DRI-322 for week of 7-21-13: Detroit: Postmortem on a Once-Great American City

An Access Advertising EconBrief:

Detroit: Postmortem on a Once-Great American City

On Thursday, July 18, 2013, Detroit, Michigan’s emergency financial manager Kevyn Orr filed a Chapter 9 bankruptcy petition on the city’s behalf. Detroit became the largest American city ever to declare bankruptcy. Although the handwriting for this action had been on the wall long before it appeared on court documents, it still sent shock waves throughout the country.

The interminable interval between recognition of reality and capitulation to it was partially explained by the ruling issued the following day by Ingham Country Circuit Judge Rosemary Aquillina. She ordered the withdrawal of the bankruptcy petition on the grounds that it would violate the Michigan Constitution to endanger the pension benefits of government employees. And retiree pensions do indeed represent roughly $9.2 billion of the $11.5 billion in unsecured claims listed under the bankruptcy petition. “It’s cheating, sir, and it’s cheating good people who work,” was her reaction to the bankruptcy. “It’s also not honoring the President, who took General Motors out of bankruptcy.” This was the same intractable attitude that had prevented Orr from negotiating any concessions from the city’s creditors, particularly pensioners who refused to relinquish the lucrative defined-benefit contracts that had made them the new aristocracy of Detroit’s organized labor community.

Americans are habituated to viewing Detroit as an economic basket case. Thus, it comes as a shock to realize the relative speed and steepness of the city’s fall from prosperity and prominence. Even more shocking is the similarity between Detroit and most other major American cities.

Various sources, particularly the website “Economic Collapse” and the Rush Limbaugh radio program, have assembled a shocking compendium of facts detailing the decline and fall of Detroit. In just over a half-century, Detroit went from one of the premier American cities to a burnt-out wasteland, comparable to a European city devastated by the effects of World War II.

The Glory Days of Detroit

Detroit was founded during colonial times. It got its name from one of the leading Indian tribes. Its location on the Great Lakes assured its economic prominence, but its development took off in the late 19th century with the invention of the automobile. Detroit became the home of the three leading U.S. automakers – Ford Motor Company, General Motors and Chrysler. Henry Ford developed and perfected the automotive assembly line in Detroit and environs. In the second half of the 20th century, General Motors became the phenomenal success story of the U.S. automotive industry.

The first half of the century belonged to Ford. Henry Ford didn’t invent the automobile, but he might as well have. He produced versions that ordinary Americans embraced wholeheartedly: Models A and T. He perfected the assembly line that revolutionized automobile production. His wage policies were public-relations triumphs in a realm where capitalism has historically taken it on the chin. (Detroit was already a high-wage city and the company was merely competing for labor with its $5-per-day wage offer, not practicing altruism.) Henry Ford presided over the automotive world and American industry from his home in Dearborn, Michigan.

When General Motors shouldered Ford aside as the premier automaker, it established a corporate reputation to rival Ford’s. CEO Charlie Wilson’s famous declaration that “what’s good for General Motors is good for America” may have ruffled feathers, but it certainly dovetailed with the thinking in Detroit. When GM decided to build a brand new auto plant in the venerable neighborhood of Poletown, even the black-separatist municipal administration of mayor Coleman Young hastened to grant the company eminent-domain rights and approve the dispossession of longtime residents. As late as 1971, Economists Roger Miller and Douglass North marveled at GM’s “phenomenal ability to generate profits.”

Led by the “Big Three” automakers, Detroit became the manufacturing center of America. As of 1950, it was home to 276,000 manufacturing jobs. During an era when America’s manufactures led the world, those jobs earned good incomes. As of 1960, Detroit boasted the highest per-capita income in the U.S. This attracted people. As of 1953, Detroit was the 4th-largest city in the U.S., behind New York, Chicago and Los Angeles, with just under 2 million people. In 1966, Look Magazine named Detroit as an All-American city.

Today, Detroit is the Dregs

Today, in 2013, Detroit is the dregs. Its 276,000 manufacturing jobs have shrunk to less than 27,000. This might not be so bad if other jobs had taken their place. They haven’t. It has lost 63% of its former nearly two-million population. Those who remain have a median household income of $26,000 and suffer from unemployment of 16%. Less than half of Detroit residents over 16 years of age are employed. 60% of Detroit’s children live in poverty. Only 7% of 8th-graders are rated “proficient in reading,” which helps explain why 47% of Detroit residents are functionally illiterate.

There are over 78,000 abandoned houses within the city. Many houses are up for sale at prices of $500 or less. One-third of Detroit’s 140 square miles are either vacant or derelict. The city hosts more than 70 Superfund hazardous-waste sites.

City services have declined pari passu with the general decline in incomes and employment. Detroit’s murder rate is eleven times greater than New York City’s. The size of the police force is 40% lower than in 2003. Average response time to a 911 emergency call is 58 minutes. Most police stations are open to the public for only eight hours per day. Police solve fewer than 10% of crimes committed in the city. One-third of Detroit’s ambulances do not run. At least 40 streetlights do not work. Two-thirds of the city’s municipal parks have closed since 2008.

The city earns $11 million of its municipal revenue from… its casinos. Police advise travelers to enter Detroit at their own risk.

In the UK’s Daily Telegraph, MP Daniel Hannan recalls the prescient novel Atlas Shrugged, by Ayn Rand. The book describes the town of Starnesville, home to the fabulously successful Twentieth Century Motor Company. Socialism has reduced both the company and its hometown to ruins. Hannan quotes Rand’s evocative portrait of Starnesville to haunting effect:

“A few houses now stood within the skeleton of what had once been an industrial town. Everything that could move, had been moved away; but some human beings remained. The empty structures were vertical rubble; they had been eaten, not by time, but by men: boards torn out at random, missing patches of roofs, holes left in gutted cellars. It looked as if blind hands had seized whatever fitted the need of the moment, with no concept of remaining in existence the next morning.

“The inhabited houses were scattered at random among the ruins; the smoke of their chimneys was the only movement visible in town. A shell of concrete, which had been a schoolhouse, stood on the outskirts; it looked like a skull, with the empty sockets of glassless windows, with a few strands of hair still clinging to it, in the shape of broken wires.”

Hannan compares Rand’s prose – circa 1957! – with a description of Detroit in the London Observer:

“What isn’t dumped is stolen. Factories and homes have largely been stripped of anything of value, so thieves now target cars’ catalytic converters. Illiteracy now runs at 47%; half the adults in some areas are unemployed. In many neighborhoods, the only sign of activity is a slow trudge to the liquor store.”

Hannan is astounded by the similarity between Rand’s fictional Starnesville and the Detroit of today. Even more astonishing, Rand predicted the effect of socialism on a preeminent auto manufacturer in 1957, when U.S. automakers bestrode the world like colossi and Detroit stood atop the U.S. league tables.

What Happened to Detroit?

In Atlas Shrugged, socialism decimated both the Twentieth Century Motor Co. and Starnesville. The real-world municipal analogue to socialism is liberalism, which features unwieldy bureaucracy spending vast sums on tasks that are none of its business. That describes almost all major U.S. cities, including New York, Chicago, San Francisco, Los Angeles, Boston, Philadelphia, San Diego, Seattle, et al. Liberals are Democrats and all these cities are governed by Democrat majorities, mostly machine-made. Only Houston can fairly be called an exception to the rule of liberalism, though even here Democrats cling to a majority in the city.

Detroit certainly fit this pattern. The last Republican mayor won office in Detroit in 1957, during the city’s glory years. Since 1970, only one Republican has been elected to the City Council. Republicans have occasionally gained statewide office – John Engler’s stint as Governor was a notable recent example – but if anything Detroit’s clout was so formidable that the city’s tail usually ended up wagging the state dog when it came to policy.

When Democrat Jerome Cavanaugh became Mayor of Detroit in 1962, he was one of the brightest lights of the Democrat Party. Cavanaugh was a young New Frontiersman, a JFK-image clone. He was determined to use the city’s prosperity as a tool to eradicate poverty and enact social justice. He raised property and income taxes and increased spending. He inaugurated a utilities tax. The failures of Cavanaugh’s policies were manifest by the 1970s and helped pave the way for the long reign of Coleman Young.

One common denominator behind the serial failure of municipal liberalism is the failure of public education. A handmaiden to educational failure in the 1960s, 70s and 80s is school desegregation and its complement, busing. Cities like Boston, St. Louis and Kansas City lived through historic desegregation sagas, all featuring savage disagreements, shocking expenditure of funds, forced taxation and virtually nothing of educational value to show for it. Detroit was a leader in the field. District-court judge Stephen Roth supervised a massive desegregation plan involving 53 Detroit suburbs and some 780,000 public-school students. Average time spent on daily bus travel hovered at 1.5 hours per day. The effect of the plan was to reinforce the separatist vision of Mayor Coleman Young and drive whites to the outer suburbs, beyond the plan’s reach.

Unions played an important role in Detroit’s downward spiral. Municipal unions do not face the private-sector competition from non-unionized labor that private-sector unions face. This gave them the impetus to negotiate fearlessly with government to increase compensation and defined-benefit pensions while lobbying endlessly for expansion of bureaucracy. The United Autoworkers treated the automakers like piñatas to be cracked open for goodies, heedless of the effects on the company.

Technically, one should acknowledge the role played by the federal government in burdening automakers with safety and mileage standards that vastly increased the companies’ costs with no commensurate offsetting gains to anybody except politicians. (Longstanding research, beyond the scope of this article to reproduce, has reaffirmed the net harm done by these categories of federal legislation.) Still, this was at most a glancing blow felt by Detroit during the reign of liberalism.

“America’s First Third-World City”

In addition to the standard drawbacks of 20th century municipal liberalism, Detroit suffered under its own unique handicap. From 1974 to 1994, it experienced the mayoral reign of Coleman Young. Young was a veteran of World War II who became the North’s first black mayor at the same time as Atlanta’s Maynard Jackson became the South’s first black mayor. Young was elected to five terms before retiring and dying of emphysema in 1997.

Although Young followed in the wake of the so-called civil-rights movement, he was really a black separatist in the tradition of Malcolm X rather than a reformer a la Martin Luther King, Jr. Young accused the Army of discriminating against him and carried that chip on his shoulder throughout his public career. When he became Mayor of Detroit, he alienated whites by insisting that only white people can be racists. His frequent diatribes induced whites to abandon the city, whereupon Young excoriated them as “racists in the suburbs,” according to Patrick Mallon’s memoir of his formative years in Detroit, entitled “Detroit: Coleman Young’s Triumph of Self-Destruction.” Mallon feels that Young was principally responsible for changing the course of his childhood by [teaching] me, my parents and my friends that we were all in the [racist] class of people.”  Likewise, writer Tamar Jacoby claims that “Detroit was governed by a black demagogue from the moment Coleman Young was elected Mayor.” Rather than take corrective measures to retain white citizens, Young encouraged the concept of black “independence.” This led writer Ze’ev Chafets to label Detroit “America’s first Third-World City.”

The loss of revenue stemming from white flight was partially offset by millions in payments by auto companies for what has been called “riot insurance.” The granddaddy of all riots occurred in July, 1967, when police tried to break up a party at an after-hours nightclub. When they discovered 82 guests celebrating the return of two Vietnam veterans, they tried to haul off all celebrants to jail. The doorman, son of the club owner, hurled a rock through the back window of a squad car, triggering a melee that spread into general rioting. Local and state police could not contain the violence and looting that killed 43 people, injured over a thousand others and caused millions of dollars in property damage. Ironically, although chronic ill will between the police department and blacks was the spark that set off the misbehavior, the first person killed was a white looter. Subsequent violence and looting was perpetrated by and against blacks, particularly harming innocent store and business owners. The riot was classified as America’s third-worst riot, ranking behind the New York Draft Riot during the Civil War and Los Angeles’ Watts riot in 1992. Despite the terrible toll taken by the riot, Young refused to condemn rioting by blacks, calling it “rebellion.”

Whatever psychological benefits blacks may have gained from Young’s posturing, it provided no economic benefits whatever. Detroit gained a reputation as “America’s blackest city,” but this carried little or no economic value. The racial makeup of the 53 Detroit suburbs became lily white, but this did not prevent Michigan from losing roughly half of its manufacturing jobs in the first decade of this century.

What Killed Detroit? “Liberalism,” Sings the Chorus

The response to the bankruptcy announcement has been well-nigh unanimous. Commentators declare that liberalism killed the city. This verdict is easy to understand.

Detroit has been run by liberals for nearly six decades. In approved liberal fashion, municipal government expanded explosively and spent money lavishly, borrowing when necessary. Detroit was not a run-down, underdeveloped community in Appalachia. It was the most prosperous city in America when the liberals took over.

Still, there were poor people – too many, apparently, to suit liberals. The best and brightest of the Kennedy New Frontier generation took a firm grip on the reins of power and set out to lift the poor out of poverty using the levers of government – government programs, welfare, affirmative action and the full-scale liberal agenda.

There were racial problems in Detroit when the liberals took over. A rift existed between the “black community” and the police department. Liberals attacked the problems full bore. They ushered in Detroit’s first black mayor. They gave him his head. He immediately identified whites as the problem. He substituted blacks for whites throughout the city, much as a producer might substitute a more efficient or cheaper input for a less efficient one. In particular, the mayor gave blacks majority status within the police department. The result was that whites fled the city for the suburbs.

In addition to having too many white people, Detroit was also adjudged to have too many rich people. Not only did rich people inhabit the wealthy suburbs like Dearborn, they also lived in enclaves within Detroit proper. One of the first liberal actions taken in the early 60s was to raise existing taxes and create new ones. These were intended to fund the liberal programs, pay the wages and salaries of burgeoning municipal payrolls and to promote social justice by correcting the unfair distribution of income.

If the creed of liberalism is to be believed – if liberalism actually worked – these measures should have enshrined Detroit in prosperity for the indefinite future. Instead, they succeeded only in immizerizing the city. “America’s blackest city” became so crime-ridden and murder-ravaged that police have now declared it unsafe for entry by outsiders. Capital fled Detroit as if it were a banana republic undergoing a revolution. Detroit was dubbed “America’s First Third-World City.”

After a half-century of undiluted, full-throated liberalism, Detroit became the largest American city ever to declare Chapter 9 bankruptcy. Much of the city has the look of a bombed-out, abandoned wasteland.

Michael Barone, author of The Almanac of American Politics, is America’s acknowledged authority on politics. “When people ask me why I moved from liberal to conservative,” he wrote recently, “I have a one-word answer: Detroit. I grew up there…I got a job as an intern in the office of the mayor in the summer of 1967… [Mayor Jerome] Cavanaugh was bright, young, liberal and charming. He had been elected in 1961 at age 33 with virtually unanimous support from blacks and with substantial support from white homeowners – then the majority of Detroit voters – and he was reelected by a wide margin in 1965… He was one of the first mayors to set up an anti-poverty program and believed that city governments could do more than provide routine services; they could lift people, especially black people, out of poverty and into productive lives. Liberal policies promised to produce something like heaven. Instead they produced something more closely resembling hell.”

The First Municipal Domino

While Detroit’s mayoral leadership may have been memorably incapable, other major U.S. cities are following in its wake. Eric Scorsone, economist at Michigan State University, concludes that “it’s the same in Chicago and New York and San Diego and San Jose. It’s a lot of major cities in this country [that] face the same problems.” After all, virtually all major U.S. cities are controlled by Democrats and governed by large, bureaucratic, wasteful administrative mechanisms. They all contain huge unfunded liability time bombs ticking loudly and conspicuously in the form of defined-benefit retirement programs for civic employees. All are spending far beyond their means, often borrowing in order to finance it.

The federal government’s debt, which now exceeds annual gross domestic product, has garnered most of the dire predictions associated with government finance. State and local government finance has a hard time competing in the doom-and-gloom prophecy business when its competitor has the biggest numbers all sewn up. The problem is that the federal government has the advantage of time on its side, as the Detroit bankruptcy shows. The feds wear square-toed financial boots in the form of money-creation powers and interest-rate manipulation powers. These enable them to kick the financial can down the road longer than state and local governments can.

Consequently, we can expect to see more cities stand in the financial dock before the day finally comes when members of Congress have to shape up or get a real job.

DRI-285 for week of 11-18-12: Twinkie Recipe: Separate Politics from Economics, Bake Cheaply and Deliver Efficiently


An Access Advertising EconBrief:

Twinkie Recipe: Separate Politics from Economics,

Bake Cheaply and Deliver Efficiently

Contemporary economic theory is now so heavily formalized by high-level mathematics and statistics as to be inaccessible to non-specialists. This has many drawbacks. Among them is the difficulty of integrating the effect of politics on markets. This is one of the few points of agreement between left- and right-wing commentators, who insist that we have a system of political economy rather than a system of markets as such.

Both sides are correct. Unfortunately, this realization causes them to neglect economics rather too much and concentrate on politics too heavily. Faced with a controversy, they tend to choose sides as if engaged in a war – by looking at the political uniform worn by the participants. Their most recent skirmish has attracted national attention. The baker, snack-food and confectioner Hostess, Inc. has filed for bankruptcy after a protracted dispute with its unions. One union in particular, the bakers’ union, has drawn the focus of attention.

The Decline and Fall of Hostess

Hostess was formerly Interstate Brands Corp., of Kansas City, MO, producer of over 30 brands of breads, cakes and snacks. These include legendary names like the Twinkie, Wonder Bread and Hostess Ding Dongs. The current dispute between Hostess and its unions is only the terminal event in a decades-long history of gradual decline. Hostess’s bankruptcy is its second; the first resulted in reorganization and the name change from IBC to Hostess. How could a company with such a distinguished roster of popular brands have fallen so low?

Some of the decline is due to a change in consumer tastes. High-calorie, high-fat, high-sugar snacks have lost favor. The realization that carbohydrate consumption carries just as much danger as fat consumption, if not more, has dampened the American enthusiasm for bread and cake. This is only part of the explanation for Hostess’s problems, though.

The longtime popularity of brands like Twinkies and Ding Dongs allowed the company to endure some highly uneconomical labor practices. The Teamsters Union – one of 12 unions operating under more than 300 collective-bargaining agreements with Hostess – forbade drivers from helping to load and unload their trucks. A stocker had to be employed to drive to the store and stock retail shelves with products transferred from storage. Some brands, such as Wonder Bread, could not share space on trucks with others.

When the falloff in brand popularity hit, Hostess could no longer subsidize this sort of inefficiency. The company has operated in bankruptcy reorganization for most of the preceding decade. The final crisis occurred within the last week, when Hostess announced that it had asked for contract concessions from the baker’s union, having already received concessions from the other 11 unions. It could not operate under the current contract and the law forbade operation without a contract. Thus, it announced that unless the bakers agreed to a deal, Hostess would once more file for bankruptcy and this time would proceed to liquidate the company’s assets.

The bakers refused. The company filed for bankruptcy. A federal judge intervened with by demanding that the parties undergo mediation. That process failed, and the bankruptcy and liquidation will now proceed.

The Left-Wing Reaction

The response on the hard left-wing, particularly among union proletarians, is that once more a company was undone by “vulture capitalism.” Private-equity firms took over the firm and ran roughshod over the rights of honest workers, raping and pillaging the firm’s assets. These commentators are doubtless fortified by the election returns, which suggest that the campaign of career-character assassination against former Bain Capital CEO Mitt Romney worked well enough to secure re-election of a fairly unpopular President.

The commentators looked at the day-to-day uniforms worn by the managers of Hostess and saw “venture capital” emblazoned thereon. Had they looked behind the scenes, however, they would have noticed that many of the particular venture capitalists involved with Hostess were closely associated with the Democrat Party. That’s right – the party of compassion, of equality and fairness, of comparable worth and social justice and the 99% and share-the-wealth and soak-the-rich. How could this be?

Actually, the real question is: How could it be any other way? Take-over artists and private-equity managers are primarily engaged in turning around businesses, not liquidating them. A liquidation is a fire sale, in which assets are generally sold at rock-bottom prices. That is why potential buyers tend to wait out dramas like the Hostess episode rather than riding to the rescue like the Lone Ranger. The rate of return on an asset depends crucially on the price paid for it. Who wouldn’t rather pay a low price rather than a higher one? Private-equity managers are business experts, right enough, but there’s no such thing as an expert in getting a high price at a close-out sale. Ask any business owner who ever went bust or any grieving son or daughter who ever liquidated their parent’s possessions at an auction. It’s pretty tough to profit from this process and it’s just as tough to earn fees from producing outcomes like this, since nobody has an incentive to pay the fees.

No, the people who bought Hostess bought it in order to run it, not break it up. Their record shows they usually succeed in doing that. They’re liquidating Hostess now because they failed this time and there’s no point in throwing good money after bad by failing to play their hole card. That card is the fact that Hostess’s 30+ brands still have considerable market value. In fact, their individual market value – outside the company and freed from the dead weight of union presence – probably exceeds its collective value inside Hostess.

The link between private-equity and the Democrat Party is eminently logical. It is economic, not political; that is, it has no necessary connection with the political sympathies of the vulture capitalists involved. Takeover targets are failing companies that have the potential to succeed. Why does a potentially successful company fail? Answer: it is being dragged down by unions, just as Hostess was. How to overcome this roadblock? Answer: persuade the unions to cease and desist from their uneconomic practices for their own good as well as the good of the shareholders. The best people to do this are not card-carrying Republican Party members or Ayn Rand sympathizers. They are fellow Democrats, who can at least gain the ear of the union bosses and perhaps retain a shred of credibility with the rank and file. And look what happened here – Hostess’s managers succeeded in keeping the company going for over a decade and persuaded 11 of the 12 unions to sign off on their latest resuscitation plan.

So much for the standard left-wing boilerplate view of the Hostess affair. Alas, the view from the right wing is not much more cogent.

The Right-Wing Reaction

Somewhat surprisingly, the right-wing view has gained considerable momentum even in mainstream media. The baker’s union suffers from false consciousness, say the mavens of talk radio. They stubbornly cling to their high union wages and benefits at the cost of their own jobs – and the 18,500 other jobs at Hostess in the bargain! How selfish can you get? Just one more case of what “union bloody-mindedness…at work.”

Wall Street Journal columnist Holman Jenkins (11/21/2012) provides a refreshing antidote to the stereotypical thinking of both right and left. He reveals that the Hostess story is a tale of two unions, not just one. It is the Teamsters who are the stereotypical hard-liners, insisting on featherbedding work rules that have driven Hostess’s product distribution costs into the stratosphere. The bakers (the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union) have made repeated concessions, to the point where production costs hardly exceed industry norms.

From the bakers’ standpoint, they are being asked to make even more concessions now in order to protect the current status of the Teamsters, whose work rules are still hamstringing the company. No matter what you may have heard, solidarity is not “forever” – that is merely a song lyric.

As organized under laws mostly passed in the 1920s and 1930s and reinforced by labor regulations handed down for decades by the federal government, a labor union is a cartel. It is analogous to cartels set up by businessmen who sell products and services. Cartels strive to emulate the outcome of a monopoly, which is to thwart the competitive process and attain the same collective profit-maximizing outcome theoretically open to a pure monopoly seller.

In practice, a pure monopolist cannot even approach that theoretical outcome without the aid of government in restricting competition. That is even truer of cartels and much truer of labor unions. That is why the federal government has conferred their coercive powers upon unions. Unions operate to raise wages above the level that would otherwise prevail in a free labor market. The only ways to do that are to artificially hold wages high or to artificially restrict the supply of labor to the market. Unions do one or the other, depending on circumstances.

Both of these practices reduce employment in the unionized sector. This drives workers into unemployment and/or into non-unionized sectors, thereby driving down wages there. Union workers have no particular incentive to sacrifice on behalf of other union workers, who are after all merely workers like the ones whose interests have already been harmed by the union cause.

Jenkins points out that the bakers had a strong case for not agreeing to Hostess’s offer. Why not “hold back further concessions, let the company liquidate, and try their luck with a new owner or owners who might materialize for its bakery operations. These new owners presumably would be in a position to invest cash in marketing and promotion… They would benefit from the deluge in free media that has befallen the Twinkies brand this week. All the more so given that Hostess plans to close or sell some of the bakery plants anyway, that unemployment benefits are generous, that bakery jobs have become crummy-paying thanks to previous givebacks, that the government-run Pension Benefit Guaranty Corp. will be assuming the Hostess pensions in any case.”

So it seems that the bakers are not dumbbells after all. They are pursuing their own interests rationally given the cards they were dealt under a system they didn’t design. The right wing is repeating a frequent mistake of blaming victims of progressive socialism for acting in their own behalf. The right should instead expend all its energies working to change the system.

Jenkins observes that “one could always ask about the wisdom of a labor-law structure that causes companies like Hostess to drag on for decades without adapting to their marketplaces.” Indeed. This is a structural consequence of the substitution of politics for economics.

The Vocabulary of Political Theater

The medium of political theater employs a vocabulary of perception rather than one of real meaning. Words are assigned a political meaning unrelated to their substantive economic impact. One such word is “corporation.”

A corporation is a set of meanings that assign claims to various assets. But the political meaning of the word “corporation” describes a personified entity that is “large,” “wealthy,” “powerful,” “insensitive,” and “evil” when remotely viewed, or “paternalistic,” “secure” and (still) “wealthy” when viewed up close – say, from the perspective of an employee. All these traits are those of individual human beings; the political view of a corporation equates it to a person.

When a corporation goes out of business, it closes – often declaring bankruptcy – and its assets are liquidated. When a person goes out of business, he or she dies. A person cannot undergo “asset liquidation” even though a person’s assets can be liquidated. Thus, a person is not a corporation. But because politics views a corporation as a person, bankruptcy is viewed as akin to human death, even though it is not.

Bankruptcy is a process of evaluating the business to determine whether, and in what form, the business should go forward. That evaluation will gauge whether the business’s assets are worth more in combination or singly. This determination is a vital social process because your welfare and mine suffers if business assets are misused. True, we may not be owners of the business, but the real beneficiaries of a business are consumers, who benefit from what the business produces. That, after all, is the whole purpose of businesses – to produce goods and services for consumption.

When companies like Hostess die lingering deaths of a thousand union and bureaucratic cuts, all of us experience imperceptible losses. We pay more for government regulatory and bureaucratic functions. We pay more for the goods and services those businesses produce and we get less. Perhaps we are able to buy less in the coin of a depreciated currency.

Bankruptcy is in no sense analogous to human death. If an analogy is absolutely necessary, the “burnoff” of dead, accumulated brush that occurs in nature would be a good one. This pruning away of dead, useless stuff enables the remaining ecosystem to thrive.

One of the most destructive of all political terms is “economics,” which means “macroeconomics.” Currently, there really is no such coherent economic theory. Even less is there a set of valid, generally recognized policy prescriptions that could be grouped under that heading. The only valid meaning for the term “economics” would be described by the sub-head “microeconomics,” with the proviso that this would include the specialty of monetary theory and the study of business-cycle dynamics. One of the two sub-disciplines of microeconomics is the theory of the firm. That logic is of more help in understanding Hostess than anything provided by the Council of Economic Advisors.

A politico-economic term that has no meaningful economic referent is “job creation.” The purpose of economics is not to create jobs but to create value. Human labor is the key means of doing that, but it is the value, not the labor itself, that is the desired end product. Totalitarian regimes are wonderful job creators; there was no unemployment in ancient Egypt or in Soviet Russia or Communist China under Mao. The trick is not putting people to work; it is getting the most out of the work they do. That is what the “labor-law structure” referred to by Holman Jenkins completely overlooks.

Whither Twinkies, et al?

A few observers are sheepishly acknowledging that maybe we haven’t seen the last of Twinkies after all. The current owners of Hostess intend to sell the rights to produce all those branded products, which portends a bright future for any brand not encumbered by the same union rules that felled Hostess. And it may well mean a brighter future for many of those in the baker’s union as well.