Choosing a shrinking Michigan middle class

After the 2010 election I was asked by several publications to write about what I expected to happen to state economic policy. My basic answer was that Governor Snyder campaigned on creating Michigan 3.0 (more knowledge-based), but almost all the legislature was elected on making Michigan 2.0 work again (primarily factories but also farms and tourism). And the choice they made on which vision of Michigan’s future to pursue would have a big impact on the future economic well being and standard of living of Michiganders.

In a post on what 2011 might bring I wrote:

… If 2011 is to be a start of a long term Michigan economic recovery it will be because Governor-elect Snyder gets us on the path to the Michigan 3.0 he promised in his campaign. The challenge is that most of the legislature that got elected with him campaigned on restoring Michigan 2.0. The decision we make on which direction to go is what matters most in 2011. It will go a long ways towards defining our economic future. Move towards Michigan 3.0 and we can once again be one of the most prosperous places on the planet. Stay as Michigan 2.0 and we will continue to lag the nation.

What appears to be the preeminent vision of a successful future Michigan is an economy still anchored by factories, farms and tourism. And a policy agenda to get us back to our past success largely through smaller government and weaker unions. If I had to predict where we will go in 2011 it is towards that vision and agenda.

But if we go in that direction I also predict it won’t work. There are some hard truths that Michiganders needs to confront:

Michigan’s prosperity in the last century was built primarily on good-paying, lower-education attainment jobs. Those jobs are gone forever.

  • The auto industry will never again be the major engine of prosperity in Michigan. It will be substantially smaller, employ far fewer and will pay its workers less with fewer benefits.
  • The decline in autos is part of an irreversible new reality that manufacturing (work done in factories) is no longer a sustainable source of high-paid jobs. Nor is it a source of future job growth. Manufacturing makes up less than 10 percent of the American workforce today and is declining.
  • The other industries that are widely believed to be drivers of the Michigan economy – farming and tourism – are also not a source of lots of good-paying jobs. Less than 2 percent of Michiganians work on a farm and, on average, it is not a high paying industry. And tourism, although a likely source of job growth, is also a low-wage industry.

If the Michigan economy of the future is built on a base of factories, farms and tourism we will be a low-prosperity state. The world has changed fundamentally. We either adjust to the changes or we will continue to get poorer compared to the nation.

The alternative – Michigan 3.0 – is a Michigan concentrated in the knowledge-based sectors of the economy: health care, education, finance and insurance, professional and technical service and information. These are the fast growing and high wage sectors of the American economy today and tomorrow.

To get there requires first and foremost that Michiganders get better educated. Nearly all the states and regions with the highest incomes will be those with the highest proportion of adults with a four-year degree or more. The policy agenda to create Michigan 3.0 is focused on public investments in education and quality of place. With a particular emphasis on higher education and central cities. The first to prepare Michiganders for the economy of the future, the second to retain and attract mobile talent which increasing is choosing big metros anchored by vibrant central cities.

The Michigan turnaround, compared to the nation, will start only when we focus on improving our ranking of thirty fourth in college attainment. That is our fundamental challenge! Low education attainment regions and states will be low prosperity regions and states. We can do better! But it will require us letting go of what made us prosperous in the past and getting on a new path: one that is aligned with new realities.

Unfortunately the prediction that policy makers (Administration and legislature) would choose 2.0 and a policy agenda “to get us back to our past success largely through smaller government and weaker unions” turned out to be true. And by choosing that vision and agenda they have chosen to take us in the direction of a shrinking, rather than expanding, middle class.

The capstone to positioning Michigan to compete in the 2.0 economy came in the recently completed lame duck session. By passing right to work legislation and another round of business tax cuts, Michigan policy makers gave up on recreating Michigan as a place with a broad middle class. Instead choosing to position the state to compete for low wage jobs with states like Indiana (explicitly) and Mississippi.

As Rick Haglund writes in a terrific MLive column entitled “Gov. Snyder, look to Minnesota, not Indiana, for economic inspiration”:

Snyder cited Indiana’s decision earlier this year to become a right-to-work state as playing a major role in his own decision to support the divisive legislation in Michigan. … in most measures of economic health, including per capita income, poverty rates and educational attainment, Indiana is worse off than Michigan. So it seems awfully strange that Snyder, a data geek, would pick Indiana as his economic model. Indiana is the antithesis of what Snyder says he wants for Michigan—better jobs, higher incomes and a more highly educated work force. Minnesota offers a smarter path for achieving those goals. Yet Minnesota, a non-right-to-work state, is rarely mentioned in Lansing’s policy debates. We are left to believe that Snyder and his fellow Republicans who control the Legislature have a different agenda that includes weakened labor unions, more corporate power and lower-wage jobs. (emphasis added)

From 2000 to 2010 as the domestic auto industry collapsed Michigan fell from 18th to 39th in per capita income. This unprecedented decline in the standard of living of Michiganders occurred because the 2.0/factory-based economy is no longer high wage or fast employment growth. Of the eleven states (including Indiana) with lower per capita income than Michigan eight are right to work states, all are small government/low tax states. Except for Utah, they not only have the lowest personal income, but also high poverty rates and, most importantly, low college attainment rates. Choosing to compete with them for 2.0 jobs by replicating their so-called business friendly small government /weak union policies  almost certainly means Michigan will remain one of the nation’s poorest states.

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