The Motor City’s Regulators are Hitting the Brakes on Regrowth

[Originally printed in the Wall Street Journal]

 

David and Sky Brown do not seem like the type of people who would be targeted by Detroit’s law enforcement. This summer the couple moved into the Motor City’s dangerous northwest area to help with revival efforts. After fixing an abandoned home, they opened a backyard pen with goats and chickens and began hosting neighborhood dinners, using the animals’ eggs and milk. They hoped to transform their decrepit block into a community farm.

But the city squelched the Browns. Without warning, animal-control officials entered their home on the afternoon of Oct. 22 and, citing a city law banning farm animals, confiscated their pets. In a phone interview, Mrs. Brown described this as “the most traumatic experience of my life.”

While housing livestock was technically illegal, the decision to target the Browns was odd. The couple had good neighborhood rapport, epitomizing the sort of urban pioneers that Detroit wishes to attract. The animals should have been a minor concern amid the city’s rampant crime. But the crackdown was one example of a broader regulatory sweep that has spread across Detroit and may kill its newfound entrepreneurial spirit.

The city has begun reinforcing regulations that, because of bureaucratic disorganization, have long been ignored. Central to this is the Operation Compliance Initiative, which was passed in 2012 by then-Mayor Dave Bing to regulate Detroit’s 1,500 illegal unlicensed businesses. Most operate on extremely low profits and, like the Browns’ project, are often run out of homes. Part of a complex underground economy, they are usually in poor areas. They offer everything from auto parts and electrical equipment, to basic retail and in-house dining—but they all have failed to meet the permitting and licensing requirements mandated by the city and the state of Michigan.

The Compliance Initiative was sold to the public as a way to target rogue enterprises that were skipping tax payments, practicing poor sanitation, or running criminal activities. It also promised to help bring the harmless businesses up to code, so they would no longer present fire or safety hazards.

But after one year, nearly 900 businesses had been threatened with closure, with some even temporarily padlocked by inspectors. And 383 were shut down permanently, most often for minor infractions like improper zoning. Sonny’s, a west-side tire store, had to close because it sold used equipment on a strip zoned for new retail. A carwash was harassed for signs that advertised its services, and a TV-appliance shop was closed for selling on sidewalks—mere aesthetic gripes in a city dominated by crumbling homes. Another man, Albert Barrow, was consistently fined for hosting live music shows in his backyard.

Detroit’s attempt to address safety hazards and tax scofflaws is laudable. But demanding full compliance on nonessential regulations is counterproductive in a bankrupt city. Paying for the enforcement diverts resources from Detroit’s numerous other failed services, like its slow-responding police, trash-filled sidewalks, burned-out streetlights, abandoned buildings and dysfunctional public transit.

Such overzealous enforcement also discourages self-help activities that are justifiable given the tough economic conditions. In a city with a 38% poverty rate, an official unemployment rate of nearly 15% (and a real one probably much higher), these businesses provide job opportunities and inexpensive goods in neighborhoods that lack mainstream retail outlets.

By enforcing the program, Detroit not only disregards these benefits, but ignores the reason that the businesses are out of compliance: because owners can’t afford to follow the onerous regulatory codes. Entrepreneurs starting in the city must endure hefty approval criteria—mostly imposed by the state of Michigan—to get licenses even for straightforward professions like hairstyling and landscape architecture. In 2013 the Detroit News reported owners as saying that the wait times to open or expand businesses averaged between eight months and a year. Larry Mongo, a restaurateur, said he waited four years to get approval from the city for patio seating.

Food carts are finally legal, but with severe restrictions on where and what they can serve. City laws prevent establishments that sell liquor from opening within 500 feet of each other, thus forbidding a genuine downtown night-life scene. Detroit’s first response to ride-sharing services like Uber was to issue a cease-and-desist order. This spring it allowed them but will likely soon regulate them like taxis. This means they would pay the city more than $2,000 for licensing and roughly $6,000 annually for insurance, and endure price controls.

Along with the city’s property-tax rates, which, at 4%, are the highest among major U.S. cities, and poor services, such regulations make Detroit hostile to growth. A 2013 economic freedom index for U.S. cities compiled by Florida Gulf Coast University economist Dean Stansel placed it 345th out of 384 metro areas.

Owners suspect that the regulations exist for all the wrong reasons: to protect existing businesses, garner revenue and justify bureaucracy. Thus many entrepreneurs prefer to stay officially out of sight. “The general sentiment in this city,” Mrs. Brown told me, “is to ask for forgiveness rather than permission.”

The bureaucrats in City Hall seem to have forgotten, if they ever knew, that Detroit arose because of entrepreneurs like Henry Ford and Motown’s Berry Gordy—who, it should be noted, began innovating from their own homes. Even though the city this week officially is no longer bankrupt, it will need to encourage entrepreneurship—large-scale and small—if it is ever going to get back on the road to prosperity.