Whither the Michigan Economy?- Part 2

by Eric Stokan 20. April 2010 04:10

It is no surprise that Michigan has lost manufacturing jobs in the last 10 years, but we have been losing those jobs 10 years before that, and 10 years before that, and 10 years before that, and roughly 10 years before that.  While many, according to Dr. Charles Ballard, Professor of Economics at Michigan State University, point at the current gubernatorial administration for the loss of manufacturing jobs, he notes that the trend has existed since 1963.

Speaking at Wayne State University’s Economics’ Department on April 16, 2010, Dr. Charles Ballard presented an overview of Michigan’s economy. He highlighted some of the central concerns which have been noted elsewhere in the blog including the loss of our manufacturing sector, the heavily subsidized Michigan film industry, the role of entrepreneurship (see also our preliminary findings from our business incubator research), as well as the growing differential in income between those who have and have-not, our underinvestment in education (k-Ph.D.) for a 20th century economy, and what industries will position Michigan for growth.

While many analogies are fitting for Michigan’s economy, Professor Ballard honed in on three.  Being so heavily invested in the auto industry was like a poker game where one goes “all in.” This is certainly a good thing when you are holding all aces, as Michigan was for a time, but the strategy is less successful when you pull a three of hearts, then a nine of clubs, and then a jack.  Describing our politicians, he took a line from the “Wizard of Oz” when he said that we need them to have a “heart, a brain, and courage.”  The absence of any of these characteristics is a prescription for danger.  We need a heart, a brain, and courage because we are sailing into a “gail force wind.”  Fortunately, for Michiganders, the wind has to die down eventually.  He quipped that he guarantees we will not lose another 200,000 auto sector jobs, because we only have a little more than 100,000 left. 

Professor Ballard echoed many of the same sentiments in the FOCIS forum on Contemporary Issues in Society “Whither the Michigan Economy?  He says that we are experiencing a structural transformation in the economy.  Ten straight years of job loss (864,400 total workers: 18.3%) between 2000 and 2009 is not a business cycle blip.  While per-capita income in Michigan has risen almost consistently since 1929, despite a declining manufacturing industry dating back to 1963, it is only since about 2001 that per-capita income in Michigan has flat lined (For recently released Local Area Personal Income, 2007 see BEA).  The problem, according to Professor Ballard, is not a decrease in overall per-capita income, but where the decrease is taking place in the distribution.  Comparing 1976/1978 per-capita income to 2006/2008, Michigan has increased, but most of the increase has taken place at the top.  The bottom quarter has either stayed flat or decreased while the top one one-hundredth of a percent has seen astronomical gains.  Professor Ballard noted that this peak group represents about 15,000 people in the US.  With the exception of athletes, talk show hosts, and movie stars, this pool largely represents CEOs of financial service industries and those on Wall Street.  In fact, Dr. Ballard noted that Michigan’s school aid and general budget is less than the bonuses paid out to Goldman Sachs staffers (Interestingly his comments came just as news broke that the SEC would be charging Goldman Sachs with fraud).    

Turning to  the root causes of Michigan’s economic problems,  Dr. Ballard disavowed the argument that decline was simply the fault of the current Governor, Jennifer Granholm, as Michigan has seen decline in manufacturing dating back to 1963 through a series of Republican governors.  Instead, he noted that much of Michigan’s woes stem from underinvestment in Michigan’s educational system.  For one, he noted that a 170 day school year will not keep us competitive in a 20th century economy, Given that most students don’t work the farms during the summer anymore.  Research indicates that students from different socio-economic statuses tend to perform similarly on achievement tests until summer time. Dr. Ballard notes that it is the summer when students from less wealthy families begin to decline on scholastic achievement tests.  Looking at education generally, Dr. Ballard drew a comparison between Michigan and Massachusetts, noting that the two states were very similar in per capita income from 1950 to the 1970s, but beginning in the 80s they diverged and Massachusetts is now roughly 40% above Michigan in per-capita income today.  This, Dr. Ballard posits is largely due to the educational system in Massachusetts.  He did note that many of its colleges and universities are privately funded; however, Michigan needs to invest more to keep pace.

Certainly, one of the major problems is the loss in general revenue that the state has experienced.  He noted that from 2000 to 2009 general fund revenue has fallen between 39 and 46 percent (depending on how you account for inflation). And it is due to drop by as much as an additional 8%. State revenues have declined well below the constitutional limit (down by approximately $9 billion). One key concern is the tax structure.  According to the Census of Governments, Michigan has always been fairly close to the national average in taxes.  Nonetheless, Michigan has serious problems that are politically difficult to address.  One issue is that Michigan exempts most of one’s pension income from taxes, even if the retired individuals/couples are receiving more than 100,000 per year.  Similarly, instead of having taxes as a percentage of the cost of beer and wine, they are capped at fee per barrel of beer and per gallon of wine.  These rates were chosen in the 1960’s.  To fix this problem, he advocated establishing a graduated income tax instead of a flat-rate tax, separate from the federal estate tax, reduce tax preference for the retired, eliminate the Michigan Business Tax (since many taxes will just be rolled into the cost of the good and thus will be an additional sales tax), reduce Michigan’s large number of small tax expenditures, and if Michigan is going to have taxes on goods, then it should on services as well.  The Federal government should enforce taxes on sales over the internet and mail order. 

Michigan’s citizens need to change some basic values, he said.  First, Michigan needs to adopt a culture of lifelong learning.  In the 21st century this cultural value is a must to compete in a global landscape.  Second, Michigan must focus on innovation and entrepreneurship. Third, Michigan’s and Washington’s politicians need to put an end to the hostile partisanship.  Finally, Michigander’s must keep a positive attitude.  To this end, he led the group of faculty, students, and others in Michigan’s State Song “Michigan, My Michigan.”

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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.