The Decline of Michigan's Economy

Recently, someone asked me if I could comment on Dick DeVos' television ads. I guess this person forgot that I have been in London, and thus have not had a chance to see them yet. The part she was puzzled about concerned Michigan's economy and some of Dick's claims to fix it. Though I could not offer my analysis on what his claims were, I could offer some insight on how our economy found itself in this situation, what the government can do it fix it, as well as provide my opinion on who is the better gubernatorial candidate. My analysis on Michigan's economy does not offer any partisan views, but is strictly entrenched in fundamental Austrian-school economic theory. I understand that there might be some conflicting views from Keynesian economists, but I have decided for brevity's sake that I will not include them. I will save that debate for another blog. However, my opinion on who I feel is a better governor is just that - my opinion. Having said that, here is my analysis...

Frankly, Michigan is in bad shape. It is the only state in the Union that is in a recession. Our GDP is pitiful, and our state continues to hemorrhage jobs at an alarming rate. The answer to these woes falls into what we did not do in the past, and what we are not doing now. Long ago, Michigan's economy was primarily manufacturing, with a smattering of agriculture, while in the UP, natural resources like iron. Most of the natural resources that are cheap enough for extraction have already been extracted due to WWII. Agriculture is a very minor product of our economy. The one part that kept us afloat in the past was manufacturing. The reason why manufacturing was such a staple of our economy was, not only because the assembly line was developed here and we had relatively cheap labor, but because our climate was temperate enough to allow for production throughout the year - something that the south, despite their cheap labor supply, could not provide without air conditioning.

Thus, Michigan's economy depended more and more on manufacturing from companies like GM, Ford, and Chrysler. Back at this time, they had pretty much 70% of the market share, so their profits were fat. They were able to compensate their employees very well - the great benefits and wage that you see them fighting for today. However, over the course of time, there R&D departments got stagnant. They did not embrace technology that would help them limit their fixed costs, and the amount of quality cars developed started to decline. This is when the Japanese companies came in. Toyota, Nissan, and alike offered great quality cars that were desirable, as well as being a fraction of the cost of their American rivals. American companies started to lose money, and what do companies do when they lose money? They cut costs. However, during their period of prosperity, instead off offering bonuses and add-on benefits that were not permanent, they cemented their labor costs (pension, wages, etc.) into a permanent "Contract" with their workers (UAW). This kept GM, Ford, and Chrysler from cutting their cost of production. The result: restructuring, massive lay-offs, etc. But even that did not solve the problem. They did not focus on innovation and creating products that would sell. Chrysler, which was bought by Daimler Benz, targeted this and is now somewhat successful. Ford and GM, however, did not and are still hurting. Their market share is down, and they are not generating the kind of revenue to sustain their operations. Thus, jobs continue to be lost. The decline of Detroit is a result of the decline of the auto industry (as well as some racial tensions of the late 70's).

Now, this only touches on the route to our State's financial situation. The reason why our State rode with GM and Ford down into the dumps is because of government's lack of initiative to diversify the economy away from manufacturing. We just have not provided the incentives for people to start businesses, whether they are small start-ups or million dollar companies. We have a single business tax - something DeVos wants to remove - which heavily penalizes small businesses from growing. If I can remember clearly, we are the only state to have it. We have continued to cut funding on our Universities, which is a grave mistake. UofM is one of the best engineering schools in the nation, and should be funded to churn out engineers that can create new technologies to be created by Michigan businesses. Michigan State is a great bio-chem and bio-med school, with the 2nd most patents (including one of the most effective cancer drugs on the market) only to NYU. It should be funded to create more drugs and spin off companies to undertake their production.

The largest misconception, especially given by liberals, is that if you cut taxes or provide tax breaks to businesses, you have to raise taxes in other areas to make up for that lost revenue. That simply is false, and is demonstrated with the record federal tax revenues received this year after the Bush tax cuts. The more money one gets to keep, the more incentive there is for him/her/it to work more to make more money, and thus a smaller percentage on a much larger income results to as much, if not more, taxes then before under the higher tax rates. The same principal works with businesses as well. The more you cut their taxes, the more incentive they have to make even more money. The extra money that a company makes can then be used to hire more workers, invest in new businesses, and so forth. The results are two fold. First, higher profits taxed at a lower percentage result in equal, if not higher tax revenue from companies. Secondly, unemployment decreases, and personal income increases. As personal income increase, people spend more money, which is great for a state like Michigan that only has a sales tax. Thus, it is clear how tax cuts and incentives can benefit the economy. Of course, you cannot cut taxes totally, because there are still basic services that you need, but the key is to find a percentage that grows both jobs and business, as well as funds the state. This is what the State of Michigan desperately needs to do.

Furthermore, Michigan needs to give incentives for manufacturing to stay in Michigan. This is the one area that I know for sure Granholm has failed. A while back, Toyota was looking to come into Michigan, buy out some of the old GM plants that were not in use, and revamp them for manufacturing today's cars. The problem is, there is a ton of red-tape for foreign car companies to come to Michigan to start operations. They have to be unionized by the UAW, and undergo all this other crap - the result of which was a 5 year timeframe. Toyota asked Granholm if they could forego the rhetoric and unionization in order to invest billions of dollars into Michigan. She declined it, and the jobs that could have gone here, resulted in going to Georgia and other states (all with open arms and open wallets) down south - armed with cheap labor and cheap air conditioning. I feel this was a mistake.

Globalization is often touted as the cause of Michigan's decline. This is false. The people who benefit from globalization are you, me, and even the poor. The cheaper one can produce a good, the cheaper it can be sold at a profit. Even the working poor – the very people that Granholm is trying to embrace with her usual Democrat rhetoric – are better off because they can afford more goods and services due to globalization. Also, businesses benefit from it greatly, which helps the state as well. Even if a company, incorporated in Michigan, produces its goods in China (subsequently hiring Chinese employees) to sell them in the US for profit; the profits are not taxed in China, but Michigan. Indeed, it bolsters the revenue of the state, and allows it to continue all their wonderful programs. Look at Apple for instance. The components of an iPod are produced in Taiwan for 20 cents, shipped over to China to be assembled for 2 dollars, and then shipped to the US to be sold for 300 dollars. Who gets that money??? Apple does, which then gives it via taxes to the state and federal government. I can assure you that they would not have gotten as much if it was done entirely in the US.

And don’t worry about China always being the country of low wages. With more investment and job growth, wages will start to naturally increase, and eventually reach our wages. By then, companies will have found other ways to produce the goods and services that we want even cheaper, and the whole process goes around again. If the larger profits are your concern, then I ask you the question: What kind of company do you want in your state, one that makes no profit like GM or Ford, or one that makes billions of dollars of profit like Apple? Even from a liberal prospective, a healthy company pays out more in taxes to the state, and well as creating more jobs, than a weak company. This tax revenue can then be used to invest in education for jobless people, as well as students, thus making them more competitive in the job market and enhancing their wages. I rest my case!

As far as who I support for governor, I support De Vos. The fact that he is a businessman – having sustained and grown Alticor – is a needed thing for our state government. I feel that government should be more like a business instead of a bureaucracy. If a business squanders money, it goes bankrupt. If a government squanders money, it just continues at our expense. That is why I like the idea of a businessman coming in and cleaning things up. Making programs responsible for their results, and if they prove to be a waste of money, than cut them out. I also think he has a better vision of what Michigan needs to do in the future to make it competitive, including providing incentives for businesses. I feel Granholm is just pandering to her base in Detroit with money and social programs, instead of truly trying to empower them and build them up so they do not have to depend on government. After all, that is what Government is for: protecting and helping people, not supporting them. If Michigan can create jobs and grow its economy, then I think its people can take care of themselves quite well.