from Kevin Williamson at National Review, Capital Matters

Like wicked old Samuel Ratchett on the Orient Express, Detroit had a dozen murderers. And an important one — important in that there is in it a lesson for us today — was a defective relationship between capital and politics. Just as short-sightedness leaves Arab oil emirates poorly prepared to weather declines in oil prices, civic and corporate myopia left Detroit dependent upon a handful of firms whose production undergirded the entire economic ecosystem of Detroit. A combination of factors deformed the economic foundations of Detroit, from governmental protectionism (which made managements thick and lazy) to union rapacity (which diverted potential investment capital into inflated pay and benefits, creating a lot of multimillionaire union bosses) to our national unwillingness to deal with the fact that Germany and Japan — smoking ruins at the end of World War II — would eventually rejoin the modern industrial economy. Rather than finding its way to its best uses through Schumpeterian creative destruction, capital was locked up in poorly performing enterprises such as Chrysler (executive hipster Lee Iacocca was into bailouts before bailouts were cool) and in malinvestments such as unsustainable pension funds.

Because most of us lack sufficient imagination, we do not understand what the price of that was. The price isn’t just bailouts and layoffs and factory closings, as painful and convulsive as those have been in Detroit and throughout the industrial communities that inflicted similar problems upon themselves. No, the real cost — the literally incalculable cost — is the lost value that would have been created had all that capital been liberated and put to its best use. We have forgone generations’ worth of compounded returns on investments that we should have made but did not. Another way of putting that: It is far easier to solve the problems of 2016 starting in 1950 than starting in 2016.


The proper cost of capital is not the established bank rates but the return on the next best alternative use.