The Path to Prosperity

If Michigan is to flourish in the Information Age, it must shed its Rust Belt tendencies, attract and retain more college graduates, and offer great places to live, work, and play


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Everyone agrees that fixing the Michigan economy is the state’s number 1 priority. Nothing else is close. But there’s little consensus on how to build a sustainable economy, primarily because there’s no agreement on the question “Where do we want to go from here?”

The answer is that Michigan needs to transform itself into a high-prosperity state. High prosperity is different from the most-often-used measure for economic success — low unemployment. If there are lots of jobs, but they don’t pay very well or are easily replicated, it will stymie long-term prospects for growth.

The goal is to create an economy with a multitude of good-paying jobs — a place with a broad middle class, where there’s a realistic chance for families to realize the American Dream. There are many areas across the country with low unemployment during normal economic times, but also with low incomes. That’s not how Michigan should define success.

Rather, we need to examine the most prosperous states in America — defined as those with the highest per-capita income — and then determine what makes them so. Looking at the 10 highest-prosperity states (save for Wyoming, which is on the list predominantly because of high energy prices), the common characteristics are as follows: a high proportion of adults with a four-year degree (by far the single best predictor of income); an over-concentration compared to the nation in the proportion of wages coming from knowledge-based sectors; a large metropolitan area with an even higher per-capita income than the respective state; and, within that metropolis, a high proportion of residents of its largest city with a four-year or more advanced degree.

What most distinguishes successful areas from Michigan is their concentration of talent, where talent is defined as a combination of knowledge, creativity, and entrepreneurship. Quite simply, in a flattening world where work can increasingly be done anywhere by anyone, the places with the greatest accumulation of talent win.

Rich Karlgaard, publisher of Forbes magazine, sums it up best: “Best place to make a future Forbes 400 fortune? Start with this proposition: The most valuable natural resource of the 21st century is brains. Smart people tend to be mobile. Watch where they go! Because wherever they go, robust economic activity will follow.”

In other words, states and regions without concentrations of talent will have greater difficulty retaining or attracting knowledge-based enterprises, and they’re less likely to be the starting point for knowledge-based enterprises. The bottom line: Michigan’s is 34th among states in four-year degree attainment. Unless that improves, the state will be one of the poorest in the country.

“Just think if we were able to retain a higher percentage of our college graduates,” says venture capitalist Rick Snyder, former COO of Gateway and a Republican candidate for governor in 2011. “It’s clear we relied far too long on the auto industry to sustain our economy, and we really need to establish a very business-friendly environment to attract and retain talent.”

For most of the last century, Michigan enjoyed high prosperity. As recently as 2000, the state ranked 16th in per-capita income and was consistently below the national average in both upturns and downturns. According to the latest available data (from 2007), Michigan was 33rd — 11 percent below the national average. This is the lowest the state has been since the federal government began collecting data in 1929.

What happened? What made us prosperous for nearly a century — an extraordinarily long run — was the abundance of good-paying, low-skill jobs, primarily in manufacturing. In a flattening world driven by technology and globalization, those jobs are gone forever.

Unfortunately, with the continuing decline of the domestic auto industry, it’s highly likely that Michigan will, in the next few years, fall to the bottom 10 states in per-capita income. This is a stunning collapse of what was one of the most prosperous states in the nation.

To effect a turnaround, Michigan needs to confront some basic truths. First among them: high-pay, low-skill jobs aren’t coming back. The auto industry will never again be the major engine of prosperity in Michigan. If the domestic auto industry survives the current downturn, it will be substantially smaller, employ far fewer people, and will pay its workers less (with fewer benefits).

The irreversible new reality is that factory work is no longer a sustainable source of high-paying jobs. Nor is it a source of future job growth.

Manufacturing makes up about 10 percent of the American workforce today, and it’s declining. Nationally, the average annual manufacturing wage is about $35,000. In the future, Michigan factory work will pay around the national average. So whether it’s traditional Michigan industries such as autos and furniture, or new industries such as alternative energy or technology, factories will simply not be a source of new high-paying jobs.

The other industries that are widely believed to be drivers of the Michigan economy — farming and tourism — aren’t  great sources of good-paying jobs, either. Farming represents less than 2 percent of the Michigan workforce, and the average pay is low. Tourism, although a likely source of job growth, tends to be a very low-wage industry.

While agriculture and tourism are important sectors of the economy, they’re not a path to high prosperity or a broad middle class. If the Michigan economy of the future is built on a base of factories, farms, and tourism, it will be a poor state, indeed.

The path to prosperity is the broad knowledge-based economy defined as industries where 30 percent or more of the employees have a four-year degree or higher (high-education-attainment industries), and those where less than 30 percent of workers have a four-year degree (low-education-attainment industries).

From January 1990 (also a recession year) to January 2009, employment in low-education-attainment industries rose 15.7 percent in the United States. During that same period, high-education-attainment industries saw employment increase by 32.4 percent.

What that means is that, for two decades, the American economy has been going through a profound structural transformation from an industrial-based to a knowledge-based economy. Naturally, the high-education-attainment industries are where the good-paying jobs are, with average wages in 2007 of nearly $59,000, compared to just above $33,000 in low-education-attainment industries.

This transition h0as accelerated in the current deep recession. An overwhelming proportion of the job losses over the last two years have come in the low-education-attainment industries (primarily manufacturing, construction, retail, hospitality, and temporary services). When the current downturn ends, it’s clear that knowledge-based industries will continue to be where job growth is strongest and average wages are highest.

It’s quite simple: Future high-wage jobs will be increasingly knowledge-based. When the economy improves and job growth resumes, it will be concentrated in the knowledge-based economy — primarily health care, education, finance and insurance, and professional and technical services. For the last two decades, this has been the trend in the United States — and it’s accelerating.

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