Extended Essay in History
The Economic Collapse of Detroit
Research Question:
To what extent were economic pressures more important than political pressures to Detroit’s
economic decline and failed recovery?
Candidate Personal Code:
May 2018 Session
EE Subject: History
Word Count: 3,821
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INTRODUCTION .......................................................................................................................... 3
SECTION 1................................................................................................................................... 4
SECTION 1.1: Oil Embargo of 1973 & the Preface to Demand Shift ....................................... 4
SECTION 1.2: Demand Shifted towards Smaller European & Japanese Cars ........................ 5
SECTION 1.3: Outsourcing of Jobs & the Deindustrialization of Detroit .................................. 6
SECTION 2................................................................................................................................. 10
SECTON 2.1: Lack of Union Insight ....................................................................................... 10
SECTION 2.2: Government Attempts to Mend Detroit ........................................................... 12
CONCLUSION............................................................................................................................ 13
BIBLIOGRAPHY ......................................................................................................................... 15
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INTRODUCTION
Detroit was the pinnacle American Dream, a bustling booming city where the middle
class thrived as urban factory workers in the nation’s once largest automotive industrial hub.
During the early quarter of the 20th century, this is what Detroit was like; a city where
hardworking citizens could go to make a living and thrive under the success of the city.
However, the famed Motor City reached a point where the city began to fall apart: population
exoduses, massive local job losses, and urban deterioration. This economical downfall of Detroit
is wholeheartedly agreed to have began around the 1950’s by the majority of historians;
however, the main factors that mainly influenced the massive loss of jobs in Detroit vary in their
actual importance on the fall of Detroit, and the extreme slowing of their economy, when varying
from historian to historian. In Detroit, these main influencing factor on its shrinking job markets is
argued to be the situation with the automotive industry in the city, while it is also argued that in
fact it had been the ineffective government action and other global political pressures of
Detroit's governing body that served most influential to the job shortage issue Detroit had been
face with. To what extent were these economic pressures on Detroit more important than the
overarching political pressures on the economic decline and lack of recovery for Detroit’s
economy? The evidence gathered throughout this paper indicates that global political actions
are the main influence behind Detroit’s fall such as the OPEC oil embargo of 1973, various
failed local government initiatives, as well as politically charged free trade agreements. This
paper will be split into two sections that will isolate the two overriding factors and evaluate their
role on the shrinking job markets and failure of the city’s economy. Following this isolated
evaluation, the two overarching factors will be compared and a conclusion of which was more
influential to the shrinking job market.
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SECTION 1
SECTION 1.1: Oil Embargo of 1973 & the Preface to Demand Shift
Detroit was poster child of American industrialization and the good it does for an
economy. As quickly as Detroit became an exemplar of a booming city backed my booming
industry, it very quickly went bust. From hard working factory workers, providing for their families
and living out the rawest form of the American Dream, to a vacant city littered with a jobless
population and abandoned industrial remains, where jobs were as rare as a properly upheld
property. Detroit's lifeline was the auto industry: Ford, GM and Chrysler, better known by their
colloquial name “the Big 3.” They were the economic warhorse of the Motor City, their success
would always lead to Detroit's booming economy, nothing else was perceivable. This perception
was cracked and later on shattered in the 1970’s. In 1973, the Organization of the Petroleum
Exporting Countries (OPEC) imposed an embargo against the United State, as Arabic retaliation
during the Arab-Israeli war where America gave support to the Israelis. While the impact of this
embargo was an economic one, the overarching decisions leading to the embargo were
politically charged, which leads to indicate the start of a long string of political policies that stress
and kill the labour force and economy of the Motor City. The embargo “sent gasoline prices
soaring and automobile sales dropped nearly 30 percent between 1973 and 1975, from around
eleven million to eight million cars.” (Rothstein, 67) This loss of market share for the Big 3
opened up space for other companies so deliver where the American companies could not.
Since the oil embargo of 1973 changed the course of the demand for ever expanding American
vehicle size, people started to either buy smaller cars or not buy cars in general to save money
and avoid the steep gas prices brought with the original embargo. “By the late 1970s, the
market had recovered, only to face a similar crisis provoked by the 1979 Iranian revolution…
these short-term fluctuations in demand provoked a long-term structural shift in the market”
(Rothstein, 67) After the second gas crisis, Americans had shifted their car interests for a more
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permanent stint. The beginning of smaller cars had begun. However, how does this related to
job market loss in Detroit? The simplest explanation is that the increasing competition by
Japanese automotive brands continuously pushed the Detroit based Big 3 out of the market. As
they lost market dominance they had to cut costs to reflect their lack of sales; this mean the
closure of factories and plants and the loss of jobs of the many people working in these Detroit
factories. It got so bad that the company Chrysler of the Big 3, “‘merges’ with Daimler-Benz in
what looks more like a buyout of one of the three U.S. automakers.” (Rothstein 65) As time went
on the demand shift for the American market further moved to foreign cars and ever edging
away from the domestic machine built on its own soil.
SECTION 1.2: Demand Shifted towards Smaller European & Japanese Cars
One cause in particular that caused trouble for the economy of Detroit was its lifeline
being connected to the auto industry there. Majority of Detroit’s jobs were held in the auto
industry; due to this, the events affecting the performance and jobs of the Big 3 gave a notable
reflection on the job situation in Detroit. Before the crash of Detroit and the auto industry crisis
that caused it, the idea of driving a small car was seen as unpatriotic. The idea of driving a
vehicle not made by American hands was shunned and seen as anti American. Nevertheless,
this shunned and unpopular idea of driving an import began to grow in 1956, where the Big 3
automotive giants in Detroit noticed a slight slump in sales whilst the market for smaller import
cars began to grow, this set the scene to what was to come in the 1970’s (Wright, 1) This
demand shift only served as incentive to the political choices that were to follow suit: free trade.
Fuelled by the drastic corporate concern and market shifts that the oil crises and Middle Eastern
threats had started. International auto manufacturers had much lower costs of production than
what the Big 3 faced in America, and what the American market was providing was not what the
people wanted. People no longer wanted to drive large gas guzzling cars, it was to expensive a
lifestyle. The trend had begun to change, and the majority of the Big 3’s short term output did
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not speak to that change. “Detroit was dispirited and its economy was faltering. In the early
1980's Chrysler was sliding towards financial disaster. GM poured 50$ million into the
development of a new rotary engine, but couldn't get it to work, while a small Japanese firm,
Mazda did. Ford was losing money so fast that there was talk of not only pulling out of Detroit,
but North America all together. The Japanese were selling about one of every four cars sold in
the United States.” (Source 5) More foreign cars sold and less domestic cars from companies
like Ford and GM meant that there would be no need for the Big 3 to produce as much in such a
competitive market, meaning jobs would have been cut further shrinking the job market. This
becomes more apparent when the Big 3 began to close out factories and lay off workers all over
Detroit. The demand shift was a major blow to the domestic auto manufacturers and forced
them to have major lay offs in their factories, “General Motors (GM) announces it will close
twelve plants and cut workforce by 30,000. Ford announces the company's intent to reduce its
white collar workforce by 4,000 and close plants to shed 30,000 assembly line jobs.” (Rothstein,
65) The demand shift was not the choice of the people; it was a direct result of the gas crises
that followed the oil embargos. People shifted to smaller cars, putting the Big 3 in a pinch and
searching them in a search for a solution to their lost sales, all because of the political paradigm
surrounding the oil embargos in the background of Detroit's fruiting economic crisis.
SECTION 1.3: Outsourcing of Jobs & the Deindustrialization of Detroit
The majority of Detroit's population decline was during the 1950’s to the 1990’s, this was
a multifaceted issue that was mostly driven by a shrinking job market of the entire city. The
ultimate reason, and quite possibly the most prevalent reason, why the job market in Detroit
began to plunge and drastically mangle the economy of the city is due to the unpatriotic
outsourcing of jobs by major firms in Detroit, namely the automobile industry’s leading Big 3.
Despite the performance concerns for the American companies in the previous section,
they rebounded as quickly as they got stifled by the politically fuelled shift in demand. Why?
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American free trade deals, like North American Free Trade Agreement (NAFTA) and the
General Agreement on Tariffs, Reciprocal Tariff Act (RTAA), and Trade (GATT), allowed large
corporations to lower their own costs by selling jobs overseas. Detroit's largest auto firms made
the decision not to suffer with Detroit; they began to globalize to counter the losses the
experienced in the shifting market at home. This very action of globalization is what lead to the
growing shortage of jobs all across Detroit. It was fuelled by the government’s policies of free
trade and could not have been possible without them. “General Motors and the factories located
just northwest of Detroit were the most tragic example of this… in the mid 1980's GM began
laying off thousands and closing plants which had been the city's lifeline for over fifty years. It
was finally announced that eleven GM plants were to be closed and moved to Mexico in order to
cut costs.” (Counts, Ronson, Spenser, 2) The cause of these business plan changes for the
automotive giants of Detroit can only be attributed to the political policies of free trade designed
to empower cheap corporate growth. “But, since 1983, GM's car sales had risen, and the
company had posted record profits reaching 19$ billion, yet GM laid off over 50,000 people in
Flint alone by 1989… It clearly wasn't the Japanese that the Detroit auto workers had to worry
about, it was their "own" profit seeking corporations that were putting them out on the curb.”
(Counts, Ronson, Spenser, 3) GM could afford to lay off 50,000 local labours because they
were shifting their production elsewhere; without the politics behind the scenes of Detroit's
situation this unpatriotic outsourcing of American jobs would likely not have happened. The
globalization of the car industry blurred the lines between what was American labour and what
was outsourced international labour.
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Population
Detroit Population (1950-1980)
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
1950
1960
1970
1980
Detroit Population (1950-1980)
Figure 1.3.1, (Data sourced from worldbank.org)
Revenue/Profit of GM (1955-1980
100,000.00
80,000.00
60,000.00
40,000.00
20,000.00
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
0.00
Revenues ($ millions)
Profits ($ millions)
Figure 1.3.2, (Data sourced from archive.fortune.com)
Here GM’s revenue compared to the population of Detroit hints to the outsourcing of jobs
that killed the economy of Detroit. A stark increase in productivity by GM clearly indicates that
GM had no longer been making its money off of the factories in Detroit. Political action allowed
GM to leave the city, causing a drastic shrinking of the job market. Companies like GM and Ford
closed off local work in favour for cheaper labour outside its country’s borders only through the
gateway opened for them through trade deals such as NAFTA, which eliminated 50% of Mexico
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to USA exports . With their home city on the road to utter collapse and failure, companies like
GM and Ford stood behind the freedom of America’s new foreign trade policies: free trade and
globalization. “From 1969 onward, however, the auto industries began slashing jobs in the city.
Detroit lost 19 percent of its jobs between 1969 and 1973; by 1975 the unemployment rate had
climbed to a catastrophic 18 percent. Then conditions worsened. By 1982 Detroit had half as
many manufacturing jobs as it had in 1963; half of those jobs were gone by 1992.” (Boyle.120)
The situation in Detroit simply worsened and worsened as more and more companies began to
pursue the new cost effective options brought to light by free trade. This outsourcing is, by far,
the most major influence on the shrinking job market that preceded Detroit's failure as an
economic bull, however the puppeteer of this outsourcing is the political figurehead of the US
government that enacted free trade deals.
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
Population
Employees of GM & Ford Motor Co.
Employees (Ford Motor Co.)
Employees (GM)
Figure 1.3.3
America on a whole lost around 86% of its manufacturing jobs since the 1970’s. (Hodge)
“The loss of manufacturing jobs that began in the late 1960s has sapped the city's economic
strength and drastically number of of non-skilled jobs paying a decent wage.” (Thomas, 224)
Having a quick comparison between figure 1.3.1 and 1.3.3 gives the clearest indication that the
supporting companies of Detroit where selling out the jobs in Detroit to foreign nations, further
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shrinking the jobs market in an already failing city. On the surface this seems like a economic
driver for the fall of Detroit, however under the surface it becomes more apparent that it was a
political agenda that enabled such actions by US corporations.
SECTION 2
SECTON 2.1: Lack of Union Insight
Detroit's complete collapse and uncontrollable unemployment was not solely due to the
major firms abandoning the city. There were other socioeconomic factors that affected Detroit
and caused its spiral into a state of poverty, unemployment and economic failure. One of which,
was the union insight, or lack thereof, that should have fought to prevent the auto makers to
abandon them so easily. The crux of the issue was that the President of the United Automobile
Workers (UAW, labour union), Walter Reuther, moved from a position of challenging corporate
power “at the bargaining table, in national politics, and at the point of production” (Boyle 111) to
short term beneficial agreements with the same corporate powers the UAW had been trying to
curb. In the 1940’s Walter and the rest of the UAW moved from this corporate control position to
one that was to be the best of both worlds for the companies and the people. The “Treaty of
Detroit” was one such agreement that birthed from this new agenda from the UAW. It set the
terms for the relations between auto companies and their employees for the next thirty years of
Detroit.
On the surface, the “Treaty of Detroit” did two main things. It allowed for the UAW and its
workers to get the wages and benefits they demanded, which made Detroit auto workers some
of the highest paid industrial workers in the entire United States. For the corporate leaders, the
treaty allowed for the auto companies the right to fully control the companies’ investment
decisions and the quality in which the workers had to work inside the plants, all without any
worker consent. Auto firms could have reinvested any and all of their assets in anyway they saw
fit for the company, meaning that they could have relocated entire factories without any form of
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say from the people who worked within them. This increase in corporate power, as well as the
aforementioned free trade, was the corner stone to the eventual outsourcing of jobs that left
Detroit crippled and impoverished.
The “Treaty of Detroit” also served as a catalyst and accelerated another issue of the
labour unions issue: race and gender inequality. Higher wages and benefits, that the UAW
condemned the future of their city’s industrial sector to achieve, were not being enjoyed by
minorities such as African Americans and women, who were actively excluded from unions. “By
pushing up wages, finally, the UAW and the automakers split the working class in two. Union
members, overwhelmingly white and male, enjoyed greater security and comfort than ever
before. Non-union members, disproportionately black or female, continued to receive low wages
and few if any benefits.” (Boyle 111) This growing split is what allowed for the drastic shifts in
the city’s demographics that ensued both during and after the fall of Detroit. As the auto industry
left more and more American workers out of jobs, the growing amount of unemployed labourers
needed to find jobs elsewhere. The benefits of the union members served as the tool for many
whites to leave Detroit and find jobs elsewhere. This as well as their ability to find work
elsewhere more easily because of their racial superiority during segregation hurt Detroit's job
market even more due to the lack of incentive to supply jobs in the city after the population
exodus. “Residents left behind in the nation's urban centres were not only poor, they were
largely African-American - even though poverty is multiracial in American society” (Thomas 222)
The exodus of the majority of able working white males from Detroit left their economy in a
position where it was seemingly impossible to rejuvenate the city, directly due to the lack of a
workforce present in the nation and the fact that there were no longer any non skilled jobs for
the people to use to slowly build their city back up. In Detroit's case, the city was now left with
truncated job markets due to economic pressures on the citizens of the city.
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SECTION 2.2: Government Attempts to Mend Detroit
As the city began to be left in the dust by profit seeking automotive firms, there was no
real vision by the government to steer Detroit in a situation where the city would be able to
survive and, more ideally, thrive after the exodus of the auto companies and the massive
amounts of people it would leave unemployed. The massive layoff caused by these car
companies not only impacted the people but threw Detroit's government off balance. Detroit's
government began suffer from its own struggle to gain income as more people were left without
jobs. “‘over the past four years, total city tax revenues increased only 16 percent, while the
national index of the costs of local government rose 35 percent’ (Detroit. Mayor’s…, 1976)”
(Riddle, 53) Due to the skyrocketing unemployment rates that plagued Detroit, tax revenue
plummeted while the cities spending costs rose. Creating an economy so indebted in cash that
its own downfall aided in the increase in unemployment rate even further. The city had to
attempt to mend the situation that was hindering Detroit's growth and fostering its collapse.
However, the plans to stimulate the economy and urge reinvestment either had such poor
execution and low funding that there could not have been any real impact, or they only provided
short term solutions, which had various long term negative externalities on the cities
development.
The poor execution of plans to save were never aimed to work with the surprising lack of
national government help to one of its star cities back to its feet. This lack of alacrity with any
government aid plans to support the people of Detroit. “Lyndon Johnson tried to fight poverty on
the cheap. His administration made no effort to redistribute resources or power from the rich to
the poor, the most direct way to combat poverty, nor did it try to create jobs for poor Americans.”
(Boyle 116). The hilariously underfunded poverty combat programs launched in Detroit served
for nothing more than a way for the government to publicize that they had helped the city. With
this apparent lack of help from the government, people who could leave continued to leave,
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further shrinking the job pool in Detroit and worsening the state of the dying ‘Motor City.’ Even
Detroit's own city government matched that same lack of effort given by the president, “Detroit's
antipoverty programs reflected the weaknesses in the national effort. The mayor targeted a
nine-square-mile area of the centre city, with a population of 133,000, as the focal point of his
antipoverty campaign. The campaign's funds were so low, however, that if Detroit had divided
its entire antipoverty budget equally among the area's residents, each recipient would have
walked away with $60.00.” (Boyle 117). From this is clear to see that there was no real effort to
try mend Detroit's financial issues. Apart from this lack of effort and funding on the part of the
local and national government, the plans that were put in place had unforeseen long term
consequences that left Detroit worse off than before.
Despite the short term benefit of some of the plans that where implemented to stimulate
Detroit's economy, certain plans in Detroit sparked long term issues that further crippled
Detroit’s population furthered the shrinking of their working force. One main plan by the local
government was the Public Act 198, which was actioned in 1974. This plan disrupted Detroit's
tax system to a point of short term benefit from investment, while setting up tax issues for the
residential sector. This “twelve-year property tax relief for investment” gave “100% property tax
relief for improvements or rehabilitation in new facilities (Michigan. Department of Commerce...,
no date)” (Riddle 54) The tax reform left a gap in the city’s tax income. To fill it, the government
pushed the tax stresses onto the residential area. Causing for increased incentive for Detroit's
labour force leave, killing the potential for the growing job market.
CONCLUSION
The various contents of this essay provide two scopes to the development of Detroit's
employment and economic issues and their various causes. Throughout this investigation is has
become abundantly clear that Detroit's failure was due to politically charged actions and
government policies that set the stage for the backbone of Detroit's economy to separate itself
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from the city for cheaper labour elsewhere in the world. What were the factors influencing
Detroit during the 1950’s all the way to the 1980’s that caused the city’s shrinking job market,
and to what extent was the situation surrounding Detroit’s own automotive industry more
important than the city’s lack of effective government towards the failure of Detroit’s economy
and its shrinking job market? The original thesis stating that the influence of the exodus of the
auto industry was more paramount to the labour situation that plagued Detroit was challenged
but ultimately proved to be more substantially supported by the evidence provided by the cities
history and deep analysis of this history. While the socioeconomic factors that plagued Detroit
after the auto crisis were unquestionably influential to the shrinking of Detroit's labour force, the
evidence suggests that it is not as noteworthy as the winding blow that the automotive
disinvestment was to Detroit. Hence why it can be confidently stated that, the shrinking job
market in Detroit was caused by the much more influential situation with the automotive industry
and the politics behind it that caused the decline and eventual failure of Detroit’s economy due
to complications surrounding increased costs of production for the auto firms in the city caused
by the oil embargo of 1973, market shifts and demand changes for the domestic auto market,
and the eventual outsourcing of American jobs through globalization and free trade.
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BIBLIOGRAPHY
Boyle, Kevin. “The Ruins of Detroit: Exploring the Urban Crisis in the Motor City.” Michigan
Historical Review, vol. 27, no. 1, 2001, pp. 109–127. JSTOR, JSTOR,
www.jstor.org/stable/20173897.
Counts, Glenn, et al. Detroit: The New Motor City. pp. 1–6, Detroit: The New Motor City,
web.stanford.edu/class/e297c/poverty_prejudice/citypoverty/hdetroit.htm.
FORTUNE 500: 1960 Archive Full List 1-100,
archive.fortune.com/magazines/fortune/fortune500_archive/full/1960/.
*Guerrieri, Veronica, et al. “Within-City Variation in Urban Decline: The Case of Detroit.” The
American Economic Review, vol. 102, no. 3, 2012, pp. 120–126. JSTOR, JSTOR,
www.jstor.org/stable/23245515.
Riddle, Dave. “CAPITAL MIGRATION, URBAN FISCAL CRISIS AND UNEMPLOYMENT IN
DETROIT.” The Peninsular Papers, vol. 2, no. 2, 1977, pp. 50–61.,
www.jstor.org/stable/40968904.
Rothstein, Jeffrey S. “The Uncertain Future of the American Auto Industry.” New Labor Forum,
vol. 15, no. 2, 2006, pp. 65–73. JSTOR, JSTOR, www.jstor.org/stable/40342622.
*Watkins, Myron W. “The Labor Situation in Detroit.” Journal of Political Economy, vol. 28, no.
10, 1920, pp. 840–852. www.jstor.org/stable/1820758.