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

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.

Unfortunately, Michigan has lagged in its support of the assets necessary to develop a robust, knowledge-based economy. And the transformation to a smart economy will take years to implement and require fundamental change. But it is the only reliable path to regain high prosperity. Either we do what’s required to build the necessary assets to compete in the knowledge-based economy, or we accept the fate of being a poor state.

This analysis runs counter to the prevailing thinking. Many still believe that the path to economic success comes from a combination of low taxes, small government, and weak unions. They point to states like Alabama, Indiana, and much of the South as models for Michigan to follow.

Research demonstrates, however, that those states are collapsing in the downturn. They now have high unemployment (although not as high as Michigan’s), along with low incomes and low education attainment. Who wants to be like them? The low-tax, anti-union, low-education-attainment environment in the South was successful in attracting low-paying jobs in construction and manufacturing for a while, but as we’re seeing today, that is not the way to build a sustainable, prosperous economy. Low taxes and labor costs are helpful, but they’ll only take a state so far.

Another common recipe for economic growth is to pick industries of the future for special subsidies. Across the country, states and regions are handing out tax cuts or even writing checks to bet on a few technology-based industries such as information technology, life sciences, or alternative energy. There are also tax credits for filmmakers to tap in Michigan — up to 42 percent for production and other activities.

But state governments don’t have a particularly good track record of being able to choose winning enterprises. More important is that these new industries aren’t where most job growth is occurring. Job growth for the last decade has been highly concentrated in health care and, secondarily, education — not in high tech or movies.

So if lower taxes, small government, and picking industries aren’t the answer, what is? Minnesota — the most prosperous Great Lakes state — provides a clue. Its four-year degree attainment is in the top 10 nationally. Of the top 10 states in college attainment, nine are also in the top 12 in per-capita income. Education attainment — talent — is now the preeminent predictor of a state’s per-capita income. Nothing else comes close.

So the economic-growth priority for Michigan policymakers is preparing, attracting, and retaining talent.

Yet there are no quick fixes. Michigan’s economy is going to continue to lag for the foreseeable future. But there is a path back to high prosperity. Our first strategic priority should be to build a culture aligned with the flattened world of today. What most underpins economically successful regions is not state and local policy, but their culture. What matters most is the attitudes and beliefs of citizens about how to get ahead in a world of constant change. The most successful regions will be those that highly value learning, have an entrepreneurial spirit, and are welcoming to all.

The evidence suggests that Michigan is having trouble with all three.

Our second strategic priority should be to invest in higher education. Michigan has spent decades building a world-class system of higher education — both universities and community colleges. They’re arguably the most important assets we have in developing the concentration of talent we need to be successful in a knowledge-based economy. But in recent budget cuts made by the Granholm administration, higher education was one of the first areas on the chopping block.

The single most important thing policymakers can do for the future economic success of Michigan is to ensure the long-term success of a vibrant and agile higher education system.

Our third strategic priority should be to create places where talent wants to live. Minnesota and Illinois, for example, have large metropolitan areas with even higher per-capita income. A central characteristic of these prosperous regions is that a large proportion of their adults have a four-year degree. And in almost all prosperous regions, a high proportion of its largest city’s residents have bachelor’s degrees or more. So metro Detroit and, to a lesser degree, Ann Arbor, Grand Rapids, and Lansing, are the main propellants of a prosperous Michigan.

However, for many Michiganians, vibrant central cities are part of the past. They view core cities as no longer relevant — or just someplace unique, such as Manhattan, Toronto, and Chicago. But, as the research shows, core cities are a key ingredient to future economic success.

The pattern across the country is clear: High-prosperity metropolitan areas have central cities with a high concentration of knowledge workers — particularly the millennials before they have children. And those young professionals are most likely to raise their children in the suburbs of the city they’re living in, rather than where they grew up.

In a recent poll for CEOs for Cities, nearly two-thirds of recent college graduates said they decided on where they wanted to live first, and then looked for a job. The inescapable conclusion is that place matters.

Attracting those graduates — the asset that matters most in the knowledge economy — requires creating safe, vibrant, walkable neighborhoods, particularly in and around downtown Detroit, Ann Arbor, Grand Rapids, and Lansing. It means investing in amenities like transit, recreation, public safety, and the arts — with cooperation between the central city and its surrounding suburbs.

Our fourth strategic priority should be to transform teaching and learning so that they’re better aligned with the realities of a flattening world. There isn’t much evidence that high-spending states have better student achievement. Michigan is still a high-spending state on K-12, with high teacher salaries and benefits, and a high proportion of state and local spending devoted to it. But in terms of academic achievement, our results are average.

It’s also clear that the form of school governance is no magic bullet. Despite claims by advocates on all sides, the evidence is that in each system — district, public charter, parochial, and independent — there are few quality schools.

There are no shortcuts. Michigan’s business and legislative leaders are going to have to do the hard work to develop quality teaching and learning from birth to retirement. It needs to develop educators — from classroom teachers to superintendents to college presidents — who are thoroughly grounded in the realities of the flat world in which we live. And we need to give them the ability to experiment and innovate, so they can help all students develop a love of learning and the academic and soft skills required to succeed in the flat world.

Our fifth strategic priority should be to develop new public-sector — and, most importantly, private-sector — leadership.

Leaders who are willing to speak the hard truth to Michigan: that nothing can be done to get their old jobs back. Many who prospered in the old economy will suffer a decline in their standard of living, regardless of state action.

But even with this harsh new reality, there is a path to success.

At the turn of the last century, we were America’s Silicon Valley. Through pure innovation, Michigan created the 20th century’s broad middle class. And we can do it again — but only if we embrace what’s next, rather than hanging on to what once was.