The City of Detroit is teetering on the edge of bankruptcy, with a team of auditors expected to report this month, after which Michigan Governor Rick Snyder may appoint an emergency financial manager. The reasons for Detroit’s decline are no secret: excessive taxes and spending led to an exodus of population, which was exacerbated by the decline of the automobile industry, the region’s major industrial sector. A more interesting question is what an “emergency financial manager” should do to bail the City out, other than going to Congress and asking for money.

The state of Michigan may already have made the greatest single contribution to Detroit’s revival, by passing “right to work” legislation last December, becoming the 24th state with such a rule – the legislation comes into effect at the beginning of April. While nominally the only outcome of this legislation is to allow workers in unionized companies not to join the union, the practical effect on union strength is much greater. Michigan has always been known as a strong union state, with the notorious battles of the 1930s to unionize the automobile workers; this legislation makes unions much less effective, in both existing and new workplaces.

For Detroit, that’s extremely important. Strong trades unions can only have a major effect on workers’ wages and conditions in environments such as the U.S. automobile industry of the 1950s and 1960s, in which there is little or no outside competition from non-unionized or foreign producers. However, even when they do not drive up workers’ wages (and, more especially pensions and healthcare benefits) they have a major negative effect on employers’ cost structures because they add rigidity.

With a full union presence, hours and working conditions are negotiated item by item at negotiating sessions every few years. This raises employers’ costs by eliminating their flexibility; much planning has to take place to ensure that production demands can be met within the framework of the union contract. In addition, scarce management time is itself taken up with union negotiations, a vital input into the facility’s profitability but contributing nothing to it.

Union-favoring historians will generally retaliate at this point with tales of the Triangle Shirtwaist Fire of 1911, the Haymarket riots of 1886, the Homestead strike of 1892 and other historic employer oppressions of the workforce. However the overall trend in worker remuneration, mostly before the unionization drive of the 1930s, is highly favorable. U.S. workers have generally been the highest paid in the world and until the 1970s (in some heavily unionized industries) and the 2008 recession (more generally) their living standards have improved steadily decade by decade.

The key to ensuring that workers are paid properly is to avoid special-interest legislation in either direction. In the 1930s, legislation favoring unions allowed some U.S. workers to increase their compensation (and still more markedly, the cost of employing them) far above the market-clearing level. Similarly, the current immigration “reforms” favored by the U.S. Chamber of Commerce, especially those legalizing illegal low-skill immigrants, would place an equal thumb on the free-market scale, allowing employers in some sectors, such as agriculture and meat packing, to drive wage rates down to Third World levels, thereby reversing decades of advance in U.S. blue collar living standards. A modest liberalization in high-skill immigration may be economically beneficial, but opening the floodgates even partially to over 6 billion impoverished non-Americans would provide unscrupulous employers with a mechanism to immiserate the U.S. workforce that is neither socially nor economically beneficial.

For Detroit, Michigan’s decision to implement “right-to-work” legislation is very important, as is the potential U.S. immigration legislation. If it is to recover, the city needs to find new sources of employment for its citizens, most of whom are oriented towards manufacturing rather than the fancier service sectors and many of whom are of modest educational attainment. For this, the cost of employing Detroiters must be kept as low as possible and the competition for them from low-skill undocumented outsiders must be kept to a modest level.

To address the most important cost factor for many potential new employers considering Detroit, they must be reasonably safe from violent crime. In 2011, Detroit had the highest rate of violent crime of any major city in the nation, at 2,137 per 100,000. That is double the rate for the District of Columbia, a notorious crime blackspot (though cleaned up in recent years) and almost four times the rate for New York (Chicago was not calculated separately, but Detroit’s murder rate was three times Chicago’s). Detroit’s violent crime rate was more than 30% higher than the next worst crime location, Oakland CA..

I’m not an expert in policing, but whatever needs to be done to reduce this appalling statistic to a level no worse than the big-city norm must be done. One important function of an “emergency financial manager” will be to root out dozy liberal shibboleths from the city government, many of which have doubtless rendered its police force ineffectual. At the very least, the Detroit police must implement former New York Police Commissioner Bill Bratton’s “broken windows theory” whereby petty infractions are punished, in order to raise community standards of behavior. If Bratton himself can be spared from advising David Cameron on the appalling ghettoization of much of London, he must be brought in to take a look at Detroit and recommend some steps to be taken.

Once the crime level is reduced to tolerable levels, and without the dead hand of unionization, Detroit has a lot of attractions as a place to locate the right sort of business. It has very cheap real estate, both for office buildings and for private homes for the employees concerned, both at the shop-floor level and, mostly in the suburbs, for senior management. It has good infrastructure, currently rather underused as it was built 40-50 years ago when population was much higher. Cleveland, a city that has suffered similar albeit less extreme depopulation, is a joy to drive around with its relaxed traffic patterns and lack of congestion (especially for those used to rapid-growth areas like Washington DC or urban California); so presumably is Detroit. It has ample education and training facilities, at least at a modest level, with Wayne State University and Wayne Community College, between them with 50,000 students, together with the University of Detroit and several smaller institutions. It has a major international border with Windsor Ontario, thus acting as a trade hub. Finally of course it has the remnants of the automobile industry, with all the varied parts and ancillary facilities and pools of skilled labor that industry has spawned.

Detroit thus has the makings of a revival entirely under its own steam, provided crime is brought down, and with Michigan’s new right-to-work legislation attracting outside investment. However, without additional incentives it’s likely that revival would be very slow to get started, probably too slow to overcome the forces of continuing decay. The question is: what form those incentives should take.

We know what doesn’t work, because it has been tried before. The approach of massive prestige investment projects was implemented in the late 1960s, and failed abysmally. The Renaissance Center is itself a spectacular if somewhat brutalist complex, and its hotel has superb views over Lake St. Clair. Nevertheless, even after it was completed and opened in 1977, it did not lead to a Detroit Renaissance, far from it – visitors soon learned to remain within the complex, for fear of what went on outside it.

For similar reasons, Gov. Snyder should avoid writing a few checks for hundreds of millions of dollars to large international companies that promise to locate their facilities in Detroit. For one thing, Michigan can’t afford it. In any case, such bribed relocations generally produce fewer jobs and economic activity than advertised in advance. Moreover since the subsidy is paid up-front rather than annually, such deals often result in only a short-term uplift before a change in “market conditions” leads the international behemoth to relocate somewhere else for an additional bribe.

The ideal encouragement for job creation is a tax abatement that lasts for a number of years, and is focused generally on smaller rather than larger businesses, which can be expected to remain in place if their business succeeds, and will create jobs as they grow. By focusing on smaller rather than larger businesses, the provider of the subsidy spreads both its risks and the employment opportunities provided.

Here we come up against a problem: the split between local, state and national responsibilities for taxation. The city of Detroit is near bankruptcy, and can’t afford to provide massive abatements of real estate taxes, for example. In any case, Detroit real estate prices are exceptionally low, so even with above-average levels of city taxation it is not an expensive location for either residents or businesses. The state of Michigan could provide taxation incentives, but its state taxes are not excessive, and do not form an important cost deterrent to investors.

The ideal tax to abate would be that on payrolls. This represents a direct cost to employment, especially at modest levels of remuneration, and is charged on both employer and employee at 7.9% each, with 6.45% of that 7.9% cutting out at a salary of around $110,000. It also provides a deterrent to self-employment, an especially important source of economic regeneration, since the self-employed pay both the employer’s and employee’s payroll tax, thus raising their overall marginal tax rate above 50% including state taxes.

Thus a partial or total payroll tax holiday for the next 10 years for the city of Detroit would provide the best possible stimulus to regenerating the city, since it would encourage both self-employment and the creation of new jobs in Detroit by businesses large and small. By 2023, provided the Emergency Financial Manager did not cede control to inept and grasping local politicians, you could expect that Detroit’s population would have rebounded, its economic base would be regenerated and its finances would have been entirely restored.

Equally however, we cannot impose on the U.S. Social Security system the burden of providing retirement and Medicare benefits for perhaps a million Detroiters without having received contributions from them. The solution would be to provide a subsidy from the state of Michigan to the Social Security and Medicare trust funds of the Medicare contributions and perhaps half the employer and employee contributions due from Detroiters, with the pension benefits accrued by Detroiters for 2013-23 being equally halved. (Overall, many Detroiters would have jobs that they would otherwise have lacked, so their Social Security retirement benefits could end up higher than they would otherwise have been.)

That formulation would place the cost of the subsidy on the state of Michigan, the entity most able to provide a subsidy of some form towards the regeneration of Detroit, while optimizing the economic regeneration of Detroit itself. Of course, the state would benefit from income and sales taxes on the wages earned in the regenerated city, so in the long run it could come out ahead.

Like most economic problems, Detroit’s can be solved. The solution simply requires the political obstacles to be overcome.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)