Michigan’s Economy Needs a Complete Overhaul
A DBusiness Economic Analysis
Detroit’s knack for all things mechanical, coupled with its abundance of natural resources, put the world on wheels and largely ushered in the middle class. The eventual concentration of the Big Three automakers in the Motor City brought untold wealth to Michigan, allowing parents to send their children to college in greater numbers here than in most other cities across America.
In the wake of the automotive revolution, thousands of companies were created in Michigan. Many of these were related to the industry, while many other businesses that bear no relation to manufacturing have thrived. In fact, if you ask anyone from another country to name America’s most-famous cities over the last century, Detroit invariably makes the list.
But those days are gone.
Today, metro Detroit and Michigan are in a much different state. For nearly a decade, Michigan has been mired in annual billion-dollar budget deficits, and the state routinely hovers near the top of the unemployment ranks. General Motors, Chrysler, Delphi, Visteon, and numerous other automotive suppliers and peripheral companies are working their way through bankruptcy court or have already closed.
High-paying jobs are disappearing, the housing industry is fraught with foreclosures, office and industrial leases are down, and the governor and state Legislature have yet to develop a long-term comprehensive strategy to ignite a sustainable recovery.
So where do we go from here?
The state’s tax structure is still built on a manufacturing model, even though services account for approximately 60 percent of all business transactions today. Fifty years ago, services made up around 40 percent of such expenditures. That’s got to change.
Many state workers enjoy more generous benefits than their private-sector counterparts. Bringing public benefits in line with the private sector’s would save the state billions of dollars annually. In addition, many civic and nonprofit organizations, such as Detroit Renaissance (soon to be Michigan Renaissance) and the Mackinac Center for Public Policy, have proffered myriad initiatives to pare state expenditures and lure businesses and investment.
But because of the potential for negative political ramifications, most of those initiatives have been ignored.
There’s also the matter of the generous tax incentives doled out to companies, large and small, that want to expand their operations or relocate here from other states. In some instances, the process for applying for these grants becomes a shell game. Threaten to leave the state, make some preliminary contacts with other areas of the country about moving, and — presto! — Michigan comes through with tax breaks. Of course, this is typically accompanied by a press conference to show that at least our elected leaders are doing something.
In addition to remodeling and enhancing Michigan’s revenue stream, our state leaders should designate tax breaks for industries that are experiencing growth or poised for it. On the following pages, we consider a number of such business sectors.
One good example of successful lawmaking is the recent legislation that provides the highest tax relief for film studios in the country. The fledgling market for advanced battery research shows great promise, as well. By developing and building the next generation of batteries, Michigan can provide a lucrative transition from combustion to the electric-powered transportation industry.
There’s another benefit to targeting such industries for tax relief. Both film production and battery research help retain young, talented workers who might otherwise leave the state for supposedly greener pastures.
DBusiness proposes a simple, three-step plan for transforming our economy:
First, instead of pointing fingers and blaming someone — or something — our political leaders need to make Michigan the most appealing place in the world for business. Start with a simple spreadsheet and list the top economic and social factors that would induce businesses to relocate to — or remain in — Michigan. Prioritize these categories and then enact legislation that would make these proposals realities. Michigan must become the most business-friendly place on the planet, bar none.
Second, business leaders and owners need to invest in research and development. They must diligently search for new sales while maintaining what they have. In order to deal with change and find new revenue, we suggest business and political leaders read Spencer Johnson’s Who Moved My Cheese? Invest in the future, invest in new technology, invest in new products and services, and invest in whatever will distinguish a business. The state of Michigan can’t do it all. The state’s corporate and business leaders must build better mousetraps.
Third, eradicate our notions of entitlement. Michigan needs to become a right-to-work state. There aren’t many businesses that are drawn here by our entitlement sentiment. As outside businesses consider relocating to Michigan, it’s imperative they understand that we can offer a highly trained workforce with the right mindset and attitude. We need to embrace change and support our political leaders as they strive to make Michigan the most attractive place in the world to conduct and grow a business.
By identifying and offering incentives to lure fast-growing companies among the following industries, Michigan could do a better job of retaining and attracting businesses, as opposed to merely offering tax incentives across a broad spectrum:
Our economic turnaround plan for Michigan also includes four viewpoints for setting the state on the right path for growth:
• Senior economist David Littmann appraises Michigan’s decaying private sector and offers a straightforward prescription for our state’s economic recovery.
• House Majority Leader Andy Dillon and Senate Majority Leader Mike Bishop opine on Michigan’s future economic prosperity.
• Former State Rep. Andy Meisner, who championed the film legislation, addresses the many side benefits to the incentive package.
It can no longer be a mystery to forecasters or to Michigan’s unquestioning media why tens of thousands of our most-promising workers leave the state in search of economic opportunity elsewhere.
Indeed, between 2007 and 2008, Michigan showed an incredible loss of net domestic population to other states. According to the U.S. Census Bureau, Michigan lost 109,257 residents — a population loss equivalent to removing Ann Arbor from the map.
Confirmation of the ongoing economic exodus from Michigan is gleaned from the 30th annual United Van Lines data. Michigan again tops the list of states experiencing a net “out-migration” of households. In 2008, Michigan’s rate of “out-bound” moves was 67.1 percent of all moves. This is a dubious “leadership” position for Michigan, because the state with the next highest percentage of “out-bound” moves is North Dakota, with 58.9 percent.
What accounts for this mass exodus? The answer is obvious. Since the beginning of the new century, government employment and budgets throughout Michigan have been crowding out the private sector, including its resourceful, dynamic entrepreneurs. Consider that just since 2000, Michigan’s public sector as a percent of private employment has risen from 17.0 to more than 18.5 percent. Now, with 2009 layoff announcements affecting automakers and dealerships throughout the state, tens of thousands of private-sector jobs will be extinguished with no commensurate shrinkage of governmental overhead to date.
Again, just consider that in 2000, Michigan’s unemployment rate averaged 3.7 percent and was well below the national average of 4 percent. But by April 2009, Michigan’s jobless rate had soared to 12.9 percent (versus 8.9 percent for the United States), and it’s now hurtling toward Depression-era levels of 17 percent to 20 percent.
Within this world of hurt and injury to Michigan’s private sector lie some nasty secrets. For example, a trenchant feature of economic adversity that no longer receives media headlines is the growing number of people who’ve become “discouraged” workers. They no longer seek to enter or re-enter Michigan’s workforce.
At least not in any formal sense.
Perhaps they’ve lost hope; perhaps they’ve tired of the search. As a result, they may have entered the underground economy. Even in normal times, between 7 and 12 percent of the labor force are engaged in a barter-type mode or are operating independently — and often, therefore, they’re invisible to tax collectors. These workers remain in remunerative circumstances, as do the multitudes of part-time employees who’d prefer full-time employment. In each case, however, Michigan’s gross state output and income are seriously impaired and cannot rise to their potentials.
Also, such sub-optimal adjustments indicate that the statistical rates of unemployment progressively underestimate Michigan’s true labor-force difficulties. Yet another increasingly apparent sign of Michigan’s under-employed and under-reported structural dilemma is the volume of desperate activity involving out-of-state job-hunting. Individuals may scout for non-Michigan opportunities while collecting Michigan unemployment insurance and other benefits.
No Sense Fooling Ourselves Any Longer
Lansing, nevertheless, remains oblivious to the future. Its economists and planners tell us how surprised they are each year that tax revenues for state and local governments fail to reach the heights they were predicting merely a year earlier. Politicians, in turn, excuse lousy forecasts by condemning the unforeseeable nature of the downturn. But instead of lowering taxes to ease the burden on Michigan taxpayers, legislators hike taxes to supplement what they label “essential spending in a bare-bones budget.” (This is eerily reminiscent of the decades of similarly disingenuous predictions and despair that have accompanied perennial City of Detroit budget cycles.)
Even the Michigan Chamber of Commerce has wearied of the annual charade of intended spending cuts announced by Gov. Jennifer Granholm. In a recent press release, the Chamber expressed its extreme displeasure with Lansing as it sought to plug large holes in the budget with federal stimulus money that was intended to create and attract long-term economic opportunities:
It is extremely irresponsible for the Governor and Legislature to rely so heavily on one-time federal monies to fund ongoing operations of state government instead of making the dramatic changes that are needed. [Every day] across Michigan, job providers are forced to tighten their belts to keep their businesses afloat, and they expect elected officials [to also] make the tough choices. The [e]xecutive [o]rder approved today does not go nearly far enough or fast enough to right-size our government. It is disheartening that the action[s] taken [of late are] more appropriately viewed as a marketing plan for a tax increase and not [as] a blueprint for economic recovery.
As late as 2008, Lansing persisted in policies that raised taxes, subsidized hand-picked firms at the expense of other taxpayers, and spent money without honest hope of repayment, either in net jobs or revenues. The immediate impact of its tax-and-spend policies was to boost deficit spending and borrowing, which creates even greater tax burdens on future generations of Michigan residents.
In effect, elected officials at nearly every level have been endorsing unbridled public spending and taxation, along with industrial policies that accommodate and augment greater control over Michigan’s economy by organized labor. In so doing, Michigan is being marginalized and impoverished. In a single decade, Michigan’s economy has fallen from pre-eminence. It is now the nation’s poster child for underdevelopment, out-migration, and decay.
And, contrary to conventional wisdom, this critical economic divergence of Michigan from the national direction has little to do with the global recession and financial market implosions that have recently affected firms and individuals everywhere. Nor do Michigan’s afflictions reflect dismal fortunes of the U.S. auto markets. After all, auto sales between 2004 and 2007 were the highest and most profitable in the entire history of the auto industry in America. It’s just that Michigan’s automakers failed to participate in the party, in part, because they were so heavily taxed both by state and local levies, but also by years of concessions that were given to buy labor peace.
Understanding Economic Basics
It can’t be stated more clearly: It’s time to wake up, face economic reality, and reform. In a nutshell, the crux of our economic problem lies with the indisputable fact that the portion of Michigan’s economy represented by government employment and government control has been displacing the productive, creative, innovative, risk-taking, and competitive private sector.
This may sound to some readers like a politically imbued assertion. It is not. In a market system, government’s economic role is to provide the most prosperous business climate possible. How? Government has the exceptionally important role of maintaining a judicial system. It is the duty of courts and law enforcement to protect the lives and property rights of its citizens. If public sectors cannot perform these primary duties successfully, then they certainly possess none of the talents or capacities to take on monopoly (or even subsidiary) roles in the areas of health care, environment, energy, or education.
Today, rather than facilitating an excellent business climate, Lansing is presiding over a calamity. Rather than allowing the marketplace and forces of competition to determine the production, allocation, and distribution of scarce resources, Lansing has now become an agent of income and employment redistribution.
When will citizens of Michigan have had enough of rotten economic policies? At what point will legislators, the governor, and other public officials be willing to say “no” to special-interest groups and “yes” to the general interest of current and future generations of workers and retirees in Michigan?
This is a political question, so the answer is indeterminate. But the economic response is brimming with optimism and realistic possibilities.
Michigan must promptly enact legislation to leapfrog the economic incentives and business climates that exist in other states. Lower tax burdens, leaner state and local governments, and a freer, more flexible labor market top the list of urgent reforms.
In particular, unless Michigan reduces its income taxes, rolls back its state and local government payroll and spending programs, and becomes a “right-to-work” (voluntary union) environment, there’s simply no credible starting point for economic improvement.
The Mackinac Center for Public Policy, in Midland, continues to update its listing of more than $2 billion in annual savings that would accrue to the state from the adoption of more than 101 very rational reforms. Some of these reforms are so logical that it’s difficult to believe they weren’t installed years earlier, when our economy was clearly sinking. Competitive bidding on all construction projects and allowing non-union workers to bid on public-school (non-instructional) services — including staff health care, custodial, food service, transportation, and grounds maintenance work — are but two examples.
Michigan must transform itself from a reactionary, protection-oriented economy (favoring a well-organized few against the larger population) into a progressive market economy where its business climate favors anyone who wants to compete with his or her labor, capital, and entrepreneurship.
Michigan’s Comparative Advantages
If Michigan were to adopt these growth policies, the world would immediately notice. Why? Because across the globe, investors, venture capitalists, entrepreneurs, and governments are scanning the world for places to succeed in business — to make, market, and sell products and services at a profit, as well as to expand and establish a sterling reputation.
Some of the vanguard industries that Michigan can profitably exploit in the 21st century, domestically and abroad, include agriculture, chemicals, defense, energy, geriatrics, tourism, transportation, turnaround management and consulting, and freshwater technologies.
To capitalize in these areas, Michigan has many strong suits in its economic wardrobe:
• Michigan is blessed with great parcels of fertile land. Those individuals and firms who own fields, herds, and orchards deploy the finest in science, tools, fertilizer, and transportation to keep Michigan a top-notch exporter of many agricultural products. Agriculture may not sound 21st-century trendy, but it has always been among Michigan’s top three industries and a gem of productivity and capital investment. Restoring a large percentage of vacant acres in the city of Detroit to farmland would be a net boost, as well.
• With more than a century of entrepreneurship and profitability, Michigan’s chemical industry today is as high-tech as any in the world. Midland-based Dow Chemical is worldwide in reputation and footprint. Just as biotech is limitless in research potential, burgeoning demand, and applicability, so, too, is our chemical industry the bedrock of the future.
• Defense and homeland security are economic arenas that Michigan, sadly, has ceded to sister states over the last half-century. This must change. It must change because the world is shifting in a predictably dangerous way. The old adage for selecting defense as a growth industry for stock investments is that “those nations in the world who ‘have’ will want to ‘keep’ and those who don’t ‘have’ will want to ‘get.’” Michigan’s aging U.S. senators and representatives have largely been advocates for welfare and social spending programs. They have been critics — and, indeed, hostile at times — to our military and to defense procurement programs. Yet Michigan would be well-advised to renew its support for U.S. military preparedness and to re-visit its more traditional and advanced role as our republic’s arsenal of democracy.
• Michigan’s greatest opportunity for trumping competitors may very well lie with the development, export, and storage of energy. Every successful growth economy in this century will rely on the use of safe, clean, efficient energy. Michigan has a special opportunity to be a leading storage state and exporter of nuclear power, the single best energy bet for satisfying economic and ecological requirements. Today, Michigan has underutilized nuclear facilities generating electric power. Furthermore, Michigan’s Upper Peninsula is geologically endowed with hollowed-out iron mountains from the past centuries that invite safe storage of spent nuclear rods. If Nevada’s Yucca Flats is rejected as a site for recyclable rods, Michigan has an entire industry (and employment base) awaiting its initiatives. Furthermore, few industries hold a candle to nuclear power generation as a high-tech employer and magnet for capital investment.
• Whether you examine the demographics of the United States, Europe, China, or Japan, a basic world trend is the aging of the population. Michigan has catered to the economics of this life-cycle development. Pharmaceuticals, manufactured homes, new medical devices and procedures, physical therapies, and
home- and nursing-care facilities and living centers have all been more impervious to business cycles than our traditional machine and manufacturing industries. For firms and employment to thrive in the geriatric century to come, Michigan must offer a considerably more competitive labor, tax, and regulatory climate than it does today.
• Michigan is well-known for all-season tourism. Michigan boasts easy accessibility, competitive prices, unique facilities, and several comparative advantages that should continue to be emphasized: water-based sports and pastimes, a geographic position favored by densely populated contiguous states, and entry points to Canada. Tourism is a natural growth industry, particularly in a world of expanding international trade with prospering workforces that find greater amounts of leisure time.
• Michigan retains a critical mass of engineering talent that designs, builds, and improves transportation equipment. Beyond the 20th-century automotive industry, Michigan might be at the threshold of devising better, faster, cheaper, and safer personal- and mass-transit facilities. If and when this occurs, the resulting firms will find unimaginably rich markets to tap, especially in North America and Asia.
• One opportunity emerging from a major economic crisis is the chance to confront problems, focus on resolution, and market the experience to others. In this respect, Michigan is in an exceptionally singular and fortuitous situation. Our firms, individuals, and public sectors have had “trials-by-fire” before. Nothing in living memory, however, compares with what confronts us now. Overcoming seemingly intractable budgetary problems leaves a determined entity better able to communicate the lessons learned. Michigan should have a flourishing cadre of educators and consultants prepared to take its “leading indicator” experiences to other firms, households, and communities. Like educating foreign students at the University of Michigan, such turnaround consultants represent a very strong export industry for the state.
• Few states or nations possess Michigan’s wealth of water properties. If other business climate and living conditions are competitive, then our unrivaled rivers and lakes afford limitless comparative advantages by which Michigan can leverage growth over the coming decades. Lakefront real estate, bottled-water firms, and even exports of renewable water resources provide a solid base of long-term prosperity.
It goes without saying that most of these promising growth industries could easily be subverted with restrictive regulations and onerous taxes. Furthermore, Washington’s reckless socialist policies promise to encumber current and prospective generations with debt that cannot be serviced, and inflation that will wipe them out.
So long as citizens of Michigan treat the pain of this decade as a serious learning curve, remembering the difference between a market economy that works and a government-directed economy that does not, we will all be astounded at the speed and depths to which prosperity returns to our state.