Conventional wisdom is the places with the lowest costs (so-called business friendly) have the best economies. Think again!
If that were true New York City–particularly Manhattan–and San Francisco should be collapsing. Instead they are surging. We explored Manhattan’s success in a previous post. Lets turn out attention to San Francisco, most likely the second most expensive place in the country. High real estate prices, high state and local taxes and high wages (strong unions too). The recipe we are told over and over again that leads to economic stagnation, if not, ruin.
But when you get off planet ideology, what you see in San Francisco is the kind of investment that every state and region in the country wants. This is detailed in a recent New York Times report entitled “Twitter Helps Revive a Seedy San Francisco Neighborhood”. And its not just Twitter that have chosen San Francisco as home. The article details the decision to locate there by tech start ups like Spotify, Square and Yammer, along with tech giants like Google, Amazon, Microsoft and Yahoo.
These companies could locate any place in the U.S.–actually anywhere on the planet. So why choose high cost San Francisco? As the Times reports: “The emphasis on San Francisco signifies how Silicon Valley, an area extending south from just below San Francisco to San Jose, Calif., no longer has a grip on technology companies. About 18 months ago, tech companies started moving or expanding here to be closer to their employees.” (Emphasis added.)
For profit companies are increasingly locating in high cost places because they get something for their money. In this case talent/human capital. The asset that Governor Snyder has told us matters most to economic success in the 21st Century. As he wrote in his special message to the legislature on talent: “In the 20th century, the most valuable assets to job creators were financial and material capital. In a changing global economy, that is no longer the case. Today, talent has surpassed other resources as the driver of economic growth.” (Emphasis added.)
Michigan has chosen to ignore talent as the main driver of economic growth. Instead choosing to focus on lower business costs. Big mistake! As I wrote in my Manhattan post:
“Turns out in the real world all those so-called liabilities are assets that lead to prosperity. A big city that works, a government that provides quality basic services and amenities, terrific alternatives to driving, density and welcoming to all. Combine those features with an entrepreneurial culture and you have a place where talent – from across the planet – wants to live and work. And where talent concentrates you get growth and prosperity, not decline and falling income and employment. To get back on the path to prosperity Michigan needs far more –not less–of what Manhattan (and San Francisco) has.”
In a previous post I explored the nearly two decade bipartisan addiction Michigan policy makers have to cutting taxes. The latest evidence of the continuation of the addiction is the near unanimous vote by both houses of the Michigan legislature to impose the sales tax on the difference between the sale price and trade in price of motor vehicles (mainly cars). As usual the “justification” for the tax cut is that it will create more jobs. As usual that claim was made without any real evidence.
Where there is evidence is that the tax cut will reduce spending. According to a Senate Fiscal Agency analysis “the revenue loss under the bills would grow roughly $23.3 million per year, eventually reaching $233.4 million in FY 2022-23 and lowering School Aid Fund revenue by $152.8 million, General Fund revenue by $43.9 million, Comprehensive Transportation Fund revenue by $8.7 million, and constitutional revenue sharing to cities, villages, and townships by $28.1 million.”
As I wrote in my previous post, this tax cut, “just like those of the last two decades, would have the same effect: diminish the state’s ability to make public investments in education, infrastructure and quality of place. The things that matters most to growing the economy. Saying you are in favor of these public investments while proposing large tax cuts with no replacement revenue means you are not really in favor of increased public investments in education, infrastructure and quality of place.”
Once again what is most discouraging is the lack of debate about the consequence of the spending cuts. There is a strong case to be made that public investments, not tax cuts, are the policy levers that matter most to the more and better jobs that Governor Snyder has set as the goal for the state.
Michigan has been trying to tax cut its way back to prosperity for nearly two decades. It hasn’t worked so far and almost certainly won’t in the future. At the very least its time for a robust debate about whether to move to a public investment led economic growth strategy.
Michigan political leaders, on a bi-partisan basis, have made manufacturing the lynchpin of their plans for restoring Michigan to prosperity.
No question manufacturing––high paid factory jobs––was the key ingredient to Michigan being one of the most prosperous places on the planet for most of the Twentieth Century. The question is “can it be the driver of Michigan prosperity in the 21st Century?” The evidence is compelling that the answer is no!
(To be clear manufacturing means work done in factories. Workers in management as well as pre- and post-production occupations in such important Michigan industries as motor vehicles, office furniture, and chemicals are no longer considered part of the manufacturing industry. They are now accounted for in the knowledge-based industries, primarily in management of companies and professional and technical services.)
University of Michigan economist Don Grimes and I are working on our latest report on the Michigan economy. This time looking at the changes in the American economy over the past two decades. From 1990 – 2011.
In 1990 Michigan had the second highest concentration of per capita income coming from manufacturing employment earnings (wages and benefits). 20.6% compared to 12.8% for the U.S. The state’s per capita income was close to the national average: $31,552 compared to $33,309 (in $2011).
Fast forward to 2011. Michigan is still one of the nation’s leaders in manufacturing, ranking third in the concentration of per capita income coming from manufacturing employment earnings. But now it accounts for only 11.7% of the state’s per capita income compared to 7.3% nationally. And the state’s per capita income has fallen from $1,757 below the national average to $5,296 below. Manufacturing employment earnings per capita accounting for $2,264 of the $3,539 under performance compared to the nation.
So being over concentrated in manufacturing was not the path to prosperity for Michigan the past two decades. In fact, it was the opposite. Michigan was second to last in per capita income growth from 1990 – 2011. (Only Nevada was worse.)
The new reality is that manufacturing is no longer a source of lots of high paid jobs. Nor is it a source of future job growth. Manufacturing accounted for nine percent of the American workforce in 2011. It accounted for 32 percent of the nation’s jobs in 1953 and 14 percent in 1998. Manufacturing’s share of American jobs has been declining for a long-time. In Michigan, manufacturing employment fell from 852,000 in 1990 to 534,000 in 2011. Factory jobs are now 12 percent of the Michigan workforce. At the same time, the collapse of the domestic auto industry brought an end to high-paid unionized assembly jobs that had been the back bone of Michigan’s 20th Century middle class.
Conventional wisdom seems to be that Michigan is entering another golden age of manufacturing. The collapse of the last decade a thing of the past. Don’t believe it! From 2011 through August 2013––latest available data––Michigan has added 31,000 factory jobs. Still 52,000 below 2007––the year before the start of the Great Recession. Good news, but not the foundation of a Michigan characterized by more and better jobs.
Michigan’s slow growth in knowledge-based industries –– the growing and high wage part of the economy –– is the main reason the state has fallen to 36th in per capita income. The path to 21st Century prosperity is clearly knowledge-based (including pre and post production work in industries like autos and office furniture.) The lesson we most need to learn is: what made us prosperous in the past, won’t in the future.
For decades there has been widespread concern on a bi-partisan basis about how lousy American kids perform on international math and science tests. Those test results have been the basis for much of the critique of American public k-12 education.
There is real concern that the lack of math and science competency is a real threat to the future of the American economy.
Now comes evidence as reported by the New York Times that American kids can do well on these tests. Turns out if Massachusetts were a country their kids would be global leaders, not laggards, on international math and science tests. The Times reports on the 2011–most recent–TIMSS tests Massachusetts 8th graders ranked second in the world in science and eight in math.
The TIMSS results are consistent with numerous other rankings with Massachusetts at or near the top of all states in k-12 student outcomes. This, of course, raises the question “how did they do it?”
The Times reports:
“Ed reform” was the Massachusetts Education Reform Act of 1993, passed by a Democratic Legislature and signed by a Republican governor, William F. Weld. The three core components were more money (mostly to the urban schools), ambitious academic standards and a high-stakes test that students had to pass before collecting their high school diplomas. All students were expected to learn algebra before high school. “It was a combination of carrots and sticks,” said David P. Driscoll, deputy education commissioner at the time. Also noteworthy was what the reforms did not include. Parents were not offered vouchers for private schools. The state did not close poorly performing schools, eliminate tenure for teachers or add merit pay. The reforms did allow for some charter schools, but not many. Then the state, by and large, stayed the course.
What jumps out if this is best practice policy–what leads to the student achievement everyone in Michigan claims they want–is how, by and large, Michigan policy makers have done the exact opposite, particularly the last three years.
- More money for k-12 education there, less here
- Set high academic standards in 1993 and stay the course there. Here it is set higher standards later–still not as high as in Massachusetts–and then backslide. With efforts to reduce high school graduation requirements and not to implement the common core.
- Not offer vouchers for private schools, close poorly performing schools, eliminate tenure and add merit pay, and only allow a few charter schools there. The exact opposite of what has either been done here or is on the to do list of the many state policy makers and the business community.
State policy makers have been great at lecturing local schools districts–and it is primarily districts and not charter schools that are lectured–on the need to follow so-called best practices. Going so far as to tie some funding to implementing best practices. Seems like it is time for us to adopt best practice state policy. Policies that are getting the student achievement outcomes we all want. Massachusetts has developed the framework for best practice state k-12 policies. Its time we reverse course and follow their lead.
In my Detroit Free Press op ed comparing the Michigan economy during Governor Blanchard’s first term to the Michigan economy so far under Governor Snyder I wrote mainly about metrics other than the unemployment rate. As I have written previously we don’t think it is a great barometer of economic well being. But it is the metric that gets the most attention.
So here is the comparison so far of the two recoveries:
- The unemployment rate the month–December 1982––before Governor Blanchard took office was 16.8%.
- The unemployment rate in August of his third year in office–where we are at in Governor Snyder’s term–was 10.1%, an improvement of 6.7 percentage points
- The unemployment the month at the end of Governor Blanchard’s first term–December 1986–was 8.5%, an improvement of 8.3 percentage points from when he took office
- The unemployment rate the month––December 2010––before Governor Snyder took office was 11.3%
- The unemployment rate in August of his third year in office–latest available–-is 9.0%. An improvement of 2.3 percentage points.
- The unemployment rate this cycle peaked in August 2009 at 14.2%.
- During the last 16 months of the Granholm Administration the unemployment rate declined 2.9 percentage points. 0.6 percentage points more than the first 32 months of the Snyder Administration.
(All the data above comes from the state’s Labor Market Information data explorer.)
As I wrote in my Free Press op ed, I don’t believe that the policies of the Blanchard Administration were the main reason for the larger drop in unemployment then than now. The main reason was a far more robust national recovery and that a recovering auto industry employed far more workers then than now largely because of automation.
That said this has been a relatively anemic recovery whether you use as the base year the start of the Snyder Administration or the low point of the Great Recession which occurred when Governor Granholm was in office.
Don Grimes and I are putting the finishing touches on our new report. The topic is the transformation of the American economy over two decades: from 1990 to 2011. Taking that long term view reveals patterns clearly. And the differences that Minnesota and Michigan have traveled is both stark and revealing of what we have to do to return to prosperity.
Minnesota has out performed Michigan in employment, personal income and private sector employment earnings per capita over the two decades. Its not close
- From 1990-2011 employment grew in Minnesota by 29 percent compared to 7 percent in Michigan.
- Minnesota today has a far lower unemployment rate: 5.1 percent compared to 9.0 percent in the latest monthly statistics.
- More importantly, also a far higher employment to population ratio. In 2011 79 percent of Minnesotans between the ages of 25-64 year old were working compared to 67 percent in Michigan.
- In 1990 per capita income in Minnesota and Michigan were close. $33,223 in Minnesota compared to $31,552 in Michigan. No more! Minnesota’s per capita income corrected for inflation grew by $11,337 compared to $4,712 in Michigan.
- Real private sector employment earnings per capita grew over those two decades in Minnesota by $7,400 accounting for 65 percent of the state’s per capita income growth. Compared to real private sector employment earnings per capita growth in Michigan of $1,000, 21 percent of the state’s per capita income growth.
Beyond the severe downturn in the domestic auto industry there are some clear lessons we can learn from states like Minnesota on how to return to prosperity. The question for Michigan is “how do we become, once again, one of America’s most prosperous states––a place with a broad middle class?”
The answer lies in growing private sector employment earnings. Its the only sustainable driver of long term improvement in economic well being. The metric reflects both the number of folks working in the private sector (more jobs) and their compensation––both wages and benefits (better jobs).
From 1990 – 2011 the basic trend is the decline of a factory-based economy. Manufacturing nationally becoming a smaller and smaller proportion of the American workforce and experiencing steep declines in real employment earnings per capita. While knowledge-based services grows––both in employment and real employment earnings.
That basic story clearly holds true in Michigan and Minnesota the past two decades. Manufacturing employment earnings held up much better in Minnesota than the nation. But it still is the only sector that saw a real employment earnings decline.
Clearly the driver of Minnesota’s out performance compared to Michigan (and the country) in real private sector employment earnings per capita came from knowledge-based services (health care and social assistance; information; finance and insurance; professional services; and management of companies). Knowledge-based services account for 72 percent of Minnesota’s real private sector employment earnings growth and nearly half (46 percent) the state’s per capita income growth from 1990-2011.
The data are clear: the absolute and relative increase in employment earnings per capita in knowledge-based services is a combination of strong job growth and those sectors are now the high wage sectors of the American economy. Knowledge-based services now are the center of mass middle class American jobs.
The lesson Michigan needs to learn is also clear: the places that are doing best today and almost certainly will do the best in the future are those states and regions that are concentrated in knowledge-based services, not factories or any other sectors of the economy (except those benefiting from high energy prices.)
Manufacturing is experiencing a long term structural decline that almost certainly is irreversible. The sector no longer is the source of mass middle class jobs––both because wages and benefits no longer carry the premium they did decades ago compared to the rest of the economy and the sector employs a far smaller proportion of the American economy.
As work done in factories has declined what has grown are services. Both in absolute and relative terms. Particularly knowledge-based services. It is almost certain that––predominantly because of globalization and technology––that the path back to a prosperous Michigan depends on growth in knowledge-based services. Those sectors are now, and are likely to be even more so in the future, the core of realizing the more and better jobs Governor Snyder has identified as the state’s economic goal.
As we explored previously Michigan is now a low wage state. What a turnaround! From Henry Ford’s $5 a day wage in 1914 Michigan was the place where if you were willing to work hard you could earning a living and realize the American Dream. No more.
Two new studies provide more evidence on the decline in wages. Both worth reading. The first comes from the Michigan League for Public Policy. It documents the decline in Michigan wages over the past three decades. The headline: Michigan has seen the second lowest change in median hourly wage between 1982 and 2012. (Only Alaska ranks lower.) Corrected for inflation, over those three decades, Michigan’s average hourly wage declined by seven percent and its national ranking fell from 4th to 24th.
Consistent with our work –– and that of many others –– the report finds that those Michiganders with the highest wages are those with the highest education attainment. The average hourly wage for those with a high school degree is $13.09 for those with a four year degree or more its almost double at $25.85.
As we explored previously, the importance of education attainment to higher wages is the topic of a terrific new report from the Economic Policy Institute. Entitled A Well-Educated Workforce Is Key to State Prosperity. The major finding: “Overwhelmingly, high-wage states are states with a well-educated workforce. There is a clear and strong correlation between the educational attainment of a state’s workforce and median wages in the state.”
Michigan is 34th in college attainment. Its the major reason why we are now a low wage state. And the path to becoming a high wage state once again is primarily increasing education attainment.
The EPI study also looks at the correlation between state taxes and median wages and finds none. They find: “The figure shows no clear relationship between state taxes (as a share of state personal income) and median wages. Higher-tax states appear to have slightly higher median wages, but that correlation is not significant.”
From the evidence EPI’s policy recommendations –– similar to Michigan Future’s –– are:
States can build a strong foundation for economic success and shared prosperity by investing in education. Providing expanded access to high quality education will not only expand economic opportunity for residents, but also likely do more to strengthen the overall state economy than anything else a state government can do. Cutting taxes to capture private investment from other states is a race-to-the-bottom state economic development strategy that undermines the ability to invest in education.
Michigan Future Schools (MFS), an initiative of Michigan Future Inc., a non-partisan, economy-focused think tank based in Ann Arbor, announced that four new Detroit high schools it has invested in opened this fall, joining three others previously launched with investments from Michigan Future Schools.
The four new schools are:
- Detroit Leadership Academy High School (YMCA)
- W-A-Y Academy West
- University Yes Academy High School
The three original schools are:
- Dr. Benjamin Carson School of Science & Medicine
- Jalen Rose Leadership Academy
- Detroit Edison Public School Academy
Each school opens with a freshmen class and adds a grade per year. The four new schools welcomed their first freshman class this fall. Dr. Benjamin Carson School of Science & Medicine and Jalen Rose Leadership Academy go through the 11th grade and Detroit Edison Public School Academy Early College of Excellence will have its first graduating class this year.
In addition to these existing schools, MFS is working to restart Schools for the Future and open the Delta Leadership Academy in 2014. This will bring the MFS network to nine schools, which at capacity should serve around 4,500 Detroit high school students. All the schools were selected based on quality, not governance. The winners were chosen through a competitive process open to traditional public, public charter, and private schools. The network will ultimately consist of one DPS school and eight charter schools.
The MFS philosophy is to let the schools design their own approach to teaching and learning, while requiring them to: (1) be open to all Detroit students, (2) enroll no more than 500 students, (3) commit to high student outcomes: 85% of seniors graduate, 85% of high school graduates go on to college, and 85% of college students earn degrees (4) hire college transition and college success counselors to help students go to and stay in college and (5) where applicable, have union agreements that allow for open hiring, no “bumping,” and no work rules that interfere with innovative teaching and learning.
These investments in new college prep high schools are made possible by the support of the W.K. Kellogg Foundation, the Kresge Foundation, the McGregor Fund, the Skillman Foundation and the Michigan Education Excellence Foundation which combined have contributed more than $15 million to the initiative.
Not good news for Michigan. The unemployment rate is going up again. Up to 9.0% in August from a post recession low of 8.4% in both April and May 2013.
This turn for the worse, comes with the huge Snyder business tax cuts in effect. You know the ones that were supposed to drive Michigan’s economic comeback from the depths of the Great Recession. Think again!
Turns out the business tax cuts did get us higher ratings in the Tax Foundation’s 2013 Business Tax Climate Index. Where Michigan is now ranked 7th in business taxes. Which the Snyder Administration (and many others) celebrates as a major accomplishment. But as we have explored previously doing well in business climate ratings has little to do with what really matters: whether Michiganders have more and better jobs.
Minnesota on the other hand has an unemployment rate that is falling. 5.1% in August, their post Great Recession low. The number of unemployed in Minnesota is down ten percent over the past year compared to less than two percent in Michigan. Minnesota’s Tax Foundation business tax ranking is 44th. So much for low business taxes driving more and better jobs!
I’m not a big fan of the unemployment rate as a measure of economic well being. Particularly the monthly unemployment rate. But it is what everyone else uses as the basic measure of how well a state’s economy is performing. In this case the unemployment rate comparison is aligned with all the economic measures that matter more. The employment to population ratio, per capita income, private sector employment earning per capita, poverty rate, on and on and on. On each Minnesota has the best performance in the Great Lakes. Far better than Michigan. And with Michigan the gap is growing larger. (You can find a Minnesota economy overview here.)
So in two huge business tax cuts we have given away more than $2 billion a year in state and local taxes. For what? Certainly not a lot of new jobs. And because of those tax cuts (and many others the past 15 years or so) we have been forced to slash the public investments that matter to long term economic prosperity: education, infrastructure and quality of place.
Minnesota has done the opposite. Starting with higher taxes and just raising them again to protect their ability to make important public investments.
I don’t know whether Michigan’s unemployment rate over the next several months is going to go up or down. But it is almost certain that for the foreseeable future Minnesotans are going to enjoy better economic outcomes (both employment and income) than Michiganders. Because Minnesota has both the concentration of knowledge based employers and college educated adults that are the main drivers of more and better jobs.
And to the degree that state, regional and local policy matters, the evidence strongly suggests that their public investment driven policies work far better than our tax cut driven policies in building the assets that matter most.
In our 2006 A New Agenda for a New Michigan we wrote: “For many Michiganians, vibrant central cities are part of the past. No longer relevant or just something you visit in unique places like Manhattan, Toronto or Chicago. Think again! They are an important ingredient to future economic success. The pattern across the country is clear: high prosperity metropolitan areas have central cities with a concentration of knowledge workers. Michigan employers who are recruiting young talent from across the country understand this. Those we talked with for this project told us that the absence of a vibrant central city impedes their ability to attract talent.”
Today its even clearer that central cities are a major engine of economic growth. Unfortunately that reality is not reflected in Michigan’s policy priorities. Its another major area where we are pursuing 20th Century policy in a world that has changed fundamentally. As former State Treasurer Robert Kleine demonstrated in a terrific Detroit Free Press op ed the state has not made central cities a priority since Governor Milliken four decades ago. Big mistake.
Knowledge-based private sector employers increasingly get it. Think Quicken Loans here. The New York Times recently featured Amazon’s new headquarters in a formerly not great Seattle neighborhood. The Times writes:
The setting is significant. In casting its lot in the center of a congested, bustling city, Amazon has rejected the old model of the suburban company campus that is typical of Silicon Valley and the technology ring road around Boston. The old way is perhaps most vividly exemplified by Microsoft. Its offices, and most of its 42,000 local employees, are about 18 miles from downtown Seattle, in the suburb of Redmond. …
Other technology companies are moving into urban spaces. Twitter and Dropbox, the social networking and online storage services, have made San Francisco home, while Tumblr and Etsy, blogging and shopping sites, are in New York. Google has huge urban spaces from Paris to Pittsburgh. The appeal of cities to potential employees is part of the reason for the shift. An urban setting, with access to good restaurants, nightclubs and cultural attractions, has become as important a recruiting tool as salary or benefits for many companies. (Emphasis added.)
… Mr. Schoettler, Amazon’s real estate director, said environmental considerations were an important factor in the company’s decision to remain in Seattle, along with the type of employee that an urban location attracts. “The energy and excitement from employees being in an urban environment — I hear it daily,” said Mr. Schoettler, who walks to work. “A lot of people don’t even have a car. They want that urban experience right there.”
In a talent driven economy –– where talent increasingly wants to live and work in a vibrant, walkable central city neighborhood –– companies are moving to where the talent is. And its not just established companies like Amazon and Quicken its also venture capital backed start ups. In a terrific series on where venture capital is investing Richard Florida for Atlantic Cities is documenting this move of technology start ups from what he calls suburban nerdistans to central cities.
In an overview article for the series entitled The Connection Between Venture Capital and Diverse, Dense Communities Florida writes: “When all is said and done, venture capital and start-up activity today is associated with denser, more talent-driven, more diverse and innovative metros, reflecting the increasingly spiky nature of America’s economic landscape.” Be sure to check out his articles on San Fransisco –– which now is garnering more venture fund investment than Silicon Valley (amazing!) and the big east coast metros (New York, Boston, and believe it or not Washington DC) where the central city is becoming the big player in venture capital investments. You read that right DC is no longer just a government town (even more amazing).
As Florida writes: Long gone are the days when high-tech startups were overwhelmingly located in sprawling suburban nerdistans. The center of gravity for venture capital and startup activity in the Bay Area today appears to have shifted to central cities. “For all its power, Silicon Valley has a great weakness,” wrote legendary Silicon Valley investor Paul Graham, its “soul-crushing suburban sprawl.” But, he added, “a competitor that managed to avoid sprawl would have real leverage.” That “competitor” has turned out to be nearby San Francisco. … This is of course in line with what urban theory has long held: That it is dense, diverse and dynamic cities filed with flexible and reconfigurable old buildings that are the real font of innovation.
Whether its established companies like Amazon or technology based start ups this is the kind of investment that is central to every state’s economic development strategy. These are the investments everyone wants. Turns out to get them you need central cities that are attractive places for mobile talent to live and work. Not exactly the current Michigan economic policy priority. The sooner we learn this new reality the better off we will be.