Explaining Michigan’s lost decade

Don Grimes and I have written in each of our annual progress reports on the Michigan economy that Michigan’s economic collapse the past decade could best be explained as a single industry recession, rather than a single state recession. That our so-called lost decade is a continuation of long-term trends, rather than a departure.

For decades Michigan has done well when the domestic auto industry has done well and done badly when the domestic auto industry has slumped. That basic fact is the best explanation of what happened to Michigan this past decade. Our dominant and very high wage industry collapsed and so did the state’s economy.

In a just released must read report on the recent history of state taxing and spending the Senate Fiscal Agency tackles the topic of the importance of the domestic auto industry to overall state performance. Proving again that a picture is better than a thousands words take a look at their summary chart at the end of this post.

It covers three decades and three administrations (Blanchard, Engler and Granholm). No matter who was Governor or who controlled the houses of the Michigan legislature personal income in Michigan tracked the fortunes of the domestic auto industry. And believe me the same pattern holds true for Michigan employment and for previous decades as well. Industry mix – particularly one as dominant and high paid as the auto industry – trumps state policy and politics.

The story that has become conventional wisdom, in large part because it has been repeated over and over again, that Michigan’s lost decade was a single state recession caused by irresponsible state tax and spending policies is nonsense. As the SFA report makes clear it is not supported in any way shape or form by the data. We will cover this in more detail in future posts, but here are the highlights from the SFA report:

• From January 2000 through April 2011 government (local, state and federal) employment across the country was up 7.7%. In Michigan it was down 7.7%. For our lost decade public sector employment grew nationally while it shrank in Michigan.

• State taxes as percentage of personal income in 2011 (prior to the recently enacted tax cuts) are more than $7 billion lower than they were in 2000.

• State spending from FY 2002 (the last year of the Engler Administration) through FY 2011 (the budget inherited by the Snyder Administration) went from $26.09 billion to $26.05 billion. Virtually unchanged over nine years. Over that period personal income in Michigan was up 22.4% and the Detroit CPI was up 18.55.

The evidence is clear: Our lost decade occurred overwhelmingly because we are still very dependent on the domestic auto industry, not because of misguided state tax and spending policies.

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