Automakers from Germany to Detroit are at a crossroads. Do they produce cars for consumers or for political points? Ford and Volkswagen are finding out what happens when they opt to please the latter at the expense of the former.

In its most recent earnings report, Ford registered a hefty $1.33 billion quarterly loss for Q2 of 2026 that was punctuated by a 10 percent decline in year-over-year sales for Q1 and Q2, along with a 4 percent fall in revenue in Q1. These lackluster results are partly the result of a failed electric vehicle battery venture along with the cancellation of EV programs that received an underwhelming consumer response. Surprisingly, Wall Street’s response was quite different. 

Ford’s shares surged by seven percent despite the quarter’s losses. They rebounded in part due to Dearborn’s optimistic estimates for the rest of the fiscal year. Why the optimism? That rosy picture comes from the automaker’s realization that the road to profit is paved by the wishes of consumers, not politicians. The report acknowledged that consumers want big pickups and SUVs and haven’t been won over by Ford’s EV offerings. 

Ford’s willingness to cut its losses stands in sharp relief against the decisions being made by Wolfsburg, Germany’s Volkswagen (VW). There, Europe’s largest automaker is discovering that the price for ignoring consumers in favor of Brussels’ mandates is lost market share, reduced productivity, and large-scale layoffs. 

In late 2025, EU leadership announced sweeping directives for reaching all-time emissions lows. One of those requirements in the passenger vehicle market requires EU-based automakers “to comply with a 90 percent tailpipe emissions reduction target, while the remaining 10 percent emissions will need to be compensated through the use of low-carbon steel Made in the Union, or from e-fuels and biofuels.” 

Compliance isn’t cheap. After the mandates were approved, VW CEO Oliver Blume announced: “Over the next five years, the Volkswagen Group intends to invest €160 billion. The focus is on Germany and Europe, in products, technologies, production facilities, and infrastructure.” Further, “ we are financing developments in future-oriented fields such as battery cells, software, and autonomous driving.” While not all of these new expenditures are purely driven by compliance costs, these regulations certainly steer capital toward politically favored investments instead of toward consumers’ desires.

This is a classic case of government-induced malinvestment into certain lines of production. Based on the EU regulators’ decrees for a 2035 ban on the manufacturing and sale of internal combustion engines, VW was forced to make politically generated malinvestments. The question to be raised is a simple one: Were these management decisions driven by market signals provided by consumers? The answer has been a resounding ‘no.’ 

Caught between genuine market signals and mandates from the EU, VW leadership chose to please regulators over customers. Unable to both comply with EU mandates and fend off further market share losses, the Wolfsburg-based manufacturer reversed course on the promise of new investments in July of 2026. They instead announced a 15 percent reduction in the original investment plan to about $148 billion. That’s not all that will be cut. In a recent internal memo, Blume warned that four plants and up to 50,000 additional layoffs may be in order on top of the same number of job cuts already agreed to by Porsche and Audi, amounting to a total loss of 100,000 roles. In response to the proposed cuts, labor representatives for VW workers — IG Metall and the works council — vowed to fight the cuts with their full might. Volkswagen’s labor force isn’t the only group feeling the pain, shareholders have seen the stock sink to its lowest level in sixteen years. 

Wolfsburg’s decision to lean into costly EU regulations aren’t the only source of strain. Leadership also cited VW’s 20-percent cost disadvantage relative to its rivals, some of whom are newcomers to the European car market. New electric models from Chinese carmaker BYD have significantly lower labor costs. Meanwhile, US import tariffs have also put a dent in VW and Audi sales stateside, taking a 20 percent year over year slide in Q4 of 2025. 

The first lesson to be taken from these outcomes is that it pays to keep consumers in the driver’s seat, rather than regulators, when it comes to management’s decisions on what types of vehicles to produce. The second is that more regulation means not only higher costs, but market confusion. Relieving automakers from such mixed signals is the surest way to speed toward profitability and satisfied customers.

Ford is now in a better position than VW in this respect, as the Trump administration has scaled back the Biden team’s more stringent Corporate Average Fuel Economy (CAFE) requirements. But there’s still plenty to be undone. The current administration’s estimates indicate that there would be $109 billion in savings to American carmakers by loosening emissions rules. Nevertheless, the rules still require that all US-made passenger vehicles make 34.1 mpg by 2031. That’s a significant reduction from the previous administration’s demands for mpg to reach over 50 mpg. Yet, consumers’ tastes for maximizing fuel efficiency have hit a wall.

This should come as a relief to Ford shareholders and workers, as the sales record for EVs in the US has been less than stellar. For every F-150 Lightning trimline sold, by way of example, Ford lost $44,000. In aggregate, that translated into a $19.5 billion loss on the project before the project was canceled in 2026. According to carbuzz.com, that massive write-down consisted of $8.5 billion for canceled EV projects, $6 billion for a dissolved battery venture, and another $5 billion for program-related expenses. Among EV truck competitors, the Tesla Cybertruck sold 7,000 fewer units than the Lightning and the Chevy Silverado EV sold roughly half of Ford’s 27,000 units. 

As US automakers had been geared up to chase more aggressive CAFE standards, but also in anticipation of future, more stringent regulations, the industry as a whole made massive malinvestments in these technologies, which consumers haven’t adopted. As a result, throughout 2025, GM, Ford, and Stellantis slashed more than 20,000 US salaried jobs, or 19 percent of their combined workforces in the past year, leaving the Rust Belt even more oxidized than it was before. 

While stateside job losses aren’t as stark as those at VW, they are nevertheless a warning sign to auto manufacturers of all nationalities. If pleasing regulators is job number one, then consumers, laborers, and shareholders get left in the dust. This stark reality reveals the high cost of intervention-based innovation versus consumer-driven innovation. The former artificially drives up costs with an unknown payoff. The latter still entails risk, but car manufacturers on both sides of the Atlantic have a far better track record of meeting consumer desires in the markets than in meeting those of regulators and bureaucrats, who are guided by the fickle nature of green politics.

Inflation crept back up in July, though not by much. The Consumer Price Index (CPI) rose 0.1 percent last month, a modest reversal after June’s 0.4 percent decline. The year-over-year rate eased slightly, to 3.4 percent from 3.5 percent.

Core inflation, which excludes food and energy, told a similar story. Core CPI rose 0.2 percent in July after being flat in June. The year-over-year core rate ticked down to 2.5 percent from 2.6 percent — another small move.

Last month’s headline decline was almost entirely an energy story, as oil prices moderated with the anticipated reopening of the Strait of Hormuz. In July, housing took over as the main driver. Shelter rose 0.1 percent over the month, accounting for roughly two-thirds of the monthly increase in the headline index. Energy fell 1.5 percent, with gasoline down 2.9 percent, continuing the retreat that began in June. The shift matters: energy moves are volatile and often reverse quickly, while shelter tends to be stickier. 

Price increases in July were broad. Medical care, airline fares, communication, education, and recreation all rose, with airline fares up 2.2 percent on the month, driven by higher prices for jet fuel. Motor vehicle insurance was one of the major categories contributing to a decline in the index, down 0.3 percent, although less than its 2.0 percent drop in June.

The Three-Month Point of View

The three-month trend annualized, which can help filter out some of the monthly noise, tells a cooler story than either the monthly or annual figures suggest. Headline CPI rose at roughly a 0.8 percent annualized rate over the three months through July, well below the 3.4 percent year-over-year figure. Core, which strips out energy, rose faster over the same stretch, at roughly 1.6 percent annualized — still below its 2.5 percent year-over-year pace but a smaller gap. The wider gap on the headline number shows that a few volatile months of energy prices can lead to huge swings.

Markets are more confident that the Fed will hold rates steady. The CME Group’s FedWatch tool puts the odds of a hold around 65 percent in September and 50 percent in October, following yesterday’s steady PPI print. 

The labor market gave the Fed more reasons to lean that way. The latest data indicate nonfarm payrolls fell by 23,000 in July, and May and June were revised down by a combined 103,000. The unemployment rate fell slightly from 4.2 percent to 4.1 percent, but the participation rate has now declined 0.7 percentage points since January. Year-over-year average hourly earnings decelerated from 3.5 percent in June to 3.2 percent in July. This is not a labor market showing acute stress, but it is no longer the source of comfort it was earlier this year.

The Nominal Income Point of View

Inflation can react to either nominal or real shocks, which makes it an indirect measure of where monetary policy actually stands. Nominal income, by contrast, is a direct measure of whether policy is loose, about right, or restrictive, since it isolates the nominal side of the economy from the real shock noise that CPI can’t filter out on its own. 

Between Q2 2025 and Q2 2026, nominal GDP grew 6.5 percent, a significant increase compared to the 4.6 percent growth between Q1 2025 and Q1 2026. That elevated trend sits uncomfortably above the roughly four-percent pace that prevailed before the pandemic. 

Despite signs of a weakening labor market and a three-month CPI trend below 2 percent annualized, the Fed faces a dilemma. CPI and payroll data reflect the current state of prices and hiring, both of which show signs of deceleration. Meanwhile, nominal spending indicates demand is still robust, and this demand hasn’t slowed sufficiently to suggest that the recent cooling is anything but temporary. If nominal spending remains strong, the softer CPI and employment figures are more likely indicators of a lag rather than a true shift in trend.

July 2026 CPI at a Glance

Category	Month-over-Month (July)	3-Month Annualized	Year-over-Year
All items	0.1%	0.8%	3.4%
All items less food and energy	0.2%	1.6%	2.5%
Food	0.1%	2.0%	3.0%
Energy	-1.5%	-13.3%	14.7%
Shelter	0.1%	2.0%	3.2%
Transportation services	0.3%	-2.4%	2.9%
Medical care services	0.6%	4.1%	2.7%

The next CPI report for August is scheduled for release on Friday, September 11, 2026.

On August 15, 1971, Richard Nixon interrupted Sunday-night television to announce the New Economic Policy. With the Vietnam War winding down, Nixon argued, the economy required federal action to deliver what he called “a new prosperity without war.” Nixon declared that night, “We must create more and better jobs; we must stop the rise in the cost of living; we must protect the dollar from the attacks of international money speculators.”

His policy froze wages and prices for 90 days and thawed a restraint on Washington’s management of money by suspending gold convertibility for foreign governments and central banks.

One policy froze the prices Americans could charge one another. The other released the government from the rule that forced it to redeem its monetary promises. Both followed the same instinct: when the signal becomes inconvenient, suppress it and escape the discipline it imposes.

Nixon called the suspension temporary. It was not.

Broken Promises

Friedrich Hayek had named the vulnerability 28 years before Nixon acted. Writing in 1943, in an essay later collected in Individualism and Economic Order, he granted that “the gold standard as we knew it undoubtedly had some grave defects.” Gold arrived too slowly to track real demand for money, producing deflation before new supply arrived and excess once it did. But the defects were not the point. Gold gave the world an international currency answerable to no single government, a monetary policy that was largely automatic and therefore predictable, and money supply adjustments that generally moved in the right direction. Hayek’s answer was not managerial discretion but a better rule: a currency anchored to a broad basket of commodities rather than one metal, governed automatically, and explicitly not a license to freeze any individual price along the way.

Seventeen years later, in December 1960, economist Robert Triffin told the Joint Economic Committee that the system carried the seeds of its own collapse. The world needed dollars abroad, pushed out by military spending, foreign aid, and capital outflows. Every dollar that left made it less plausible that the United States could redeem them all in gold at $35 an ounce. 

Later that decade, the dominoes began to fall. The London Gold Pool, a coalition of central banks trying to defend that price through coordinated selling, collapsed in 1968. Across the English Channel, France spent the back half of the decade converting its dollar holdings into gold, at one point sending a warship to New York to collect the gold. American gold reserves peaked in 1949 at 21,708 metric tons. That August night when Nixon spoke, they stood at 9,069, a fall of some 58 percent.

Treasury Secretary John Connally had been arguing for months that the old policy of benign neglect toward the dollar’s slide had run its course, and Nixon agreed. Meeting with Nixon two weeks before the announcement, Connally predicted, “We may never go back to it. I suspect we never will.” Nixon called the move a defense of the dollar and an attack on speculators. It was, in function if not in name, the opposite: a default, dressed in the language of a temporary suspension. Bretton Woods ended in all but name by 1973, and the dollar has floated on nothing but promises ever since. What replaced the rule was the discretion of whoever held the job next.

By the fall of 1971, with an election about a year out, Nixon was leaning on Arthur Burns, his own appointee to chair the Federal Reserve, to keep money loose. Burns obliged. Tapes declassified decades later show a Fed chairman reporting rate cuts to the president like a subordinate delivering good news, and a money supply that grew faster in 1972 than in either of the two preceding years.

Nixon won in a landslide. The country spent the rest of the decade paying for it, in double-digit inflation and stagflation.

The real lesson of 1971 was never about gold. It was about what happens when the person guarding the currency answers to the person spending it.

The Same Test, 55 Years Later

Since 1971, the Fed’s independence has been questioned many times. Donald Trump had no gold window to close, so he went after the guard instead, a guard he had appointed himself in his first term. Jerome Powell spent most of 2025 as the public target of a president demanding lower interest rates. When Powell refused to bend, a Justice Department criminal investigation opened into cost overruns at the Fed’s building renovation. Trump also moved against the Board itself. He attempted to fire Governor Lisa Cook in August 2025, the first such attempt in the Fed’s 111-year history.

In a video statement, Powell warned of the pressure the Fed was under. He stated, “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.” The Department closed the investigation in April 2026, handing what remained to the Fed’s own inspector general. Two months later, the Supreme Court blocked Trump’s first attempt to fire Lisa Cook by a single vote, 5-4, on the same day it affirmed Trump’s firing of an FTC commissioner. 

Powell’s term as chair ended in May but, for the first time since 1948, the former chair stayed on the Board as an ordinary governor. His replacement, Kevin Warsh, walked into the job promising independence and a hard line on inflation. He arrived with his own ties to the White House. His father-in-law, Ronald Lauder, has been one of Trump’s closest friends since Wharton; he is credited with reigniting the Greenland debate and gave $5 million to a pro-Trump super PAC.

Warsh, to his credit, held the line. Two meetings in, he has held rates at 3.50 to 3.75 percent against a president who is pushing for cuts. Three regional Fed presidents, Beth Hammack, Neel Kashkari, and Lorie Logan, dissented anyway, arguing for a hike in an attempt to temper inflation sooner. AIER’s own Monetary Rules Report found 11 of 12 standard rules pointing higher than where Warsh has held; the original Taylor rule prescribes the highest target rate, at 5.91 percent. Warsh is refusing the president’s cuts and still sitting more than two points below what that rule would require. Resisting pressure is not the same as following a rule.

But Burns did not cave in his first two meetings either. He caved in year two, once the approaching 1972 election made Nixon want loose money badly enough to ask for it outright. That incentive is forming again, on a shorter clock. Trump is not on the ballot in November, but his majority is, and since 1934 the president’s party has lost an average of 28 House seats during the midterms. A soft economy heading into them is exactly the condition that makes a president want lower rates. 

That is the institutional danger Hayek saw. His objection to discretion was not that every manager would use it badly. It was that a system governed by judgment leaves the currency exposed to a president who wants something from it. Hayek’s point was that the currency should not have to depend on either.

The AIER Everyday Price Index (EPI) declined 0.15 percent in July 2026, marking its second consecutive monthly decrease. The back-to-back declines are notable: the last time the EPI fell for two or more consecutive months was in the fall of 2024. Despite the latest easing, everyday prices remain substantially higher than a year ago, with the index up 5.47 percent on a year-over-year basis. Price movements were also broadly tilted upward beneath the headline decline: 18 EPI categories increased in July, five declined, and one was unchanged.

The largest monthly increases occurred in recreational reading materials, purchase, subscription, and rental of video, and intracity transportation. Those gains were more than offset by declines concentrated in several categories, led by admissions to movies, theaters, and concerts, prescription drugs, and motor fuel. Thus, July’s modest overall decline reflected relatively large price decreases in a handful of components rather than broadly falling prices: an important distinction given that three-quarters of the EPI’s individual categories actually became more expensive during the month.

AIER Everyday Price Index vs. US Consumer Price Index (NSA, 1987 = 100)

Additionally, on August 12, 2026, the US Bureau of Labor Statistics (BLS) released the July 2026 Consumer Price Index (CPI) data. 

Headline CPI rose 0.1 percent on a seasonally adjusted basis in July after falling 0.4 percent in June. Core CPI, which excludes food and energy, lifted 0.2 percent after remaining unchanged in June.

July 2026 US CPI headline and core month-over-month (2016 – present)

Consumer prices in July reflected falling energy costs alongside modest increases in shelter and food. Energy declined 1.5 percent after plunging 5.7 percent in June, led by a 2.9 percent drop in gasoline prices. Natural gas rose 0.7 percent and electricity edged up 0.1 percent. Shelter increased just 0.1 percent for a second consecutive month but accounted for roughly two-thirds of the overall CPI increase. Rent and owners’ equivalent rent each rose 0.3 percent, while lodging away from home fell 2.8 percent.

Food prices rose just 0.1 percent, while food at home declined 0.1 percent. Meats, poultry, fish, and eggs fell 0.7 percent, fruits and vegetables and dairy each slipped 0.1 percent, while nonalcoholic beverages rose 0.9 percent. Food away from home increased 0.3 percent, including a 0.4 percent rise in limited-service meals.

Core CPI rose 0.2 percent after being unchanged in June. Medical care increased 0.4 percent, airline fares climbed 2.2 percent, communication rose 0.6 percent, and used cars and trucks increased 0.4 percent. Prescription drugs fell 0.8 percent and motor vehicle insurance declined another 0.3 percent. Overall, July showed somewhat firmer core inflation but continued softness in energy and grocery prices, with shelter inflation remaining unusually subdued.

June 2026 US CPI headline and core year-over-year (2016 – present)

Grocery inflation held at 2.7 percent over the twelve months through July, but the underlying categories varied considerably. Fruits and vegetables climbed 5.1 percent and nonalcoholic beverages rose 4.1 percent, while cereals and bakery products increased 2.7 percent and meats, poultry, fish, and eggs rose 1.9 percent. Dairy prices moved against the broader trend, falling 0.5 percent. Restaurant prices continued to outpace groceries, rising 3.4 percent overall, with similar increases at both full- and limited-service establishments.

The much larger annual increases remained concentrated in energy. Energy prices stood 14.7 percent above July 2025 levels, primarily reflecting a 24.6 percent rise in gasoline. Electricity and natural gas posted considerably smaller but still meaningful increases of 4.2 percent and 4.3 percent, respectively. Those figures also highlight the distinction between the recent direction of prices and their level relative to a year ago: energy has fallen sharply over the past two months but remains substantially more expensive on a twelve-month basis.

Elsewhere, inflation was comparatively restrained. Core CPI increased 2.5 percent over the year, with shelter up 3.2 percent, recreation 2.6 percent, household furnishings and operations 2.2 percent, and medical care 1.7 percent. Airline fares remained the conspicuous exception, surging 25.5 percent from a year earlier and standing far outside the range of most other major core categories.

July’s inflation data strengthened the case for the Federal Reserve to remain on hold in September without eliminating the possibility of another rate increase. Headline CPI rose just 0.1 percent for the month and slowed to 3.4 percent year over year, while core CPI increased 0.2 percent and eased to 2.5 percent annually, matching its slowest pace since early 2021. Shorter-term measures were similarly encouraging: annualized core inflation ran at 1.6 percent over three months and 2.4 percent over six months. Energy again provided substantial relief, with gasoline falling 2.9 percent and energy subtracting roughly 0.11 percentage point from headline CPI. Grocery prices declined 0.1 percent, while shelter rose only 0.1 percent. Some earlier price pressures also appear to be unwinding: hotel rates fell sharply, vehicle insurance declined for the sixth time in seven months, prescription drugs dropped 0.8 percent, and several food and metal-sensitive categories softened. Core goods, however, rose 0.2 percent, with used vehicles up 0.4 percent and notable strength in computers and other electronics amid the continuing memory-chip shortage.

The details were somewhat less uniformly benign than the headline figures suggest. Core services rose 0.2 percent after being flat in June, rents accelerated to roughly 0.3 percent, and airline fares jumped 2.2 percent. Inflation breadth also increased: about 53 percent of core CPI components registered annualized inflation above 2 percent, compared with a 42 percent average during the second quarter, while the share running above 4 percent climbed from 31 percent to 41 percent. Even so, several discretionary service categories remained weak, and the fading effects of earlier energy, food, metals, and tourism-related shocks point toward continued disinflation. Estimates based on the CPI and related producer-price inputs suggest July core PCE could rise roughly 0.2 percent, although that measure has generally been running somewhat hotter than core CPI.

Markets interpreted the report as reducing the urgency for additional monetary tightening, particularly following July’s weak employment report. The Fed nevertheless faces competing signals: underlying inflation is approaching multi-year lows and hiring has weakened, but inflation remains above target, price increases broadened somewhat in July, and renewed geopolitical pressure on oil represents an important upside risk. With another CPI report and another employment report due before the September 15 – 16 FOMC meeting, the July data favor patience rather than a decisive policy turn: they make an immediate hike harder to justify, but leave the decision sensitive to incoming inflation, labor market, and energy price developments.

In early July, the Federal Reserve named the leaders of five task forces charged with reviewing how it conducts monetary policy. At the helm of the inflation task force are Harvard economist Greg Mankiw, Nobel laureate Thomas Sargent, and William White, former chief economist at the Bank for International Settlements. Chairman Kevin Warsh asked them to “examine the drivers of inflation, first principles, and weigh the full range of ideas for delivering price stability in a changing economy.” That charge is broad enough to cover an option the Fed has never seriously tried: targeting the total amount Americans spend rather than the prices they pay. It should. 

Consider 2021. Prices began climbing early that year, and for months then-Chair Jerome Powell called the increase “transitory,” a blip from pandemic supply snarls that would fade on its own. By November, with prices still rising, Powell told Congress it was time to “retire” the word. Weeks later, the Fed’s December projections still put 2022 inflation at 2.7 percent. It came in at 4.7 percent, nearly double. The Fed had every piece of data anyone could want and spent most of a year misreading what was in front of it.

The problem isn’t careless officials. The Fed’s approach makes them answer a hard question before they can act: is inflation coming from the producing side, or from people spending more? The Fed needs to decide if it’s the former (a supply-driven shock that the Fed can’t fix) or the latter (a demand-driven change that the Fed can influence). In 2021, the Fed had to decide whether rising prices meant supply chains sorting themselves out or an economy spending faster than it could produce. That call is difficult to get right in real time. The Fed got it wrong for the better part of a year, and households paid for the Fed’s error as their savings and paychecks lost value.

Targeting spending sidesteps the question. Rather than focus on a price index and judge, shock by shock, which price changes deserve a response, the Fed would aim at the total dollar value of everything the country spends, what economists call nominal income, and keep it growing at a steady, predictable rate. If spending stays on that path, no one has to rule on whether a particular price change will last. Instead, they simply ask if total spending is growing too fast, too slow, or about right. Had the Fed been steering spending in 2021 instead of parsing the nature of the inflation, data would have shown that nominal income after COVID-19 grew at a faster pace than normal, pointing to persistent (not transitory) high inflation rates. 

This task force’s three members are unusually well positioned to press the case — not simply a random assortment of credentialed names. 

Mankiw, who wrote what’s become the most widely used undergraduate economic textbook and chaired the Council of Economic Advisers under President George W. Bush, has spent decades writing the standard account of how mainstream macroeconomics thinks about inflation, which makes him a natural voice for testing that account’s limits. Sargent, a New York University economist who won the Nobel Prize in 2011, built his career on the idea that policy works best when it follows a clear, credible rule rather than case-by-case discretion, exactly the kind of framework question this task force exists to ask. White, former chief economist at the Bank for International Settlements (BIS), the central bankers’ central bank, has spent years arguing that narrow inflation targeting missed the imbalances that led to the 2008 financial crisis. He is perhaps the panel’s most persistent critic of the status quo before it even convenes. The panel members demonstrate establishment credibility with a documented record of independent, sometimes unpopular judgment.

Interestingly, Warsh didn’t ask the three to fine-tune how the Fed explains its current approach. He asked them to examine “first principles” and weigh “the full range of ideas.” A review with that charge has no good reason to bury spending targets in a footnote next to the small adjustments the Fed has already made. For example, Sargent has spent much of his career arguing for rules over discretion; getting spending is a simple rule. A panel with his name on it has the unique opportunity to push the Fed to think outside its box.

None of this guarantees an outcome. The task force could conclude that the Fed needs better messaging, or a modest change like the one made in 2020, and move on. That would be a missed opportunity. The 2021 episode was not a story about a Fed short on information. It was a story about a target that required the Fed to answer a difficult question, and the answer arrived in grocery bills and rent checks. This task force has the mandate and the people to ask a bigger question. The Fed does not need to get better at guessing whether a price increase is a response to a nominal or real shock. It needs a target that does not depend on the guess.

Protectionism, Economic Monoculture, and the Real Lessons of the Rust Belt

Executive Summary

In 1950, Detroit and Pittsburgh were among the most prosperous industrial cities in the world. Detroit led the world in automotive production, and Pittsburgh’s steel output was in many respects unmatched. However, both faced similar forces in the 1970s: foreign competition, technological change, and rising labor costs driven by union lock-in. Both turned to government for protection. By 2013, the differences between the two cities were stark. Detroit had filed for the largest municipal bankruptcy in American history, while Pittsburgh had remade itself as a center for healthcare, education, and technology.

This paper argues that the divergence between these two was not due to geography, luck, or the arrival of foreign competition. Rather, Detroit — through a series of decisions at the state and local levels — created an industrial monoculture. Pittsburgh did not.

An industrial monoculture is an economy whose fiscal base, labor market, and political institutions become tightly coupled to a single industry. While this industry thrives, the broader economy appears strong. However, industrial monocultures carry structural fragility, as any shock to the dominant industry spreads through the entire local economy. Worse, there are few, if any, alternative sectors that can absorb displaced labor and capital. Detroit’s monoculture was not a natural outcome of free markets. It was constructed and sustained through a series of protectionist policies. Union contracts in the Treaty of Detroit (1950) shielded the industry from domestic labor market discipline. Michigan’s Public Act 198, passed in 1974, was used by the auto industry to reduce its property tax burden. The Poletown eminent domain seizure in 1981 resulted in the government buying $200 million worth of land only to sell it to General Motors for $8 million. The Michigan Economic Growth Authority tax credits, first passed in 1995, were later expanded to subsidize the Big Three automakers. At the federal level, the auto industry benefited from voluntary export restraints in the 1980s and an $80 billion bailout in 2009.

Each layer of protection reduced the competitive pressures that compel firms to adapt. As a result, adaptation largely stopped. By the time Japanese automakers arrived in the American South, Detroit’s industry had spent 25 years insulated from the discipline that would have kept its costs, productivity, and product competitive. Foreign competition did not cause Detroit’s collapse. It was a series of policy choices, each built on the last, that calcified Detroit’s auto industry around expensive labor contracts and products that were simultaneously more expensive and less reliable than those of its foreign counterparts.

Pittsburgh, by contrast, did not do this. It did not rewrite its eminent domain laws to save blast furnaces or create a credit program to subsidize steelworker wages into the 2030s. Instead, Pittsburgh’s economy retained universities, hospitals, and research institutions that predated and operated independently of the steel industry. When steel collapsed, capital and labor in and around Pittsburgh had alternative sectors to absorb them.

The lesson here is not that government can reliably create economic diversity. Markets do this far more efficiently and with fewer opportunities for rent-seeking. The lesson is that single-industry protection is one of the most dangerous forms of intervention a community can choose, precisely because it creates the very fragility that it claims to prevent. Today’s industrial policy, which includes tariffs, subsidies, mandates, and “Buy American” requirements, applies the same concentrating logic but at a national scale.

The difficulties many Rust Belt communities face today are real. They are not the result of foreign competition or free markets, but of past protectionism. The protectionism of the present, in turn, proposes many of the same tools that helped produce the problems these communities now confront.

Key Points:

• The difference between Detroit and Pittsburgh is not explained by geography, luck, or foreign competition, but by economic structure. Detroit became an industrial monoculture, while Pittsburgh retained a more diverse economic base.
  
• Industrial monocultures are highly productive in good times but structurally fragile. When an economy’s tax base, labor market, and political institutions are all tied to a single industry, any shock to that industry cascades through the entire local economy.
  
• Detroit’s industrial monoculture was not the product of free markets. It was constructed, layer by layer, through a sequence of protectionist policies.
  
• Pittsburgh avoided industry-specific protectionism. It did not rewrite eminent domain law or create targeted subsidies to preserve a declining industry.
  
• Protectionism weakened Detroit by removing the competitive pressure that forces adaptation.
  
• The Rust Belt’s challenges today are real. They are also the result of protectionism, not free markets or foreign competition.
  
• Today’s industrial policy risks recreating the same dynamics that caused Detroit’s decline, but at a national scale.
  
• The protectionism of the past created many of the very problems that present-day protectionists claim their policies will solve.

1. The Political Temptation of Protection

Imagine that you are a politician. One of the largest employers in your district employs tens of thousands of workers, generates millions of dollars in local tax revenues, and supports a dozen or more ancillary industries. Its workers are organized, politically active, and vocal. The solution seems obvious: implement policies designed to keep that industry afloat and the workers employed. Unlike the workers and firms that stand to benefit, these costs are spread across millions of people who are unorganized, politically disengaged on the issue, and often unaware of how much the policies affect their wallets.

Mancur Olson identified this dynamic in 1965 (Olson, 1965). Concentrated interests have powerful incentives to lobby for protection from competition. The costs of protection, however, are spread thinly across a much larger population that has little incentive to organize against it. The nearlyinevitable result is that policy bends toward the vocal and organized minority at the expense of the silent and unorganized majority. Over time, this tendency only bends further as the protected industry grows more entrenched and economically dependent on protection for survival.

This dynamic is especially powerful when an industry is concentrated in a single city. Here, the politics are especially fierce, and the long-run consequences are especially devastating. A protected industry does not just distort prices or misallocate resources from an economic efficiency standpoint. It shapes the city’s economy, institutions, and identity. Entrepreneurs build businesses that serve the protected industry because that is where opportunities are most promising. Capital flows toward the protected industry under the presumption that the protection will continue. The city stops diversifying, resulting in an industrial monoculture, where the local economy is so thoroughly organized around a single industry that workers have few alternatives should that industry eventually decline.

No industry dominates forever, however. Technological progress marches on, foreign competitors improve, and consumer preferences change. The question that matters for communities is whether they are prepared to absorb these pressures when they arrive — either by innovating to remain competitive or by pivoting to new opportunities. Protectionist policies attempt to postpone that reckoning by shielding industries from competitive pressures. In doing so, however, they often allow underlying problems to compound. When market reality finally arrives, it does not find a community ready to adjust. It finds one that has been falling behind decade after decade while becoming increasingly dependent on a single industry. What could have been an unpleasant but manageable process of industrial transition becomes a catastrophic collapse.

The economic histories of Detroit and Pittsburgh are instructive examples of the problems of industrial monocultures and what economic diversity prevents. Both rose to industrial dominance in the first half of the twentieth century. Both faced foreign competition and technological disruption beginning in the 1970s. Both had powerful unions that lobbied aggressively for protection from these pressures. Yet their trajectories ultimately diverged. One city has filed for the largest municipal bankruptcy in American history. The other became a widely-cited model of post-industrial revival.

The story of why one city failed while the other thrived is not one of geography, demographics, or luck. It is a tale of two different responses to industrial decline. Detroit organized its economic and political life around the automotive industry through an escalating suite of interventions and protections. These ranged from relatively modest measures, such as state tax credits for the Big Three to keep workers in Michigan, to extraordinary actions, including rewriting eminent domain law to seize an entire residential neighborhood to build a factory. Pittsburgh, by comparison, pursued no comparable strategy. It did not underwrite steelworker wages with state tax credits, rewrite their eminent domain laws to save a blast furnace, or bet the state treasury on successfully keeping one industry alive at all costs.

Detroit’s ongoing recovery proves the point from the other direction. As the city gradually allowed its economic base to diversify rather than embracing an automotive monoculture, it has begun growing again for the first time in generations.

Foreign competition and technological change posed genuine economic challenges, but they were not what turned Detroit’s decline into a catastrophe. That outcome was largely the result of policies that discouraged diversification and deepened the city’s dependence on a single industry.

2. Detroit: Building and Defending a Monoculture

According to the 1950 Census, Detroit was home to 1.85 million residents and 757,722 workers. The Big Three automakers — Ford, General Motors, and Chrysler (now Stellantis) — were booming. Of further benefit were the ancillary industries that had set up shop nearby. Steel mills, metal fabrication shops, tire manufacturers, not to mention the marketing, telecommunications, and construction companies, were all opening at breakneck pace. According to the 1950 Census, of the 757,722 people employed in Detroit, 210,747 (27.8 percent) worked directly for the automotive industry. Another 187,770 worked in related occupations, bringing the total to 398,517 workers, 52.5 percent of the city’s workforce.

In 1950, the United States produced 8.0 million vehicles, while global production totaled 10.6 million. Detroit alone produced 5.3 million vehicles — roughly half of the entire world’s automotive output. Each day, some 14,520 vehicles rolled off Detroit assembly lines and into driveways, garages, and business fleets around the world.

The economic concentration was unmistakable. Detroit earned its nickname, “The Motor City,” because its identity was inseparable from the automotive industry. Its economy, politics, and civic culture all revolved around automotive manufacturing. Detroit was, for all practical purposes, an industrial monoculture. When the industry thrived, Detroit thrived. And when it faltered, so too did the city.

2.1 Locking in the Structure

The United Auto Workers transformed Detroit’s economic concentration into political power. Founded in 1935 with 25,769 members (Fine, 1958), the union initially struggled to organize automobile plants. The passage of the National Labor Relations Act of 1935, combined with the 1937 Battle of the Overpass increased support for the UAW. By 1955, UAW membership exceeded 1.5 million. By 1970, approximately 95 percent of Detroit’s automotive workforce was unionized, compared to a national private-sector unionization rate of roughly 35 percent.

Where Detroit was once controlled by The Big Three, the Big Three were now squarely controlled by the UAW, giving the union significant control over the economic policies of one of America’s wealthiest cities.

In 1950, UAW President Walter Reuther (later profiled in death as “the most dangerous man in Detroit”) secured what became known as the Treaty of Detroit with General Motors through collective bargaining (Lichtenstein, 1995). Similar deals soon followed with Ford and Chrysler. The agreement guaranteed annual raises that were greater than any cost-of-living adjustments, pensions of up to $117 ($1,600 in today’s money) per month, and 50 percent coverage of any hospital and medical insurance costs for union members. It also mandated that all new hires at the automotive company became members of the UAW for the first year of their employment but could then quit the union if they so desired. Over the coming decades, more provisions were added to the Treaty of Detroit.

In 1955, the UAW negotiated the Supplemental Unemployment Benefits (SUB) with Ford Motor Company. Under the arrangement, Ford agreed to pay five cents for every man-hour worked into a dedicated account. Workers who were laid off — provided the layoff was not the result of misconduct — could then receive up to $25 per week (about $300 in 2025 dollars) per week from the fund in addition to state unemployment benefits. The program quickly became a model for other Detroit automakers by the early 1960s. Even in 1956, however, the problems with this plan were beginning to show, as labor costs were skyrocketing (Problems of the Ford Plan, 1956). These benefits were extended in 1967 to cover a longer time period and to offer even more money (Linder, 1968). Combined with state unemployment benefits, senior workers were able to take home up to 92 percent of their pay when laid off.

In 1970, the UAW negotiated a “30 and out” retirement plan, whereby any UAW member who had worked for 30 years at an automotive plant could retire and receive full benefits (Lichtenstein, 1995). Someone who had gone to work at 18 could, under this new plan, retire at 48 and receive a full pension. The pension would be divided into two parts: the basic benefit, which guarantees about $19,000 per year, and a supplemental benefit, which matches what a worker will receive from Social Security once they retire. By 2007, total hourly labor costs at the Big Three, which included wages paid to workers plus legacy pensions and healthcare obligations, were just under $73 per hour compared to $48 per hour at non-union Japanese factories in southern US states (Wyman, 2007).

All of this led to substantial increases in autoworker compensation relative to the national average. By 1970, autoworkers were paid upward of 40 percent more than manufacturing workers in non-automotive sectors. Detroit remained buoyed by the postwar boom and low gas prices, which sustained demand for bigger and faster cars (Rae, 1984). Unfortunately for Detroit, this period would not last.

These arrangements carried significant and direct financial costs on the Big Three. They also included detailed work rules governing how many employees were to be assigned to particular tasks. Seniority systems constrained the ability of management to redeploy labor in response to changing conditions. A firm facing intense competition cannot sustain a cost structure that renders it uncompetitive indefinitely; it must either adapt or exit the market.

2.2 Protection without Adaptation

By the time Japanese automakers arrived in American markets in the late 1970s, Detroit’s automotive sector had faced limited competitive pressure to adopt new production technologies for decades. Japanese manufacturers entered the market with several structural advantages over their Detroit based counterparts. Japan paid far less in labor per hour ($6.20 per hour compared to the Big Three’s $16.80 per hour). They were also further along in automating production processes. By 1980, Japanese auto plants could produce 22 cars per worker per year compared to about 15 for Detroit’s Big Three. Each vehicle required roughly 100 hours of labor in Japan versus about 150 in Detroit.

The differences were not limited to production efficiency. Japanese vehicles were generally less expensive, more fuel efficient, and more reliable, requiring fewer repairs over time (Lincicome, 2022; Crandall, 1987). These advantages were especially consequential in the American market, where consumers were facing rising fuel prices in the wake of the 1973 and 1978 oil shocks.

Federal policy played a significant role in shaping the competitive environment of the automotive industry. The Reagan administration, seeing the protectionist impulses of Congressional Democrats, negotiated the voluntary export restraints (VER) with Japan beginning in 1981 (Reagan, 1990). The VERs limited Japanese auto imports and provided Detroit with a reprieve at the federal level. The International Trade Commission estimated that 44,000 manufacturing jobs were preserved (US International Trade Commission, 1982).

Michigan had been layering state and local protections on top of federal trade policies for years. In 1974, the state enacted Public Act 198, the Plant Rehabilitation and Industrial Developments Act, which allowed local governments to grant manufacturers property tax abatements of up to 50 percent for as long as 12 years on new or rehabilitated facilities. This funneled more capital investments into the industry and away from alternative options.

In 1980, Michigan rewrote its eminent domain law through the Uniform Condemnation Procedures Act, opening the door for the use of eminent domain for commercial development projects. The following year, Detroit Mayor Coleman Young used the law to seize 465 acres in the Poletown neighborhood for a General Motors plant. The project displaced 4,200 residents and led to the demolition of 1,300 homes and 140 businesses. The city acquired the land for roughly $200 million and sold it to General Motors for $8 million, along with a 12-year property tax abatement estimated to be worth another $60 million. In return, GM promised to create 6,000 jobs. The plant opened in 1985, employed some 3,000 workers, and closed in 2019.

In 1995, Governor John Engler created the Michigan Economic Growth Authority (MEGA), a refundable tax-credit program designed to attract new jobs to the state. Over time, however, MEGA increasingly became a tool for retaining existing jobs that were threatening to leave. In 2009, Governor Granholm expanded the number of MEGA tax credits to help keep the Big Three anchored in Michigan. The program stopped issuing new credits in 2011, but by then Michigan had already authorized some $12 billion in MEGA credits, including about $4.5 billion promised to the Big Three in exchange for retaining roughly 86,000 jobs through 2032.

These federal and state policies did exactly what they were designed to do: remove competitive pressures. But industries insulated from competition have little reason to bear the costly adjustment process that adaptation and innovation require. As a result, the quality gap between American and Japanese vehicles widened through the 1980s (Crandall, 1987) and 1990s. Every new layer of protection reinforced Detroit’s industrial monoculture and narrowed economic alternatives.

2.3 The Collapse

These struggles eventually reached Detroit’s residents. By 1990, the city’s population had fallen to just over one million, while the number of people employed in the automotive sector stood at roughly 280,000 workers (US Census Bureau, 1990). In 1950, by comparison, Detroit was home to 1.85 million people and 338,000 autoworkers. The consequences were significant. Detroit’s tax base eroded along two dimensions. First, fewer residents meant fewer people living, working, and spending money in the city, reducing tax revenues. Second, declining property values sharply reduced property tax collections. This led to schools becoming underfunded, which exacerbated middle-class flight from Detroit, leaving behind a larger share of lowerincome households to support the city’s finances. Detroit’s debt burden consequently grew from relatively modest levels in 1990 to $18 billion in 2008, while its bond rating deteriorated, limiting access to capital markets (City of Detroit, 2013).

Although the financial crisis of 2007-2009 affected the entire nation, Detroit was hit especially hard. By 2008, the city had more than 67,000 foreclosed properties — the highest foreclosure rate in the nation — and median home values had fallen below $10,000 in many neighborhoods (City of Detroit, 2009). National unemployment stood at 7.3 percent in 2008. Detroit’s unemployment rate reached 22 percent. At the same time, the city’s poverty rate climbed to 35 percent.

The automotive sector also suffered during the financial crisis. In an effort to restore profitability, Detroit’s Big Three increasingly relied on high-margin vehicles such as SUVs and pickup trucks rather than smaller sedans. This strategy proved costly when fuel prices surged. Between 2000 and 2010, average gasoline prices more than doubled, undermining demand for the vehicles on which Detroit had become most dependent.

Figure 1: US Regular All Formulations Gas Price, 2000-01-01=100

Source: US Energy Information Administration via FRED®, Federal Reserve Bank of St. Louis. Shaded areas indicate US recessions.

From 2000 to 2008, domestic auto sales fell by 30 percent, declining further once the recession began.

Figure 2: Motor Vehicle Retail Sales: Domestic Autos, Jan 2000=100

Source: US Bureau of Economic Analysis via FRED®, Federal Reserve Bank of St. Louis. Shaded areas indicate US recessions.

The effects of these long-running trends became most visible in the aftermath of the financial crisis. In 2010, Detroit was a city whose infrastructure and footprint were designed for a population of 1.85 million, despite having only 713,000 residents (US Census Bureau, 2010). In some areas, 80 percent of the houses stood vacant. Houses could be purchased for as low as $100 provided, the buyer assumed the outstanding property taxes. That same year, thenMayor, Dave Bing announced that “his administration cannot afford to go on providing services such as schools, firefighters, buses and rubbish collection to large areas of the city where the population has dropped sharply,” (McGreal, 2010). He noted that “fewer people paying property taxes has left a $300m hole in the budget.” While no residents would be forced to move, those who did not move to the still-covered areas of Detroit were told they would “need to understand that they’re not going to get the kind of services they require.”

In 2013, Detroit filed for Chapter 9 bankruptcy, the largest municipal bankruptcy filing in US history. The extent of this was so severe that Detroit considered liquidating the art collection housed at the Detroit Institute of Art. This was ultimately averted when businesses, foundations, and the state of Michigan agreed to donate more than $800 million as a part of the city’s debt restructuring plan (Smith, 2013). By the end of 2014, Detroit had emerged from bankruptcy with $7 billion of its total $12 billion in unsecured debt either restructured or written off, along with about $1.7 billion set aside for improvements to city services (City of Detroit, 2013).

The bankruptcy marked the culmination of long-term structural decline. Sixty years of protectionist policies at the local, state, and federal levels had shielded the Big Three from competitive pressures to innovate, to control costs, and to adapt. The policy environment intended to stabilize the industry and protect it from foreign rivals had instead contributed to its longrun fragility, which eventually left Detroit more vulnerable to the collapse of a single-industry monoculture.

3. Pittsburgh: Economic Diversity

Pittsburgh in 1950 was the undisputed steel capital of the world. Allegheny County had a population of 1.5 million, with the city of Pittsburgh itself being home to 676,000 residents (US Census Bureau, 1950). Hundreds of thousands of jobs were supported by industry giants such as US Steel, Duquesne Steel Works, National Tube Works, and Allegheny Ludlum (Hoerr, 1988). US Steel alone employed over 300,000 workers and produced 35 million tons of steel annually. At its peak, a single Pittsburgh furnace could outproduce Great Britain in steel production, while the region’s industry as a whole exceeded the combined steel output of the Axis powers during World War II.

Like Detroit, Pittsburgh’s industry was shaped by powerful unions and government protection. The United Steelworkers of America (USW) represented roughly 650,000 workers by the early 1950s. In 1952, amid the Korean War, national demand for steel remained elevated for weaponry, vehicles, and infrastructure. The USW had been negotiating for months with steel companies over wages and working conditions, citing the increased demands placed on workers during the war. However, the executives at the steel mill pointed out that they could not afford to meet the demands of the union without raising steel prices, something the Truman Administration had explicitly forbidden in 1951 with price controls.

In response, the USW threatened a nationwide strike to begin on April 9, 1952 (Hoerr, 1988). President Truman responded with Executive Order 10340, which directed Secretary of Commerce Charles Sawyer to seize and operate the steel mills (Truman, 1952). The order was wide-reaching, covering 88 steel companies operating more than 500 plants nationwide and representing about 90 percent of the US steel production capacity. The seizure resulted in Youngstown Sheet & Tube Co. v. Sawyer, which the Supreme Court decided on June 2, 1952, in a 6-3 ruling against the administration, requiring the immediate return of steel mills to private ownership.

Amid the Youngstown legal battle, the planned strike went into effect. It lasted a total of 53 days. The economic consequences were staggering: steel production declined by about 21 million tons, while workers lost an estimated $400 million in wages, and defense production significantly slowed. The dispute ultimately concluded after the USW secured modest increases in wages and fringe benefits for workers.

Then, in 1959, there was another strike at steel plants nationwide. This time, steel executives sought a change in the union’s contract that would allow the company to change crew sizes, revise work rules, and implement new machinery in order to reduce the amount of labor used in the production of steel. The union opposed these changes, and on July 15, 1959, the 519,000 members of the USW went on a strike.

After 116 days, President Eisenhower invoked the back-to-work provisions found in Section 206 of the Taft-Hartley Act. This was upheld by the Supreme Court in an 8-1 decision in Steelworkers v. United States, and workers were ordered to return to work. Although the strike ended, productivity slowed in its aftermath, presumably due to the poor relationship between workers and management and low worker morale (United Steelworkers of America v. United States, 1959).

The same year, cracks in the steel industry began to show. For the first time, the US imported more steel than it exported (Hoerr, 1988). The rest of the world was beginning to catch up in terms of steel production. Because other countries were free to use new production techniques and technologies, foreign steel producers had acquired an edge over their US counterparts.

The 1960s saw rising foreign competition in the domestic steel industry, especially from Japan, which was undergoing rapid industrialization. According to a report from the US International Trade Commission, by 1967, “imports [of steel] had grown to the point that there was congressional interest in establishing quotas on imports of iron and steel products,” (US International Trade Commission, 1982). Seeing this, in 1968 “both West Germany and Japan proposed to place voluntary restrictions on their steel exports to the United States in order to forestall the imposition of quotas” (McClenahan, 1991). In 1969, the agreement was put in place, limiting imports from the two countries to 5.75 million net tons. Armed with newfound protection from foreign competition, the steel industry was poised to make a comeback.

Up to this point, the parallels between Detroit and Pittsburgh hold almost perfectly. Both were dominant in their respective industries on the national and world stages. Both had heavy concentrations of employment in their particular sector. Both had strong unions to contend with. And both had received substantial protection from the federal government in the form of voluntary export restraints and related trade measures. Yet the trajectories of the two cities would ultimately diverge.

3.1 The Difference That Mattered

There was, however, one crucial difference: Pittsburgh had an economic foundation that was not solely dependent on its dominant industry. The University of Pittsburgh and Carnegie Mellon University, for example, were mature institutions with national reputations. A network of hospitals existed, serving the community and employing thousands of people. These sectors were not part of the steel economy. They didn’t depend on steel revenues or sales. They were not organized around steel labor contracts, and they did not collapse alongside the steel industry.

This was not the result of a deliberate diversification strategy. Pittsburgh’s universities and hospitals were not a hedge against the decline of steel. Those institutions developed independently. While they may have benefited from subsidies, both at the federal and state levels, they nonetheless offered robust alternative destinations for capital, labor, and entrepreneurial activity.

Because Pittsburgh possessed economic assets beyond steel, lawmakers faced less pressure to preserve the industry at all costs. Pittsburgh did not layer state and local protections on top of federal protections in a bid to retain the steel industry. There was no MEGA-style tax credit program. There were no eminent domain seizures to give the steel industry additional land at taxpayer expense. In fact, quite the opposite: where Detroit used eminent domain to seize land from residents in Poletown in 1981, Pittsburgh went against the community’s desire to save the famed “Dorothy Six” blast furnace when it closed in 1984. Known around the world for its sheer size and productivity, the furnace had become a symbol of the city’s industrial strength. The city rejected several proposals to save the furnace, which was finally torn down in 1988.

With the increasing viability of these alternatives, the USW’s bargaining strength waned considerably over the 1980s. In 1983, after months of negotiations, the USW agreed to concessions (Serrin, 1983). Some of the specific concessions were a wage cut of $1.25 per hour, reduced vacation time, and limiting automatic cost of living adjustments only to years where inflation exceeded three percent.

In exchange for these concessions, the USW gained early retirement incentives, increased corporate funding for the Supplemental Unemployment Benefits program, and a “dignity and justice” provision whereby a worker had to be proven guilty of wrongdoing before they could be suspended or fired.

Armed with cost savings measures, the steel industry in Pittsburgh was poised to start making a comeback. Unfortunately, like the auto industry in Detroit, the steel industry in Pittsburgh failed to capitalize on this opportunity. Tornell (1997) describes this as “rational atrophy.” Briefly, management in the steel industry can allocate profits in three ways: reinvesting in steel operations, investing in other sectors, or distributing profits to shareholders. As Tornell notes, “the steel firm’s reaction to the excessive wage increases the unions pushed for was to reduce the share of profits they reinvested in steel.” In other words, rather than use the cost savings they had secured, management decided to let the steel industry atrophy instead of using that money to reinvigorate it, concluding that any investments in steel would ultimately fuel further labor disputes.

Tornell points to US Steel’s acquisition of Marathon Oil, Husky Oil, and Texas Oil and Gas in 1982, 1984, and 1985 as examples of this strategy. US Steel claimed that they did so because they were unable to secure financing to invest in steel. However, as Tornell notes, “this explanation is not fully convincing because US Steel used $1.4 billion of its own cash to buy Marathon Oil. In principle, it instead could have used this cash to invest in, for example, [new technologies like] continuous casting.”

This sent a clear message to the USW. While they had made many concessions to try to preserve jobs for their members, management had already begun shifting their focus and investments away from steel and toward new opportunities. When invited for subsequent rounds of negotiations, USW leaders largely declined. The result was a wave of steel plant closures throughout the 1980s. In early 1983, US Steel began shutting down its operations in Homestead and Rankin. Bethlehem Steel also announced that it would close its Lackawanna plant and reduce operations in Johnstown, eliminating 7,300 jobs. Later that year, US Steel announced the permanent shutdown of part or all of 28 plants and mines.

The contraction continued in 1984. The Duquesne Works facility, which housed the famed “Dorothy Six,” closed in 1984. Jones & Laughlin Aliquippa Works, once one of the largest steel mills in the entire world, also shut down. All told, between 1981 and 1986, over 150,000 steelworkers in the Pittsburgh area alone lost their jobs with an additional 95,000 manufacturing jobs in downstream industries vanishing (Hoerr 1988). Suburban towns, such as Homestead and McKeesport, both less than ten miles outside of Pittsburgh’s city center, saw their populations decline sharply. Unemployment in the region rose to 27 percent and only really came down when workers left Pittsburgh to find work elsewhere, with many settling in Birmingham, AL, then known as the “Pittsburgh of the South.”

While the steel industry never died off, it was clear that it was not going to return to its heyday of massive numbers of employment. The postwar boom the industry experienced, with the domestic car industry and the installation of railroads across the country, had ended and with it, the demand for new steel had seriously diminished. At the same time, minimills, which could recycle scrap steel and were not bound by union contracts, along with foreign producers, stepped in to serve much of the remaining market.

It was not until around 2000 that global demand for steel began to grow again, driven largely by the rise of China as an economic superpower. Unfortunately for Pittsburgh, China was able to fill most of their demand with Chinese-made steel.

3.2 Reluctant Diversification

Pittsburgh’s transition was neither clean nor market-driven in any simple sense. The latter half of the 1980s saw significant growth. In 1985, the University of Pittsburgh Cancer Institute was founded, which would eventually become part of UPMC’s Hillman Cancer Center. To support the expansion, the institutions drew on federal NIH money to build research capacity and attract top talent to the area. In 1986, UPMC began consolidating with other university-affiliated hospitals, laying the groundwork for a larger, integrated health care and research system.

At the same time, Carnegie Mellon University became one of the first six colleges to register a .edu domain on “the Internet.” With this, researchers at Carnegie Mellon were able to communicate not just internally, but externally with researchers at other schools such as Berkeley, Columbia, Purdue, Rice, and UCLA. Their ability for collaboration was leaps and bounds ahead of most peers and they were able to attract some of the top talent in the world to join their faculty, transforming CMU from, in the words of the Pittsburgh Post-Gazette, “a regional technical school into a national engineering powerhouse.” With this, their ability to attract research funding exploded from roughly $12 million per year in the 1970s to over $110 million by the late 1980s. Much of this money was used to build infrastructure and to attract talent, particularly in the field of robotics, with CMU launching the world’s first robotics PhD program in 1988.

The 1990s continued this trend, with the healthcare sector growing and expanding steadily year after year. In 1994, the UPMC formed the Tri-State Health System Network, extending its medical footprint into the surrounding states. Increased private and public investments in healthcare fueled economic growth. By the early 2000s, the healthcare sector had become Pittsburgh’s largest employer.

Figure 3: All Employees: Education and Health Services: Nursing and Residential Care Facilities in Pittsburgh, PA (MSA)

Sources: Federal Reserve Bank of St. Louis; US Bureau of Labor Statistics via FRED®. Shaded areas indicate US recessions.

Pittsburgh continued to innovate and attract more new businesses and industries. In 1999, Pennsylvania established Keystone Opportunity Zones, “defined-parcel-specific areas with greatly reduced or no tax burden for property owners, residents and businesses.” More broadly known as special economic zones, these areas provide powerful incentives for economic development and can help change local politics toward more market-friendly alternatives (Moberg, 2017). Importantly, these zones were not directed toward any industry in particular.

In 2006, Google opened a Pittsburgh office, putting Pittsburgh on the map as a tech center (Carter, 2016). In 2009, Duolingo, the language learning app, was founded as a part of Carnegie Mellon University’s Olympus incubator. In 2015, Uber and Carnegie Mellon University formed the Uber Strategic Partnership and Advanced Technologies Center. That same year, Facebook opened its Oculus VR office in Pittsburgh. The following year, Amazon opened a Pittsburgh office focused on machine translation, Alexa integrations, and Amazon Web Services.

While not a laissez-faire story, the critical difference between Detroit and Pittsburgh is one of diversification. Pittsburgh’s subsidies and government investments pointed in multiple directions at the same time. Healthcare, research and development, robotics, and business services operate in distinct markets, draw on different skills and, importantly, are largely insulated from one another. Healthcare demand does not depend on the investment cycles of the robotics sector, and vice versa. The portfolio of opportunity is the opposite of a monoculture.

4. Detroit’s Comeback

Fortunately, Detroit’s story has a final chapter. Even before the city filed for bankruptcy, the seeds of recovery were in the ground. In 2010, Rock Ventures, led by its CEO, Dan Gilbert, had begun investing in the city. Between 2010 and 2024, Gilbert’s company had invested $7.5 billion in real estate, which led to the creation of more than 17,000 new jobs and making Rock Ventures the city’s largest private employer. For the first time in Detroit’s history, an automaker was not the city’s top employer (Feloni & Lee, 2018).

In the process, Gilbert helped break the industrial monoculture that had defined Detroit for decades. The city was becoming a technology hub with companies like Detroit Labs and Newlab. Financial services followed, with companies such as Rocket Mortgage, Rocket Money, and Detroit Venture Partners expanding downtown. Today, all four of the Big Four accounting firms — Deloitte, EY, KPMG, PwC — maintain offices in downtown Detroit. Attracted by low property values and growing economic opportunity, other companies came as well, like StockX, which sells high-end consumer goods, and Fathead, maker of “officially licensed and custom wall decals.”

All of this spurred a resurgence in population; in 2023 Detroit experienced its first population growth since 1957 and has continued to grow (City of Detroit, 2024). The downtown population is younger (57 percent are between the ages of 25-34) and more educated (45 percent have a bachelor’s degree and 34 percent have a master’s or professional degree).

Detroit’s recovery did not come from saving its automotive monoculture. It came from allowing new industries to fill the space that six decades of concentrated automotive protections, subsidies, and political incentives had inculcated. The same city, geography, and infrastructure that produced economic hardship under the monoculture are producing genuine recovery today through diversification.

5. Implications for Today

The story of Detroit and Pittsburgh is, in part, a story of how different cities respond to the same political and economic pressures. Those same pressures are alive today.

There is an irony at the center of today’s industrial policy debate. The communities that advocates of protectionism and industrial policy want to help the most are struggling in large part because of protectionism and industrial policies of the past. The decline was not caused simply by “free markets” or “foreign competition.” It was shaped by decades of tariffs, quotas, export restraints, union contracts backed by political guarantees, tax abatements, and direct subsidies. Each of these insulated incumbent industries from the competitive pressures that would have forced adaptation and diversification. The result was not resilience, but dependence on a narrow industrial base.

A market-based approach points in the opposite direction. Prices, not politics, should guide capital and labor to where they are most productive. Allowing failing firms and industries to contract frees resources so they can be redeployed elsewhere. This process is disruptive and often painful for workers and communities in the short run. But as Mokyr (2016) argues, with the right institutional and cultural settings, the process of adaptation rather than calcification leads to greater growth and continued prosperity.

The current wave of industrial policy in 2025 and 2026 is animated by the same logic that guided earlier protectionists. Calls for “supply chain security” have been replaced by “national security” and “good jobs” has shifted toward “putting American workers first,” but the underlying mechanism is familiar. Concentrated industries with organized lobbying power capture diffuse costs borne by unorganized consumers and workers in other sectors. Over time, the protected industry stops adapting and the gap between what it produces and what the market wants widens. When protections either stop or prove insufficient, the reckoning is more severe than it would have been had adaptation occurred earlier.

Politically, the difficulties of a free-market approach are real. Markets allow industries to decline. These declines are visible, concentrated, and potentially devastating to specific places. Organized workers in a declining industry form exactly the concentrated interest group that Olson described. Even elected officials who understand that protection is economically harmful often support it because allowing large job losses is politically perilous.

This does not rescue industrial policy from its fundamental flaws. Governments cannot identify tomorrow’s winners in a reliable way. Subsidies create political dependencies that outlast their rationale and become a national security risk in and of themselves. Concentrated intervention leads to the same dynamics Olson warned about. The first-best answer of letting markets determine industrial structure, allowing prices to direct resources, and exposing firms to competition remains.

The lesson of Detroit and Pittsburgh is that single-industry protection is the most damaging form of intervention a community can choose. It undermines the diversity that would allow the community to survive the decline of a dominant industry.

6. The Real Costs of Protection: Stagnation, Fragility, and Dependence

Detroit and Pittsburgh rose together on the same postwar tide and saw their dominant industries decline for largely identifiable reasons. Detroit organized its economic and political life around a single industry and spent decades defending that concentration against the competitive pressures that might have forced adaptation. When that industry finally began to decline, the city had little else to fall back on. Pittsburgh, by contrast, maintained a more diverse economic base and survived the collapse of its dominant sector because it had other sources of growth.

Detroit’s bankruptcy was not a random act of fate. It was the predictable outcome of an industrial monoculture rooted in sixty years of concentrated economic and political investment in a single industry. The city’s recovery, which began only after the economic base diversified, underscores the dangers of industrial monoculture. Today, Detroit is rebuilding itself around technology, finance, and business services rather than automotive assembly, and is experiencing growth for the first time in generations.

Left to their own devices, markets tend to produce diversity. No single industry dominates indefinitely, and rational actors spread their bets rather than concentrating them. Detroit’s monoculture did not emerge from markets. It was constructed through politics. Union contracts that locked in labor rigidities, tariffs, and voluntary export restraints insulated incumbents from competition, and government subsidies favored existing industries rather than enabling new ones. Every act of protection deepened the monoculture and narrowed the viable alternatives within the community.

The first-best prescription remains the same: let markets work. Prices, not politics, are better suited to directing capital and labor toward their most productive uses. But the second-best prescription, that takes seriously the political realities that policymakers face, is equally clear: policymakers should avoid concentrating support on a single industry. Economic resilience comes from economic diversification.

References

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