San Francisco is the 21st Century's Detroit
My city had been pulled down Reduced to parking spaces
Perfecting Equilibrium Volume Two, Issue 42
I went back to Ohio
But my city was gone
There was no train station
There was no downtown
South Howard had disappeared
All my favorite places
My city had been pulled down
Reduced to parking spaces
The Sunday Reader, June 11, 2023
There’s a stretch of the TV series Mad Men that makes little sense to us denizens of the 21st Century. The ad agency gets a chance at an automobile account, and everyone wants to go to Detroit.
Who wants to leave Manhattan, the Big Apple, for Detroit? Heck, who wants to leave Manhattan, Kansas, for Detroit?
But that’s today. In the Mad Men era of the 60s. Detroit was the richest city on earth, its millions of residents producing the endless stream of automobiles driving the world.
By the 70s, just a decade later, being forced to go to Detroit was a punch line as the worst punishment imaginable in Kentucky Fried Movie. Today Detroit’s 600,000 residents fill less than half the old city; entire sections are abandoned.
Was Detroit’s destruction unique? Could it happen again?
Is it happening right now to San Francisco?
It is. San Francisco lost 6.3 percent of its population from 2019-2021, a larger drop than any two-year slide in Detroit’s decline.
And there are signs that the actual situation is even worse. Cell phone usage in the city remains at just 30 percent of pre-pandemic levels.
How bad is it? This bad: In just two years so many high-income people moved out that the city lost $7 billion in household income from its tax base.
How bad is it? This bad: The owners of the 1,921 Hilton San Francisco, the city’s largest, simply walked away from it this week. They also abandoned the 1,024 room Parc 55 hotel at the same time. The hotels are appraised at $1.56 billion; the owners announced they were stopping payments on the outstanding $725 million loan, and abandoning the hotels to the bank.
So what did San Francisco do wrong? What terrible mistakes were made to turn the City by the Bay into the 21st Century Detroit? How can it recover?
Mistakes were made – they always are – but they are not the reason for the decline.
San Francisco’s time has simply passed.
The 20th Century’s endless mega metropolises were a function of the Industrial Age. Older cities, such as Paris and London, had fairly stable populations for centuries, then exploded into the millions to feed the Industrial Age’s endless appetite for factory labor.
Consider Ford’s Rouge River Plant, the crown jewel of Detroit’s auto industry.
The Iron Law of the Industrial Age was that Economies of Scale defeat everything else. So companies grew and grew, and required more and more management. And managers.
Economy of Scale is a simple concept we have all come to understand: A single craftsman is perfectly capable of making a knife or a jacket. But a factory is capable of making a hundred or so of equal or better quality for the same time and less money. Individual craftsmen cannot compete on price and find it hard to compete on quality. It’s simple: because the factory is making hundreds of times as many items, it can buy bulk supplies at much cheaper rates. And because the factory is producing so many units, workers can specialize tasks on an assembly line, increasing specific skills, reducing labor costs and solving problems. The bigger the operation and the higher the production, the lower the cost of each unit.
The epitome of Economies of Scale was the Ford Rouge River Plant; 2,000 acres in Dearborn, Michigan, 10 miles from Detroit on the Rouge River. Iron, silicon and a stream of raw materials flowed into the blast furnaces and glass plants, and finished Fords rolled out.
Then the Detroit auto industry foundered. Storied name after storied brand disappeared. American Motors. Buick. Oldsmobile. Pontiac. Chrysler went bankrupt and was sold repeatedly. General Motors went bankrupt in one of the largest Chapter 11s in history.
Mistakes were made by Detroit’s city leaders. But they are not responsible for the fact that the Packard plant now looks like the ruins of some lost civilization reclaimed by the rain forest.
Detroit’s auto industry implosion made the city’s fall inevitable.
As the Information Age supersedes the Industrial Age gives way, its primary law - the Economies of Scale – gives way also, and with it all of the structures and procedures built on its architecture.
And as these give way, the millions who worked and lived there are swept away, their way of life vanishing into the recesses of history.
Managers and management – the Industrial Age’s elites – are the new Luddites.
The Luddites were a movement that fought the first factories during the birth of the Industrial Revolution. But history is written by the victors; the victorious industrialists about the defeated Luddite’s was such a slander that their very name has become a common term for fools who fear and don’t understand technology.
The Luddites didn’t fear technology. They feared that it would end their way of life. And they were right.
The Luddites were piece workers, skilled weavers and textile artists in what was literally a cottage industry. The factory looms produced cloth at such a rate that pieceworkers could not compete. The piece workers protested and tried to negotiate, but the owners of the new mills were uninterested in slowing their progress.
So the pieceworkers formed a secret society led by the mythical General Ludd. Factory after factory was sacked in 1811, their looms smashed with huge hammers named Great Enock after the blacksmith who had made both the hammers and the looms they destroyed. “Enoch made them,” they declared, “Enoch shall break them.”
As the looms put the pieceworkers out of work, they also cut deeply into the village economy. As village economies struggled and factories demanded more and more workers, rural England emptied out and was impoverished, and cities exploded.
Adam Smith explained that society renews itself through Creative Destruction: old inefficiencies are crushed and swept away by innovation. And it is impossible to argue that the Industrial Revolution was not enormously beneficial to society. People are living almost twice as long. Modern medicine has wiped out entire categories of diseases. And no 19th century prince or princess lived half as well as the modern middle class.
All of that was cold comfort to the Luddites of the 19th century. And it is now cold comfort to our 21st Century Luddites. Generations of elites have attended the best schools, walked their diplomas into the best management jobs, and lived the best lives.
No more.
As hundreds of thousands gathered in Detroit to build cars, the flood of workers created entirely new classes of problems. Solving them called for a new kind of organization, launching the Era of Management Expertise, marked by the 1922 establishment of the Harvard Business Review.
Managers became the new elite. Generation after generation sent their children to the right schools, then into lucrative careers managing those armies of workers who had filled the cities.
Here’s the problem: Ford in 2020 has just under 200,000 employees, and a market cap of $55 billion.
Apple has around 72,000 employees (not counting the retail stores), and is worth $2.85 trillion.
Ford is a manufacturing company. Apple is a hybrid company. There is no Apple Rouge River Plant. But Apple does have thousands of employees managing outsourced manufacturing, supply chain, shipping, distribution and then managing all those processes.
If Apple is a hybrid company, what would an Information Age company look like? At some point in the next decade or so 3D printing will allow you to purchase a smartphone by downloading a design and printing it.
How many employees will Apple need if it is a website with designs you can purchase for downloading and printing? Certainly not 45,000. 4,500?
450?
Whatever the final number, tens of thousands of middle management jobs will disappear.
Companies with 450 employees don’t hire a lot of Wharton or Harvard MBAs. Companies with 450 employees don’t have dozens and dozens of employees in Human Resources or Legal. Small companies outsource vital functions such as payroll.
Why should you care about whether some silver-spoon fed Ivy League MBA’s job prospects?
The Industrial Revolution is called that because the transition transformed the world. Those millions of managers will no more fade quietly than the Luddites.
The collapse, when it comes, comes quickly. Inertia is a powerful force in favor of the status quo, but once it breaks it’s just as powerful preventing recovery. In Detroit’s case the 1960s riots broke the status quo. The city never recovered because the industry that had built the Motor City had collapsed.
In the 21st Century the COVID crisis cleared out San Francisco. And Chicago. All of the biggest cities that ruled the Industrial Age are suddenly in trouble. More than 20 percent of office space nationwide are empty, and its worse in the biggest cities. Nearly $1.5 trillion in interest-only loans are coming due over the next three years. Owners are starting to walk away rather than refinance at today’s much higher interest rates. Analysts estimate more than three-quarters will not be able to refinance at current rates.
This is the start of a new series. American Luddites: How Manifest Destiny made the United States the colossus of the Industrial Age, and how that same force is breaking America apart.
Future installments will look at how the largest metropolises such as San Francisco are losing residents and employers to smaller cities with lower costs and better quality of life, how the US and the European Union are being split apart by the onset of the Information Age, how what seem to be intractable political divisions are really the result of entire sectors of the workforce being displaced, and whether smaller city states might be more nimble and better positioned for the world to come.
Why does Texas need Illinois, anyway?
Next on Perfecting Equilibrium
Tuesday June 13th-The PE Vlog: Tutorial: Adobe Photoshop AI tools Part II
Thursday June 15th-The PE Digest: The Week in Review and Easter Egg roundup
Friday June 16th-Foto.Feola.Friday
Sunday June 18th: Happy Father’s Day!