|The Dark Ages|
Jan 14, 2010/The Economist
As America hopes for recovery, Michigan needs whole-scale reinvention. It may be 15 years before the state returns to prosperity.
A new hope?
THE sign for the American Beauty Electric Iron building in Detroit has only five letters left, spaced far apart in a gap-toothed grin. The building itself is empty except for a few trees. Across the street, however, a building buzzes. TechTown, a project of Detroit’s Wayne State University, offers classes, offices and other support for entrepreneurs of all kinds. Jarrett Erwin wants to expand his painting business. Robert Brooks, a former engineer at Ford, wants to start a consultancy for non-profits. In a state whose economy has shattered, TechTown is one of many attempts to start anew. It is a daunting task.
Michigan was once a Canaan, rich with jobs in the car industry. “Detroit is the largest city of opportunity in the world,” declared a city directory in the mid-1920s. In 2010 Michigan is America’s most vivid portrait of despair, with an unemployment rate of 14.7%, almost five points above the national average. The state is not short of ideas. From Detroit’s grey streets to the lovely bays along the Great Lakes, it teems with plans for future prosperity. However, recovery is only a distant goal. The interim will be full of hope and disappointment.
The national recession began in December 2007 and has probably now ended. Michigan, its fate yoked to that of carmakers, must observe its own dismal calendar. The state has lost jobs in every year since the middle of 2000 (see chart), the longest stretch since at least the 1930s according to economists at the University of Michigan. Michigan’s loan delinquencies have outpaced America’s for more than eight years. In 2001 Michigan ranked 20th for personal income per capita. By 2008 it ranked 37th. Even given this history, 2009 was particularly painful. The bankruptcies of Chrysler and General Motors were devastating. State economists reckon that car manufacturing shed 30% of its jobs in 2009. The state’s total employment level is more than one-fifth smaller than it was in June 2000.
There are some hopeful signs from the Big Three. Ford posted profits of almost $1 billion in the third quarter, aided by the “cash-for-clunkers” programme. Chrysler and GM emerged from bankruptcy freed of burdensome debt and cost structures. But the old glory days will not return soon. According to economists at the University of Michigan, the market share of the Big Three will continue to drop even as car sales recover. By 2011, the economists expect car manufacturing to employ about one-quarter of the workers it did in 2000. The loss is staggering.
Plans for the future
Faced with such a void, Michigan is searching for ways to fill it. For years, the state has sought to attract new businesses and cling to existing ones. More recently, a lovely tourism campaign has advertised Michigan’s beaches and forests, a bright antidote to relentless gloomy news stories.
But the loftiest ideas centre on transforming the rusty state into a “new economy” powerhouse. Jennifer Granholm, Michigan’s governor, wants to use grants and tax incentives to make Michigan a hub for green jobs and advanced-battery technology in particular. She has had some success. When the Recovery Act awarded grants for advanced-battery development last summer, Michigan won $1.35 billion, more than any other state. Such efforts, the state hopes, will build on existing engineering expertise and help Michigan’s manufacturing base begin a new era.
Universities, too, are preparing to play a bigger role in the state’s economy. The top-notch University of Michigan, a mere 40-minute drive from Detroit, is filled with cheerful cafés and big brains. The three-year-old University Research Corridor is a collaboration between Michigan’s three main universities. “I describe it as the university becoming much more porous”, explains Mary Sue Coleman, president of the University of Michigan. She hopes to improve ties with businesses and ease the commercialisation of academic research. Just as energetic is the attempt to nurture a new generation of entrepreneurs. (For 100 years, Michigan coasted on the success of that hyperactive entrepreneur, Henry Ford.) The University of Michigan has a two-year-old Centre for Entrepreneurship, providing classes and other support to students with business ideas. In Detroit, Wayne State University’s TechTown is a research park as well as an incubator for new companies. TechTown hopes to help create 1,200 start-ups by 2012.
However it is impossible to guess whether such efforts will pull Michigan out of the mire. Advanced-battery firms may move their headquarters to New York and their production to Asia. A spin-off from a university may employ only a few, highly skilled workers. Some entrepreneurs may succeed. Many will fail. Timothy Bartik of the Upjohn Institute, a regional think-tank, recommends more staid ways of improving Michigan’s labour market, such as investing in universal pre-kindergarten, or boosting business by cutting the marginal tax rate for firms that expand.
Regardless, the reinvented Michigan remains only an idea. The University of Michigan expects employment to begin rising in the fourth quarter of 2011. But Michigan’s employment level is not predicted to return to its 2000 peak until 2025 at the earliest.
The painful present
In the meantime, the state must grapple with an uncomfortable reality: its government and workforce are framed around an economy that no longer exists. Revenue for Michigan’s general fund has fallen by a devastating 43% since 2000, adjusted for inflation. Prisons and Medicaid gobble almost half of the general fund, leaving little money to spend elsewhere. Despite all the talk of universities’ importance, funding for higher education has dropped by 22% since 2002. Michigan will be even more pinched next year, as money from the Recovery Act runs out. Mitchell Bean, director of the non-partisan House Fiscal Agency, argues that Michigan’s revenue system is in desperate need of reform. But even if the state extends its sales tax to services as well as goods, it will need to reconsider what it can afford to provide. “What should state government really do?”, Mr Bean asks.
As politicians mull such questions in the capital, workers across the state are confronting their own dilemmas. Thousands are without jobs and many are tethered to Michigan, unable to sell their homes. The worst affected are those who had high-wage, low-skill jobs. “The bottom has fallen out for the unskilled manufacturing worker,” says Andy Levin, the state’s director of workforce development.
Mr Levin hopes that new skills will give workers a path forward. Michigan’s retraining programme, No Worker Left Behind (NWLB), is the country’s most ambitious, scraping together federal and state money to send workers to school for up to two years. Between August 2007, when NWLB began, and November 2009 the scheme enrolled 108,884 workers in training. Even more are waiting to attend school. Over 16,000 workers were on its waiting list at the end of November. But better skills do not guarantee work. According to the most recent data 48% of those trained in NWLB had found a job; 52% had not. There are over 50 résumés for each job listed in Michigan’s data base.
Given this climate many young educated workers are fleeing the state. About 40% of Michigan-born graduates leave each year, according to a two-year-old survey. It is not through lack of local pride. On any Saturday during football season, graduates from the University of Michigan cram into Duffy’s bar to cheer on their beloved Wolverines. Duffy’s, though, is in Chicago.