The Census just reported that Detroit’s population dropped by 25% between 2000 and 2010, a stunning fall that is even larger than the 20% drop Detroit experienced during the 1970s. The story of this city’s devastating decline reminds us that urban fortunes depend on entrepreneurial human capital. Failed public policies that tried to fix Detroit with urban renewal and transportation projects stand as stark evidence against the view that our economic woes call for more federal spending on infrastructure.

The White House’s fondness for transportation spending may reflect the fact that projects like the Erie Canal had great value when moving goods was near impossible. In 1816, it cost as much to move goods 30 miles over land as it did to ship them across the Atlantic. Public investments in waterways and railroads created a transportation network that made the natural wealth of the American interior accessible.

Cities like Detroit grew up as entrepreneurs came to the nodes of that network. Hiram Walker moved to Detroit from central Massachusetts in the 1830s and made his fortune shipping Canadian whiskey over the Detroit River. Detroit Dry Dock produced innovative engines and boats that plied the Great Lakes, and in the process, exposed the young Henry Ford to cutting-edge engineering.

A century ago, Detroit was crammed with smart innovators who competed and collaborated in their quest to produce the newest thing. Ford, the Fisher Brothers, the Dodge Brothers, David Dunbar Buick and Billy Durant in nearby Flint were only a few of the automobile entrepreneurs who collectively invented the mass-produced car.

Henry Ford in the T Ford model in front of his car plant in Detroit, in 1900.

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Today, the Ronald Reagan Presidential Foundation, the Manhattan Institute and The Wall Street Journal will host a morning seminar concerning the economic legacy of Ronald Reagan. The get-together couldn’t be timelier.

Reagan came into the White House facing an economy as troubled as ours—one that had even higher unemployment, catastrophic interest rates (18% for mortgages) and a stock market that in real terms had fallen 60% from its mid-1960s levels. When he left office eight years later, the U.S. had become an economic miracle: 18 million new jobs had been created; Silicon Valley had blossomed, becoming a global symbol for innovation; and the stock market was experiencing a bull run that, despite dramatic ups and downs, didn’t end until the turn of the 21st century, after the Dow had expanded 15-fold. The expansion of the U.S. economy exceeded the entire size of West Germany’s economy, then the world’s third-largest.

How did this happen? You could make the case that Reagan’s economic miracle had its origins at a Washington, D.C., restaurant in 1974. That December night, 34-year-old University of Chicago professor, Art Laffer, scribbled a single—and now legendary—curve on a cocktail napkin to illustrate to a group of President Ford’s advisers why a proposed plan to raise taxes would not increase government revenues. Mr. Laffer posited that deep cuts in existing tax rates would stimulate the economy and ultimately lead to far higher government revenues. Conversely, increase the tax burden and government receipts would fall below expectations because of a weaker economy. (more…)