Submitted by CARPE DIEM

Fifty years ago, Detroit was the fourth largest city in the United States, with a population of 1.7 million people, and at $8,500 per year, one of the richest cities in terms of per capita income. It was 3.5 times the size of Indianapolis, the 26th largest city, whose income was almost identical on a per capita basis (see population chart above, click to enlarge). Today, Detroit and Indianapolis are the 11th and 12th largest cities, respectively, with Detroit’s population cut in half from 50 years ago (and losing 3,000 people per year this decade), while Indianapolis has grown by 70% during the same time frame. Remarkably, Indianapolis now has a per capita income 50% greater than Detroit’s.

How did this happen? One answer, according to the Mackinac Center for Public Policy, is that Detroit’s city government is far larger, more regulation prone, and more bureaucratic than Indianapolis’s city government: the ratio of residents to city employees, a key measure of city government productivity, is 50:1 in Detroit, one of the worst in the United States, but is 203:1 in Indianapolis, one of the best. More broadly, the central issue in political economy concerns the optimal delineation of the sphere of government activity versus that ascribed to markets, and in this essay we examine this question from the vantage point of municipalities.

Another answer: Indianapolis Mayor Stephen Goldsmith took office in 1992, committed to a turnaround based on privatization of city services, and creating a climate more conducive to entrepreneurship. During his eight-year tenure as mayor, the city’s population increased by nearly 50,000 residents, induced by a more business-friendly environment and its corollary, smaller government. The Indianapolis turnaround was engendered via a three-part program that included privatization and transparency.

From “The Privatization of Public Services,” by John Chapman of the American Enterprise Institute.

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