A company town with newly remote workers and a bloated city budget.

Is San Francisco becoming Detroit?

A comparison I’ve heard since at least 2014 is that San Francisco is on an inevitable path to becoming the next Detroit. There does seem to be a lot to the comparison: In each case, a small city with a bureaucratic government and an economic base rooted in a single industry experiences massive growth alongside that industry. Tensions grow between the industry and the city. When the industry outgrows the city, the city is left with substantially less revenue and a huge mess to clean up. 

Let’s break down the comparison.     

  • Detroit became the center of American industrial production after World War II -- the result of a government-funded, fully modernized supply chain. Comparatively, San Francisco has become the center of the 21st century economy, the result of investments made during the dotcom bubble and leveraging technology which allows companies to profit at a truly global scale.  
  • The availability of high paying industrial jobs spurred massive migration into Detroit. Many of the migrants were poor rural blacks from the American South who were met with racist attitudes and policies. Likewise, the value growth in Bay Area real estate values has tracked with the growth of the tech industry. Pre-existing local residents not fortunate enough to own land and the city’s homeless have felt the downsides.     
  • The growth of the auto industry created the conditions for American suburbanization. Detroit had perfected the very technology its residents could now use to leave. The tech industry based in San Francisco has created similar conditions for an exodus. Zoom is worth more than Exxon Mobil. Tech jobs can happen anywhere with an internet connection. Living in San Francisco is not a requirement. 
  • The outflows of people from Detroit manifested in unequal ways. Whites were able to buy homes in suburban neighborhoods which openly excluded black residents. All the while, much of the freeway construction destroyed black neighborhoods. In San Francisco to see similar inequality look no further than the growing homeless population and compare that to the wealthy cabal of local landlords.     
  • Hostile relationships between the city and privileged whites leaving Detroit caused plummeting tax revenues and skyrocketing home abandonment. Detroit’s leaders engaged in a billion-dollar borrowing binge, created new taxes and failed to cut expenses. Simultaneously, they gifted workers and retirees with generous bonuses. Under pressure from unions they failed to cut health care benefits — saddling the city with staggering costs that still two generations into the future threaten the safety and quality of life of Detroit’s residents. Similarly, The San Francisco exodus caused by remote work opportunities and the high cost of living could damage the revenue streams of a city burdened with a payroll of 32,000 employees and $1.6 billion of debt. The most vulnerable residents would suffer.   

DETROIT (A four part timeline):

Detroit mobilizes for war

When looking at the economic rise of cities, it’s tempting to start with iconic heads of industry. But, reality is more nuanced. Detroit manufacturers achieved previously unseen manufacturing scale on the back of heavy government investment and “can’t lose” government policies which guaranteed manufacturer’s profits and insured against their losses.

The bombing of Pearl Harbor on December 7, 1941 threw the United States directly into the conflict of World War II. President Roosevelt fully mobilized the country for war. US automakers fearing loss of profits were initially reluctant to convert to military production. In February 1942, the US government banned civilian auto production. Later in that same year, Roosevelt created a system of tax breaks and incentives which guaranteed production costs and paid a percentage of profits for wartime goods.  

The auto manufacturers couldn’t lose! As a result, Detroit moved at a staggering pace. By June of 1942, 66 percent of Detroit’s machine tools were being used for military goods. Ford Motor Company built a 67-acre plant which employed over 42,000 people. The uptick in wartime production wiped out seemingly overnight unemployment from the Great Depression. 

Detroit gets an influx of new workers

Approximately 500,000 workers (many from the American South) flooded into Detroit for defense work and overtaxed its already inadequate, depression wracked living conditions and social services. It’s important to note the large number of black Southerners moving into the city. Blacks as a total % of Detroit’s population doubled between 1940 and 1950. In half a generation World War II transformed black Americans from a rural, agricultural, Southern population into a metropolitan, industrial, multi-regional population. 

The lack of housing, competition for jobs and racist white attitudes unchanged from the Jim Crow era culminated in the bloodiest racial episode of the 1940s. In June 1943, the Detroit Race Riot ended with 34 dead, 433 people injured and two million dollars worth of property destruction.

It’s hard not to look back at the events of 1943 and see a timebomb waiting to go off in Detroit’s future (ditto the US at large). But, at the time this eventuality seems to have been largely shrugged off. There are a host of reasons why this might be the case: (1) the US still had a war to win (2) victimization occurred largely within the black community and whites were not moved by black victimization (3) there was a relatively high amount of post depression prosperity being enjoyed across the city and (4) challenges notwithstanding the freer environment, greater earnings and potential for education were overall better for African Americans than the Southern conditions from which they had migrated.          

The auto industry outgrows Detroit

By 1950 Detroit had a population of 1.8 million people and accounted for 1/6 of the country’s employment. The auto manufacturers used their increased capacity (financed by the US government) to take center stage. New car sales went from 2.1M in 1946 to 6.7M in 1950 (59% of families owned a car) and 7.9M in 1955 (70% of families owned a car). With wartime contracts dried up, the auto manufacturers eyed exploitation of suburbanization policies to spur growth.   

Increased auto sales stimulated road building which in turn stimulated a residential housing boom. The auto industry was literally outgrowing the city of Detroit. Postwar highway and urban development projects promised to improve the city’s residential areas and bolster the economy. Urban planners made sure that middle class neighborhoods were minimally disrupted. But, they had little concern for black neighborhoods especially those close to downtown shopping districts.

The John C Lodge freeway represented not merely separation of the city, but outright destruction. The first three-mile stretch of the freeway leveled large portions of the densely populated Lower West Side and the heavily black neighborhoods bordering Highland Park. The Ford Lodge interchange, the first full freeway-to-freeway interchange built in the United States and an emblem of urban avoidance opened in 1955. That same year GM topped the list of the newly created Fortune 500 (oil and steel manufacturers garnered the next 11 spots). Just one year later, the Detroit streetcar system shutdown entirely. At its peak the system had run nearly one thousand cars. By 1958, a 7-mile stretch of the Lodge Freeway had displaced over 2,200 buildings, much of them black owned businesses, institutions and homes.  

People leave, taxes go up, services diminish, more people leave

What was designed to make Detroit more accessible ended up making it easier to leave. By 1960, the city’s population declined by nearly 11%; the first decline in the city’s history. Businesses followed suit, leaving the 1950s as the peak of Detroit’s population and housing values. This upper-class exodus occurred while many lower-status populations heavily dependent on municipal services continued to flood into the city. Further, due to a complex mixture of private sector practices and housing policies at the local, state, and federal levels, most African Americans were excluded from new housing and employment opportunities in the suburbs.

In 1962, in an effort to stem the loss of revenue, the city government implemented its first ever income tax. This opened the floodgates for additional taxes on utilities and other revenues. The taxes intended to stop the city’s free fall only led to increased incentives by those with means to flee to the suburbs. The exodus was devastating. Even today, Detroit does not take in as much tax revenue as it did just from property taxes in 1963.

Detroit Public Schools suffered from underfunding and racial discrimination before the riots. Underfunding was a function of a decreasing tax base as the population shrank while the numbers of students rose. From 1962 to 1966, enrollment grew from 283,811 to 294,653, but the loss of the tax base made less funding available. At the same time, middle-class families were leaving the district, and the number of low-scoring and economically disadvantaged students, mostly black, were increasing. In 1966-67, the funding per pupil in Detroit was $193 compared to $225 per pupil in the suburbs.   

In the 1960s, the city lost about 10,000 residents per year to the suburbs. When the auto industry boomed again in the early 1960s, only Chrysler and the Cadillac Division of General Motors assembled vehicles in the city of Detroit. The blacks they hired got "the worst and most dangerous jobs”.

The above combined with police and housing discrimination paved a road to the riots of 1967. The scale of the riot was the worst in the United States since 1863 and was not surpassed until the 1992 Los Angeles riots 25 years later. The white exodus from Detroit had been steady prior to the riot, totaling twenty-two thousand in 1966, but afterwards it was frantic. In 1967, with less than half the year remaining  the outward population migration reached sixty-seven thousand. In 1968 the figure hit eighty-thousand, followed by forty-six thousand in 1969.

Things continued to get worse for Detroit. Fueled by debt, increased government spending and sweetheart deals for the unions the city filed for bankruptcy in the mid 2000s. Further, a city government who fanned the flames of racial tension limited the city’s ability to become a cultural center as crime increased throughout the 70s and 80s. Symbolically, Motown records left for Los Angeles in 1972.      

Is San Francisco becoming Detroit?

When reviewing the history of Detroit, it’s hard not to see San Francisco. When overlaying timelines of the two cities, there emerges an eerie symmetry. Today, the Coronavirus pandemic lines up with the Federal-Aid Highway Act of 1956 (the key piece of legislation which turbo-charged suburbanization). The pandemic and indefinite work from home arrangements seems to be doing the same, although across a much larger surface area.  

Post WWII Detroit and Post dot-com bubble San Francisco have some eerie similarities

Why is San Francisco not like Detroit? 

The major difference with San Francisco of the 2000’s and Detroit of the 1950’s is San Francisco’s prohibitively high cost of living. The high cost of housing, in particular, has served as a significant barrier to entry and minimized the influx of population. The net population growth of San Francisco was only 1.6% from 2003 to 2013; compare that to Detroit’s 14% growth from 1940 to 1950. Ironically, many of San Francisco’s byzantine housing policies were enacted in response to the devastation wrought by suburbanization and freeway construction of the 1950s.

Limited housing supply means San Francisco’s population influx of the past two decades was limited to mostly high earning tech workers. Middle income workers have been priced out and many long-time residents have left for good. 1940s Detroit, on the other hand, had an influx of low wage agricultural workers who had no reason to return from where they came. Given San Francisco’s reduced burden, it’s tempting (and plausible) to make the case that an exodus of high earning workers will lead to reduced cost of living and the city can return to what it was before it went full “company town”.

Unfortunately, concentration of wealth cuts both ways. San Francisco's budget has more than doubled from 2010 to 2020 -- $6.4 billion to now $13.7 billion, thanks in large part to the tax revenue from tech companies and their employees. And while many middle class workers have left, there is one category that remains -- city employees. Municipal employment eats up a large share of the city’s budget. Salaries and benefits account for almost 45 percent of the budget, averaging $175,004 per employee. The city employs 31,830 people, one for every 28 residents and six employees for every city block. The $873 million spent on grants—payments to nonprofits or other groups for various social services—almost equals the total spent on capital projects and facilities maintenance combined. 

Where San Francisco could be going...   

If even a modest percentage of the high-end tax base moves out, it will leave a debt-burdened city short on revenue. Stressed infrastructure, a growing homeless population and falling real estate values could cause further outflows. With so few holding so much of the wealth, this could be devastating. 

Ultimately, San Francisco of the 2010’s represents a missed opportunity. Concentration of wealth, incompetent city governance and draconian housing policies prevented what could’ve been an historic economic growth story that benefited far more than just NIMBY landlords. Sadly, it looks like that ship has sailed and the exodus has begun

Given the city’s politics, I don’t expect an even-handed response. There are already several proposed tax hikes, mostly punitive actions against “tech”. If this hostility persists, the remaining businesses and employees will be penalized to the point where it no longer makes sense economically or psychologically to stay. The city will be forced to act. 

Rather than scale back the wages of city workers amidst falling revenues, I anticipate the city will take on more debt while making waves of service cuts and workforce reductions. They will, as they do, find capacity for flavor of the month progressive policies. This will lead to a city that can barely provide basic services looking more like Detroit. If property values plummet, the exodus will hasten and what will remain is a city composed exclusively of ride or die San Franciscans, Boomers shielded by Prop 13, Gen-Xers shielded by rent control, a homeless population that was failed by both national and state governments and Marc Benioff smugly lecturing people about paying more taxes.