Whither the Michigan Economy?

by Eric Stokan 8. April 2010 02:53

Editor's note: This post was greatly improved with the help of Mary Hennessey and Lyke Thompson. 

Yesterday’s Forum on Contemporary Issues in Society (FOCIS) conference at Wayne State University brought together some of the leaders in Michigan who are searching for answers regarding Michigan’s economy.  The conference, aptly titled “The Michigan Economy: Will it Get Better, Can it Get Worse?”, brought forth a notion of cautious optimism.  Most of the answers bordered on- ‘Yes, it can and probably will get worse in the short term, but in the long term, it can get better’ and ‘it can get worse, but it doesn’t have to’.  Of course, as many like Dr. Alice Rivlin, an economist at with the Brookings Institution and visiting professor at the Georgetown Public Policy Institute, noted, it depends largely on what we do.  Rivlin noted that letting the financial sector “go wild” again could lead to worse problems if the derivatives markets are not regulated.  Furthermore, if we do not stabilize national debt, we will have continuing long run problems.  Rivlin, noted that the recent economic downtown did not turn into a Great Depression scenario because of many reforms that date back to the post-Great Depression era like (a) deposit insurance, (b) social security, (c) unemployment insurance, (d) size of the federal government, (e) government acting “bigtime” and “fast”, and (f) federal aid to states.  While our current situation is a result of “overspending” and “overborrowing,” she notes that despite recession beginning with a financial crisis, making it  longer and deeper, this is better than a recession from stagnation in ideas or from inflation.  While this was a “perfect storm,” she finds hope in the increase in productivity we have seen.  However productivity growth may not be completely positive; see this Washington Post article showing that past productivity gains are acting as a brake on job growth.                  

The role of government was a major theme at the conference.  While Rivlin saw our economic shortcomings resulting in part from “overspending” and the lack of regulation in the financial sector, not everyone shared the sentiment that we need more regulation.  For Michael Poulus, President and CEO of Michigan First Credit Union, the only thing that keeps him up at night, “is the government.”  He does not see a lack of regulation as a problem in the financial sector, rather he would like to see less regulation.  Citing the fact that the government banned the issuance of credit cards to those under 21 without jobs, despite being able to still get a credit line without the card, he felt that such government “dictation” was hurting his industry. Among Mr. Poulus’s idea for correcting this would be to force government officials, after five years of government service, to work in the private sector under the laws they made.  Joseph Lehman, President of the conservative Mackinac Center for Public Policy, held similar sentiments regarding the overly burdensome role of government.  He indicated that Michigan’s economic situation has been clouded in several myths.  The first myth is the notion that our economic crisis is chiefly the result of an overreliance on the automotive sector.  He noted that just 3.4% of Michigan’s economy is from the transportation/manufacturing auto sector (No discussion was had about the indirect and induced job creation effect or the multiplier from these jobs).   One of Lehman’s solutions was to bring the benefits of government in line with the private sector which he estimates will save $5.7 billion dollars.  Other ideas included making all public schools charter schools, amending Article 8 of the Michigan Constitution to prohibit vouchers and tax credits, repeal the prevailing wage law, adopt a Right to Work law, eliminate some business taxes, and repeal the Public Relations Act.  He noted that the status quo cannot go on forever, because there are real movements going on.  Among them he cited the “Tea Party” movement which he indicated was not actually affiliated with any party.  Mr. Lehman noted, discussing Michigan’s past, “when government got out of the way, entrepreneurs got things done.”               

Others at the conference focused less on the role that government should play and more on the policies that would help Michigan in the long term.  Lou Glazer, President of Michigan Future Inc., indicated that Michigan’s largest problem is the lack of educational attainment (His presentation can be found here). Glazer noted that Michigan is 34th in college attainment.  With a lower proportion of knowledge industries and a lower proportion of college graduates, he also noted that this was hurting our per capita income.  Despite Lehman’s retort that we are about average in Michigan’s loss in college graduates, Mr. Glazer pointed out that this is one time that average is not good enough.  Other noteworthy ideas included those of Dr. Belzer, Professor of Economics at Wayne State University.  Belzer advacates making Detroit a “Global Freight Gateway” to use our current resources in a positive way to grow our economy.  These resources include our sea, air, rail, and road access.  While population decline is bad economically, this will allow Michigan to use this to our advantage in the creation of “freight villages,” noting that Chicago has become too populated to handle all the freight.  Of course, the estimated investment needed ($4.85 billion) poses the largest challenge during this economic time.  Another challenge is the required paradigm shift for Michiganders to think of themselves as transportation rather than a manufacturing hub.               

Doug Rothwell, President and CEO of Business Leaders for Michigan, offered some thoughts into Michigan’s structural issues hindering its ability to grow.  Mr. Rothwell noted that our issues are the result of a lack of competitiveness with other states as a result of operational issues, cost structures, human capital, and not using our assets.  Operationally, lacking a cohesive state and regional plans has hurt us in attracting businesses.  Unlike other areas, having divided regions has led  businesses considering Michigan to opt for other states where the business could get regional support.  Regarding Michigan’s cost of doing business, he estimates Michigan is about 4% above average in overall cost.  We are about 10% above those we are directly competing against and roughly 20% above North Carolina.  These costs can be offset partially when human capital and other assets are in line, but this has not been the case for Michigan.  Despite having a great post-secondary educational system, college graduates are leaving.  Despite having an advantageous geography including the Great Lakes, we haven’t marketed ourselves enough with this as a focus.  Michigan has not created a good transportation system in Mr. Rothwell’s eyes.  Furthermore, while Michigan spends in the top 10 of all states on K-12 education, our scores consistently rank us in the bottom half.  Taken together, our lack of competitiveness on these fundamental has led many local governments and the state to rely on financial incentives as a means to attract business.  This has not been a fiscally sound strategy and Mr. Rothwell thinks Michigan has been “overtargeting” industries.                 

The last panel of the conference was on Michigan’s entrepreneurship.  Representatives from TechTown, Automation Alley, and Ann Arbor Spark, who claim success in helping entrepreneurs, discussed how they have been working with individuals to foster the entrepreneurial system in Michigan.  This is a strategy that Sandy Baruah, President and CEO of the Detroit Regional Chamber, thought could benefit Michigan in the long term.                 

At the end of the day, one can answer the title question “Will it Get Better, Can it Get Worse” somewhat pessimistically.  We have a weak housing market, an overreliance on a declining sector- especially in Detroit, a troubled national economy, employers less apt to hire employees even if they are needed, an uncompetitive cost structure, a lagging K-12 educational system, and an inability to keep our college graduates in the area. However, the question can also be answered with some cautious optimism. Our geography has largely been untapped as a source of economic growth, we have skilled engineers who can lead us in alternative energy advancement and a range of other technologies, we have business incubators that are fostering an entrepreneurial spirit, we have great post-secondary educational institutions, and this panel indicated that we have many very able and invested individuals who are determined to see a better Michigan.  Michigan seems to be at a crossroads, and the Center for Urban Studies hopes further discussions like this one will push us toward the more optimistic outcomes.

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About the Authors

We are the Center for Urban Studies Economic Development Unit.  We have several authors who contribute directly and indirectly to this blog.

Lyke Thompson, Ph.D.

Director of the Center for Urban Studies and Professor in Wayne State University's Political Science Department, has specialized his research on the urban political and economic environment.  A primary focus has been centered on municipal economic development, urban policy, and the determinants of economic growth.

Eric Stokan, MA.

Research assistant at the Center for Urban Studies Economic Development Unit.  Mr. Stokan serves as the lead researcher of the Unit, analyzing economic data using various statistical techniques.  Mr. Stokan is interested in questions concerning municipal economic growth and industry mix as well as determinants of local economic incentive adoption.

Mary Hennessey

Research technician at the Center for Urban Studies Economic Development Unit.  Ms. Hennessey researches the effectiveness of local economic development incentives.  Specifically, she has conducted a thorough investigation of brownfields and is currently working on public transit.