Is Michigan a Third World Country?

By 1972 Singapore was in real trouble. Independent for just 13 years, it had failed to merge with Malaysia and, worse yet, the British Army, a major source of income, was going home. If something didn’t change dramatically, and soon, Singapore would cease to exist.

What does this have to do with Michigan? A few weeks ago I went to Detroit for the first time to see the Tigers play. My impression of Detroit was that it was in worse shape than many of the developing countries I had worked in as an executive for several different computer companies and now as an academic. To put it bluntly, Bangkok, Kuala Lumpur, Seoul, Taipei, Shanghai, and other Asian cities were rapidly eclipsing Detroit in terms of wealth and progress. Except for the area around Comerica Park, I saw mostly abandoned buildings, decaying infrastructure, and little if any sign of economic life.

Recent statistics reflect this general malaise. Michigan has the highest unemployment in the nation and Detroit the highest rate of poverty in a metropolitan area. The auto industry, the backbone of Michigan’s economy, seems hopelessly lost in an uncompetitive squeeze between unproductive labor policies promoted by out-of-touch unions on the one side and stale designs and tardy engineering fostered by unimaginative and risk averse executives on the other.

What can we do to reverse this slide and reclaim our position as an economic leader? Governor Granholm has suggested a classic Keynesian idea to invest $10 billion in our infrastructure to create jobs and demand that will jumpstart the economy. But if such infusions are not coupled with higher productivity and output over time, the result will be a one-time economic boost that will soon fall back into prior levels. Knowing this, the Governor plans attract high-tech firms and highly skilled people to “cool” cities. The problem, however, is the difficulty of matching supply and demand. Why do high-tech firms come if there are no well-trained people? And why to well-trained people remain if there are no firms? It’s certainly not because of Michigan’s mild winters, ocean beaches, or mountain skiing.

To solve this problem we need to take a page from the history books of successful developing countries. Last week I presented a paper on how Singapore simultaneously created highly skilled people and attracted high-tech companies. After my presentation, a well-known colleague inquired if I had ever applied my research to Michigan. To be honest, I had never considered it. But as he talked I saw the potential application: globalization and an increasingly complex and technical international economic system is driving the primary location of competition to the state level. Michigan is not competing only with other states. Michigan is competing directly with Singapore and every other developing country. If true, why not act like these other countries?

Singapore’s success in the world economy has come from a mixture of technocratic and bureaucratic professionalism, strong political leadership, and active private sector participation. And by participation I don’t mean simply consultation. Heads of companies, leaders of unions, and leading academics have all taken turns directing the entire public policy process in key economic areas including forming, implementing, monitoring compliance, and ensuring enforcement of policy. The key to making this work is tight coordination between the private sector and government—not government as a regulating force, but as a facilitating one.

In many ways Michigan is at the crossroads that Singapore was in 1972. The cash cow industry that we have depended on for so long is floundering. Our economy is overregulated, our workers underproductive, and our industries less than innovative. What we do next will determine whether we compete successfully in the global economy or whether we continue our slide into underdevelopment.

New Horizontal Thinking

A few months ago I suggested that saving, and even creating, new jobs in Michigan might not be in our best interest if they did not promote our transformation into a third-stage, upgrading economy. I’d like to push this assertion even farther by arguing that to survive, yes survive, we need to become a community of innovators.

How do we do this? It may be helpful to apply insights from the theory of evolution to the question. In a very simple form, organisms that adapt to new circumstances survive. Those that don’t, don’t. But some biologists suggest that in fact evolution is not a linear process. Instead, critical events lead to “punctuated equilibria” in which massive changes create entire new paradigms. Organisms that survive must change rapidly to survive. Then a period of stasis follows in which change happens primarily at the margins until the next critical event.

Economics might also work this way. Relatively long periods of stasis as one kind of economy gives way to another relatively rapidly. Interestingly, the period of stasis between critical events and the time it takes to move to a new paradigm have both shortened dramatically over time, putting increased pressure on firms, individuals, states, and countries to change ever more quickly.

We in Michigan are now facing just such a transformation. For almost an entire century we’ve benefited from a vertical agglomeration in a few industries, especially autos and agriculture. But then over a few short decades, the international economy changed. Oh, we knew changes were happening, but we didn’t really appreciate what they meant to us. Changes in consumer tastes, market access, technological capabilities, and foreign competitive capacity, among other things, have critically altered our system of wealth creation. So, what do we do next?

The answer is to strategically abandon our old economy and create a new one. Note the word strategic. We need to take our old, vertically integrated of manufacturing and turn it into a new, horizontal of innovation and capacity that can be applied to numerous industries and at numerous points in the production process.

In this new economy, value and wealth are created in the design and research phase. Agglomerations and linkages are based on talents, skills, knowledge, and capacity, most of it scientific. Centers of innovation emerge that produce knowledge applicable to numerous industries simultaneously. Industries are then linked horizontally: new generation automobile engines lead to alternative energy, which leads to advanced agriculture, which leads to pharmaceuticals, which leads to medical technologies, etc.

The same change can also be applied to humans. Global changes demand that unions remake themselves to be pertinent in this new economy. For example, in Singapore organized labor leads in training and skills development, recognizing that increased pay MUST be tied to productivity gains, not collective bargaining.

These changes undertaken in response to a shifting global economy will attract similar capacities, skills, knowledge, and capital. We must again become a capital, but one that produces ideas rather than cars.

An open letter to the governor

February 9, 2007

Dear Governor Granholm,

I listened with great interest to your state of the State address. I was pleased to hear you talk of investment, as indeed, investment is the ONLY variable correlated with economic growth and development over time. I was also pleased to hear you talk of encouraging high-tech, high-innovation business creation, since the type of investment also matters greatly. In short, I believe you have identified the key areas for success.

Yet despite moving in the right direction, I wonder if you really grasp the seriousness of our current situation and the height of the obstacles facing us. Historically, former economic powerhouses that fall from the top rarely, if ever, regain their former position. Two things prevent a recovery. First, the government assumes the entire burden of change. And second, (ironically) the government doesn’t do enough to change entrenched institutions and vested interests that would encourage the private sector to invest.

My experience in the United States as well as Thailand, Singapore, Malaysia, Indonesia, the Philippines, Korea, Taiwan, and Japan is that governments have a key role to play in economic development and growth. This role, however, is not to do everything themselves, but rather to release the entrepreneurial spirits of the private sector to invest productively. Some may lament our current economic vulnerability, but new research suggests that such vulnerability spawns creative responses that may in fact lead to long-term progress. Whether we release and channel appropriately our entrepreneurial spirits depends on policy and institutional choices we make now. I would suggest the following ideas.

Prioritize investment from a broad range of sources and in a broad range of activities. Your investment priorities, primarily in human capital, are too narrow and too state centric and ignore the importance of private-sector participation.

Refocus your economic plan on business creation rather than job creation. Focusing on jobs will lead you to make short-term decisions that may be detrimental to long-term growth. Focusing on jobs does not take into consideration externalities. In many cases the five person high-tech firm will be far better for our economic health in the long term than a 1,500 person transmission plant. I realize the latter is far better politically, but it is increasingly not better economically.

Emphasize and support entrepreneurialism and innovation. I applaud your willingness to "go anywhere and do anything" to bring businesses to Michigan. But the reality is that only a very small number of firms actually move locations, for any reason. The number is less than 6% per year. So, although this effort will be important, it is far more vital that we encourage entrepreneurship and innovation within our communities. We must create the new firms, just like Henry Ford did, that will power our economy into the future. As new firms form and naturally coalesce into industrial agglomerations, other firms will move into the state to join them. Medical equipment, insurance, financial services, pharmaceuticals, transportation R&D, and alternative energies are only a few of the industries that have begun to grow and might thrive in Michigan. The MEDC, universities, economic development agencies, smart zones, etc., should all be focused on generating innovation both in new firms and through expansion of existing firms.

Focusing on entrepreneurship also addresses a problem not touched upon in your address. Although we certainly need to improve the level of education for Michigan students, we are currently losing a large portion of our college educated 20-29 year olds every year. In my senior seminar I teach at James Madison College and MSU, every student for the past 3 years is leaving the state for employment reasons. The answer here is not to create cooler cities (like jobs, cool cities are an outcome, not a cause), but to create companies, and even better, help students create companies. What a great opportunity we have in our university system to not only provide an education, but to help in the application of the education to bettering our communities and society.

Next, quit playing the unfair trade card. While some of the accusations may be true, there is little we can do from a state perspective and, far more importantly, it matters very little for the industries of the new knowledge economy. This is also true for the criticism the political right often makes about labor, regulation, and taxation. All of these variables are far more important in the old economy than in the new and should be de-emphasized.

Now, that said, taxes are a direct incentive for industry. Fewer business taxes mean that more money can be invested. But it doesn’t guarantee that it will be. From my perspective, you should move as many of the taxes as possible to final consumption. Ideas for “service” taxes and “beer and soft drink” taxes for example, are an excellent way to generate income from consumption. Although we need consumption for our economic health, less consumption is not always bad, especially if the surplus is saved and invested. The key is to provide concomitant incentives to invest surplus. I would counsel you to lower business taxes while increasing consumer taxes and simultaneously providing incentives to invest surplus.

Finally, to return to our entrepreneurial roots will require significant reform of existing institutions. I mentioned above that regulation, labor, and taxes should be de-emphasized. But the institutions they have created should be dramatically reformed. Incentives that will help K-12 and university education cooperate with labor and business to improve skills, create knowledge, and then transfer and disseminate that knowledge will add to our competitive advantage.

Governor, I realize that the task ahead of our great state is a daunting one. But greatness never emerges in times of ease. I have been encouraged by the new direction you are taking and I hope you’ll make decisions that are more economically and socially correct than politically correct. But with challenge comes opportunity. As best exemplified by one of my favorite politicians, Harry Truman, now is the time to speak and do the right thing.

Sincerely,

Bryan K. Ritchie

Co-Director
Michigan Center for Innovation and Economic Prosperity
Associate Professor, International Relations
James Madison College 302 Case Hall
Michigan State University
East Lansing, MI 48824
(517) 353-8614
(517) 974-1353
ritchieb@msu.edu
www.msu.edu/~ritchieb

Michigan must nurture innovators and ideas

A shorter version of the following appeared in the Lansing State Journal on Sunday, March 18, 2007.


Comerica’s decision to move its headquarters from Detroit to Dallas is one more piece of bad news for the state. But what does it mean? Are we to surmise that the tax environment remains too onerous for business, despite the elimination of the Single Business Tax at the end of 2007? Although Texas ranks 6th, and Michigan 27th, on the Tax Foundation’s State Business Tax Climate Index for 2007, Comerica’s CEO Ralph Babb, Jr. did not cite taxes as a major reason for the move. And he’s probably right, at least about the fact that taxes did not prompt the company to leave Michigan. Research we have been conducting in the Michigan Center for Innovation & Economic Prosperity suggests that the tax environment is not the key deterrent to business activity in Michigan by state residents; there are enough other obstacles to overcome! But our research does suggest that companies considering moves to Michigan do consider the tax environment an obstacle. One could say the following about Comerica’s decision: the company left Michigan for business reasons, but Texas’ low tax environment made it an attractive location relative to the company’s other choices. Comerica’s other major markets are Arizona (ranked one spot behind Michigan at 28th), California (ranked 45th), and Florida (ranked 5th). Texas may have won because it provided a low tax environment close to the majority of the company’s customer base.

But saying that taxes didn’t matter to Comerica’s decision to leave Michigan doesn’t let the state off the hook! Comerica is a financial services company, and thrives when it operates in an environment where people are starting up new businesses and existing companies are growing. Comerica can find funds anywhere (notice, it will keep its branch facilities open in Michigan), but its company operations need to be near its commercial and investment customers. And they, in turn, need to be in a location conducive to business startup and expansion. Michigan’s bureaucratic and regulatory structure right now is not designed promote entrepreneurial activity. And that needs to change.

The state’s economic focus continues to be jobs, jobs, jobs. I understand the motivation behind that focus, but it needs to shift. We need to focus on creating an environment conducive to innovation and to encouraging companies to serve customers around the world. The focus on jobs comes from the old notion that capitalism is about the accumulation of capital and the employment of labor. We assumed for decades that economic growth in Michigan was built on wedding the capital of companies like GM and Ford to our labor. Instant prosperity. Except that it wasn’t their capital and our labor that were the real keys to that prosperity. It was their innovation and the world’s demand. Innovation is about people having new ideas about how to use things. Increased demand is also about people having new ideas about how to use things. In short, the economy is not first and foremost about capital and labor: it is about people, ideas, and things. Thomas Edison, Henry Ford, Ransom Olds, and the Kellogg brothers understood that. We somehow forgot it along the way, settling instead for jobs, any jobs.

How do we move as a state from a conception of economic development built upon the old economy to one that helps people find new ideas and new ways to use things? We need to streamline the process of business startup and expansion: reducing the confusion of paperwork and office-jumping would help; a real one-stop shop would be even better. We need to stop trying to pick “winners” (companies that will provide lots of jobs in Michigan) and provide an incentive structure that encourage Michigan entrepreneurs to devote their activity to serving customers around the globe. We need to facilitate the interaction of entrepreneurs and innovators in our universities with entrepreneurs and innovators in the private sector. Perhaps most of all, we need not only to upgrade our children’s education, but connect them more often to activities of private sector businesses and non-profit organizations so that they can become people who have new ideas about how to use things.

Profs, students study Michigan’s economic future in research seminar

The link provides access to an article in MSU's News Bulletin about the "Michigan Futures in the Global Economy" undergraduate applied public policy research seminar that Professors Emmett and Ritchie run. More information about the seminar can be found at the seminar's web site.