving the jobs of its Detroit employees, analysts remain skeptical about the corporation’s future success.

A Detroit News editorial wisely advises that Michigan should move forward from this difficult time rather than attempting to preserve GM workers’ jobs for as long as possible while the company continues its likely slow decline:

Michigan’s entire focus must be on creating a business climate that makes the state attractive for job creators in a wide range of industries. It can’t afford to focus on any one segment in hopes of finding the next Big Three. Its future will depend on making itself irresistible to investors across the spectrum.

This perspective is grounded in historical evidence, according to a recent series in The Economist called “Business in America.” In the past, recessions have offered an opportunity for entrepreneurial innovation:

Firms founded during tough times have to be tough. Although more firms typically start up in fat years, Paul Kedrosky of the Kauffman Foundation found that each bad year in America since the second world war produced just as many firms that have subsequently grown large enough to list their shares. He concludes that firms that begin in bad times are more likely to turn out to become economically important: think of Microsoft, Apple, and Krispy Kreme doughnuts.

If Detroit and Michigan can succeed in creating an attractive business climate through maintaining a favorable regulatory climate and lowering corporate tax rates, the area could foster new industries that may profit from some of the capital that becomes available from the auto industry, the current low rental rates, and the environment of creative destruction.

By supporting the common belief that GM is too big to fail, the federal government is probably just slowing the company’s eminent disappearance. At present, this policy appears favorable to Detroit constituents who are supporting federal assistance to auto makers. If instead, however, the city were allowed to organically develop a variety of new businesses to take the former auto giant’s place, opportunities for future growth would be permitted, and business people could take advantage of a situation that has potential to be favorable to new start-ups.