Seven steps to reviving Michigan

Reliance on the beleaguered auto industry is out. But what to do? Economic sages weigh in.

By , Correspondent

Every cloud may have a silver lining, but when it comes to Michigan's economy, you'd be forgiven for thinking you'd need an electron microscope to find it. Two of the Big 3 automakers are in Chapter 11 bankruptcy, and many auto-parts manufacturers look likely to join them, with giant Visteon heading the list. Plant closings are announced weekly, and thousands of people are losing their jobs.

"The challenge of the state is clear to everyone: We're a one-horse town with a sick horse," says George Erickcek, senior regional analyst with the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.

General Motors' bankruptcy filing June 1 put an exclamation point on the fact that the state can't keep tying its fortunes to the auto industry. Over the past decade, Michigan's economic output has plummeted - dropping from No. 16 in 1999 to No. 42 in 2007. Unemployment is almost 13 percent and seems destined to climb. Residents' per capita income lags 11.2 percent behind the national average.

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"Not even during the Great Depression did we see that," says Michael LaFaive, a senior economist at the Mackinac Center for Public Policy. State government, for its part, faces a roughly $2 billion shortfall as of October.

But beyond boarding up Detroit, or transplanting the Great Lakes somewhere warm and sunny like Bermuda, what can the state do to shake loose from its economic malaise?

Consensus is hard to come by. Take the state's flat income tax. Some economists, heads of business incubators, and small-business owners say it's one of the few business-friendly things in Michigan; others insist it's time for a progressive tax. Some say yearly cuts to education squander the state's human capital; others say hard choices must be made. Still others suggest that Michigan would be more attractive to business if it became a right-to-work state.

But agreement did emerge on some fronts - mostly about what not to do. For one, no one interviewed believes that green energy will translate into major greenbacks. (The field is not a proven jobs creator, they say, and how do you know you're pouring tax dollars into the right technologies?) For another, most economists wish Lansing, the state capital, would take a more hands-off approach to finding a cure-all for the state's fiscal woes.

The state, moreover, is not without its charms.

"A lot of the pieces are there for Michigan to do very well," says Michael Hicks, director of the Center for Business and Economic Research at Ball State University in Muncie, Ind., who has studied Michigan's tax incentive programs. "It has fantastic universities and not unreasonable high school graduation rates. That's easier to sustain than to build."

It also has a trained manufacturing workforce (although that's shrinking with every moving van headed across state lines). Plus, it's a border state with a good location and a lot of transportation assets. With its hundreds of miles of lakeshore, mineral deposits, and resource-rich Upper Peninsula, the state is hardly a wasteland.

"Used properly, Michigan is a Fort Knox of natural resources," says Mr. LaFaive.

So what dos and don'ts can the state follow to plump up its portfolio? (Hint: It doesn't involve handing out incentives to filmmakers in Hollywood.)

No. 1: Nix tax incentives for individual firms or industries.

"By incentivizing one firm to come to town, what you're doing really is raising costs for everybody who's already here," say Professor Hicks and most other econo-whizzes. "Either you're raising their taxes or you're actually lowering the quality of services you're offering." Cutting taxes for all businesses creates more jobs, they argue.

No. 2: Repeal the Michigan Business Tax. Don't replace it.

The 2008 tax, which replaced the cordially loathed Single Business Tax, hasn't won many friends. Michigan needs to become more attractive to businesses, says LaFaive, and doing away with the complicated MBT is a good start.

No. 3: Quit trying to pick the next big thing.

"It's impossible for governments to pick winners," says Theodore Bolema, a principal at the Anderson Economic Group. Frankly, he and others add, even Wall Street types aren't that good at it, so why should bureaucrats be expected to get out their crystal balls? First it was Hollywood incentives, now alternative energy, he says. Fad industries are like fad diets, in his estimation: They just don't work.

A key to keeping the state's manufacturing force is development of new products. "That has to come from within the firm," says Mr. Erickcek. "Firms know who their customers are and what their abilities are; they're the ones who need to create new products."

No. 4: Invent a new development tool kit.

Faced with multiple business losses in the 1990s (from a GM plant to Checker Cab to Gibson Guitars), Kalamazoo built a community foundation - a cooperative effort of businesses, government, and charitable groups. Ron Kitchens, CEO of Southwest Michigan Works in Kalamazoo, calls its model "societal venture capitalism." "Philanthropy over the last 100 years has been about feeding a man or teaching the man to fish," he says. "This is a third level, where you're taking the best fisherman and supporting him with a good environment to fish, a business plan to hire 60 other fishermen and build a cannery to process the fish, and they'll feed 600 families."

A decade on, Kalamazoo's jobless rate is about four percentage points lower than the state average, and last year, during the height of the recession, 6,000 new jobs were announced. Kalamazoo is one of only three Michigan communities that is growing.

No. 5: Whittle government's budget.

To lower taxes (and you really should, economists say), cut back wherever possible without destroying the quality of life for taxpayers. That takes a lot of political will. "The good news is," says LaFaive, "when their backs are to the wall, people will make the hard choices."

No. 6: Think long-term.

Thinking long-term doesn't mean shovel-ready road projects. "The widening of I-94 can't be our No. 1 priority," says Mr. Kitchens. "You've created jobs for a season or two, and that's it."

But if the state built research centers? "I don't care if it's alternative-energy engineering schools or incubators for medical devices. The same amount of concrete will produce wealth for 40 years, and that wealth will then build the roads and bridges," he says. If the federal stimulus money is used to simply fill holes in the budget, "which is what looks like is going to happen - we're not going to see any long-term benefit."

No. 7: It's time for leadership.

The good news is that "leaders usually emerge in times of crisis," says Hicks. "When's the next election?"

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