Politics & Policy

Michigan’s Single-State Recession

When local politicians attempt to allocate capital, local economies suffer.

The U.S. economy remains in better shape than bearish partisans contend. Broad economic indicators like real GDP, payroll employment, and industrial production are expanding, while the U.S. economy itself is nearing its sixth year of expansion. Yet the same bullish claim cannot be made about Michigan, which continues to lose jobs.

It’s rare for a state with an economy as large as Michigan’s to record job losses in the midst of a national expansion. A lot of ink is spilled in Detroit each month reporting short-term job losses. But some key long-term trends have been overlooked.

 

How bad is Michigan’s labor market? Michigan is the only state to record a contraction in nonfarm payroll employment for five consecutive years. The state’s labor market is headed for its sixth straight annual decline in 2006. This unprecedented contraction is centered in the private manufacturing sector, which peaked in July 1999. Total Michigan nonfarm employment peaked in June 2000. Employment in some of Michigan’s metropolitan statistical areas peaked earlier — including Flint, which peaked in 1997.

 

Say again? You mean Michigan’s job losses didn’t start under President Bush?

 

Trained economists are debating the various factors that have contributed to Michigan’s single-state recession. These include fiscal, regulatory, trade, and monetary policy. By contrast, too many Michigan politicians have resorted to the logical fallacy of poisoning the well in an election year.

 

Fortunately, a few officials are focusing on sound economics. Thanks to the efforts of Oakland County executive L. Brooks Patterson and state Rep. Leon Drolet (R), and despite Democratic Gov. Jennifer Granholm’s opposition, Michigan’s anti-competitive single-business tax has been repealed. That’s good news since employment isn’t the only troubling economic indicator in Michigan. Income growth also has been weak when compared to historical norms.

 

The BEA’s per capita income series dates to 1929. Between 1929 and 1980, Michigan PCPI was 100 percent or more of the U.S. total for all but two years (1932, 1933). It peaked at 122 percent of the U.S. total during WWII. Since 1980, Michigan PCPI has been several percentage points above or below the U.S. rate — until 2005, when it fell to 94.8 percent of the U.S. total. The only time Michigan recorded a weaker number was in 1933, when income was 93 percent of the U.S. total.

 

Michigan’s rank in the national income sweepstakes also has fallen. From a peak of eighth in the U.S. in 1944, Michigan has dropped to twenty-fourth in the nation as of 2005, its second-worst performance. (In 1982, a recession year, Michigan was twenty-fifth in PCPI.)

Before his untimely passing in August, Stephen Dresch advanced a neo-Hayekian critique of the Michigan government’s many failed attempts to pick economic winners with tax dollars. According to Dawson Bell of the Detroit Free Press, Dresch helped set in motion investigations of university economic-development activity “which led to public outcry, criminal convictions and the departure of high-level officials” at Michigan Technological University. Dresch was later elected to the state legislature as a Republican in a heavily-Democratic Upper Peninsula district.

 

It was Hayek who argued that governments lack the knowledge to successfully engage in central planning. And Dresch, a Yale Ph.D, was treated in a boorish manner in Lansing for defending this moral high ground. But there is cause for longer-term optimism. Dresch’s critics lost this year’s policy battle over the single-business tax, while more positive change seems inevitable in the wake of Michigan’s severe employment and income declines.

 

Those serious about solving Michigan’s economic problems should reflect on Dresch’s critiques and let private venture capitalists and entrepreneurs, not politically connected funds and authorities, allocate capital.

 

One lesson to be learned from Michigan’s single-state recession is that economics trumps politics. Another is that markets don’t wait for politicians.

 

Greg Kaza is executive director of the Arkansas Policy Foundation, an economic research group founded in 1995 in Little Rock.

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