Michigan at the Millennium by Charles L. Ballard (Editor), Paul N. Courant (Editor), Douglas C. Drake (Editor)

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This book is concerned with the economic policy issues facing Michigan. However, before we can dive into policy discussions, we need a basic understanding of the facts of the economy. What's big? What's little? What's growing? What's shrinking? The purpose of this chapter is to provide some of those basic facts, in five areas:

First, we look at the industrial composition of Michigan's economy and compare it with the economy of the United States as a whole. We also look at the long-term decline of the manufacturing sector. Michigan is involved in manufacturing to a far greater degree than most other states. Thus, the decrease in the relative importance of manufacturing is key to many of Michigan's economic problems.

Second, we look at the trends in employment and unemployment. For the Michigan labor market, the recovery from the 2001 recession has been very slow. Consequently, the Michigan unemployment rate has been above the national rate for several years. However, the gap between Michigan and the rest of the country is smaller than it was in the 1970s and 1980s, when Michigan's unemployment rates were extremely high.

Third, we look at incomes. Per capita income in Michigan has grown substantially over the last half-century, but the rate of growth has been less rapid in Michigan than in the rest of the United States. Until the early 1980s, per capita income in Michigan was consistently above the U.S. average. For most of the last 25 years, however, Michigan incomes have been below the national average. We also look at the trend toward greater income inequality.

Fourth, we look at the economic connections between Michigan and the rest of the United States. Michigan's economy is very closely interconnected with the rest of the country. This makes the people of Michigan much more prosperous than they would be if they were cut off from the other 49 states. However, it also means that Michigan's economic performance depends a great deal on things over which people in Michigan have little control.

Finally, we look at the connections between Michigan and the rest of the world. Largely because of our closeness to Canada, Michigan has greater international connections than most other states have. This means that Michigan has much to gain from a strong world economy, and much to lose from excessive restrictions on international trade.

Which Industries Are Most Important to the Michigan Economy?

We begin our tour of Michigan's economy by looking at the relative sizes of various industries in 2003. For each industry in table 1.1, the second column gives the industry's percentage of the Michigan economy. The third column gives the comparable percentage for the United States as a whole. The industries are shown in order of their importance in Michigan.

The first row of table 1.1 shows that the service sector is the largest sector of the Michigan economy. The service sector encompasses a wide range of activities, including legal, medical, management, and accounting services; computer-systems design; performing arts and museums; food services; and many more. The service sector accounts for about 25.6 percent of Michigan's economy, and about 25.2 percent of the economy of the entire United States. Thus, Michigan is a fairly typical state in terms of the fraction of its economy in services. Michigan is also close to the national average in wholesale and retail trade, real estate, state and local government, construction, transportation, and utilities.

However, the second row of table 1.1 shows that Michigan is not at all typical when it comes to manufacturing. Nearly 21 percent of Michigan's economy is in manufacturing, while less than 13 percent of the U.S. economy is in that sector. Table 1.1 also shows some detail within the manufacturing sector. It is probably no surprise that Michigan's heavy reliance on manufacturing is concentrated in durable-goods manufacturing, and especially in the automobile industry.

Table 1.1 also shows that several sectors are relatively smaller for Michigan than for the United States as a whole. One of these is finance and insurance: none of the nation's leading financial centers is located in Michigan. Another sector where Michigan lags behind the national average is the information industry, which includes publishing, software, motion pictures, broadcasting, and telecommunications. These industries tend to be strongest on the East and West Coasts.

Mining is also relatively small in Michigan. Mining is about 1.2 percent of the national economy, but only about one-sixth of one percent of the economy in Michigan. This is partly due to the relatively small size of the oil industry in Michigan.

Table 1.1 shows that agriculture, forestry, fishing, and hunting make up one-half of one percent of the Michigan economy; this compares with a bit more than one percent of the national economy. Note that these figures do not include food processing and distribution, food retailing, or restaurants and bars, which are included in other sectors. If we were to combine all of these activities into a "food-related" industry, it would be substantially larger. (For example, food-product manufacturing in Michigan is about twice as large as agriculture, and restaurants and bars are more than three times as large as agriculture.) Subject to that clarification, however, it should be clear that agriculture itself is relatively smaller in Michigan than in the rest of the country.

Finally, it is worth noting that the activities of the federal government are small in Michigan relative to the rest of the country. For example, the federal military makes up about one percent of the national economy, but less than one-fifth of one percent of the Michigan economy. This is because most of America's major military installations are in southern and western states.

The Relative Decline of Manufacturing

Table 1.1 has provided a "snapshot" of the Michigan economy in 2003. Figure 1.1 is a "motion picture" of the share of the economy in manufacturing from 1977 to 2003. Throughout this entire period, manufacturing has been a much larger part of Michigan's economy than of the overall U.S. economy. All across the country, however, the trend for manufacturing has been downward. Both for Michigan and for the entire United States, manufacturing's share of the economy was barely more than half as great in 2003 as it had been in 1977.2

Figure 1.1 begins in 1977, because high-quality data are readily available in a convenient form for the years since then. However, other data sources indicate that the relative decline of manufacturing has been going on since the 1950s. Thus, Michigan is very heavily involved in a sector of the economy that has been in relative decline for several decades. That simple fact is the source of many of the challenges facing Michigan's economy.

The automobile industry is at the head of the list of manufacturing industries in Michigan. As with so many manufacturing industries, the auto industry has accounted for a shrinking percentage of output and employment in the United States. However, the auto industry has fared worse in Michigan than in the United States as a whole. This is partly because the auto industry in Michigan is dominated by the Big Three U.S. automakers. In the middle of the twentieth century, the Big Three enjoyed a cozy situation. They did not usually compete vigorously with each other, and they faced very little competition from abroad. As a result, they were able to raise car prices to higher levels than could be sustained in a competitive market. The industry was very profitable, and the United Auto Workers were able to capture a portion of the profits. Eventually, however, companies from Japan and other countries brought increased competition to the American auto market. The foreign-owned companies have expanded their production facilities in the United States, but these facilities have tended to be located in other states, such as Alabama, South Carolina, and Tennessee.

When we include the operations of foreign-owned auto companies, the overall automobile industry in the United States has not done so badly in recent years. However, the U.S. companies have lagged behind their competitors from Japan, Germany, and South Korea. As shown in figure 1.2, General Motors, Ford, and Chrysler have steadily lost market share in the U.S. market for passenger cars.

The wages and benefits of auto-industry workers in Michigan (who are heavily unionized) are substantially higher than the wages and benefits of auto-industry workers in the rest of the United States (who are less likely to be union members). In 2004, Michigan workers in automobile and light-truck manufacturing received annual wages averaging 11.7 percent more than such workers in the rest of the country. In the motor-vehicle-parts sector, Michigan workers received annual wages averaging 28.7 percent more than parts workers elsewhere in the United States. (Fringe benefits are not included in these comparisons. If fringe benefits were included, the differences in compensation between auto-industry workers in Michigan and elsewhere would be even greater.)

Increased competition in the auto industry has been great for consumers, who have benefited from lower prices and a wider variety of products. But competition has cut into the profits of the Big Three, which find themselves with a cost structure that cannot be sustained in the face of competition. From 1984 to 2004, auto-industry employment of nonunion workers in America actually increased by about half a million, but auto-industry employment of union members in America fell by about 300,000.

The Transitions in Agriculture and Manufacturing

In many ways, the long-term decline of manufacturing is similar to the earlier decline of agriculture. In the nineteenth century, the Michigan economy was dominated by agriculture. In those days, the average farm worker could only produce enough food to feed a few people. The only way for the population to feed itself was for a large fraction of the labor force to be employed in agriculture.

However, as a result of unprecedented improvements in agricultural productivity (some of which were developed at Michigan Agricultural College and its successors), each farm worker in America today can produce enough to feed several dozen people. This increase in agricultural productivity was essential for the economic development of the United States, because it allowed us to feed ourselves while freeing resources for pursuits other than agriculture. (Around the world today, the most prosperous countries have the smallest percentages of their labor forces in agriculture. On the other hand, most workers in the poorest countries have to be involved in agriculture, because those countries have low agricultural productivity.)

The improvements in agricultural productivity were crucial for economic growth, but they were not painless. As agricultural productivity increased, fewer and fewer workers were needed in the farming sector. (That is the nature of a productivity increase-it allows us to produce more stuff with fewer people.) Millions of Americans left the farm during the twentieth century. Many found new jobs quickly and achieved a new prosperity. But some farm workers encountered a difficult transition in the search for new occupations.

For better or for worse, the long transition out of agriculture has already run most of its course. But the transition out of manufacturing is still very much under way. The two transitions are very similar, in positive ways and in negative ways. Improvements in agricultural productivity paved the way to a higher standard of living, and improvements in manufacturing productivity have had the same beneficial effect. But just as some farm workers were left stranded by the changes in agriculture, so have some factory workers been left stranded by the changes in manufacturing. Since Michigan's economy is so deeply involved in manufacturing, the transition continues to be more difficult for Michigan than for much of the rest of the country.

One of the biggest challenges facing Michigan is how to handle the ongoing transition out of manufacturing. One possibility is to do nothing, other than to hope for the good old days to return. But that would be very unwise. To see why, we only need to recall the history of the transition out of agriculture. One hundred years ago, it would have been unwise to do nothing while merely hoping that the dominance of agriculture would somehow reestablish itself. Instead of hoping for a return of the past, Michigan embraced the future (which, at that time, was in manufacturing). Similarly, today it would be unwise to do nothing while merely hoping that the dominance of manufacturing will reestablish itself. Instead of hoping for a return of the past, Michigan would be smart to embrace the future. Increasingly, future prosperity lies in a more highly skilled work force, and more advanced technologies.

Perhaps the most important challenge facing Michigan today is a psychological one. It will be difficult for our economy to move ahead unless we are mentally prepared to do so. As long as some Michiganians hold onto the false hope that yesterday is coming back, it will hinder our progress toward tomorrow.

Potential Sources of Future Growth

Of course, there is no need to abandon the manufacturing industries that have played such a large role in Michigan's economy in the past. In fact, one of the bright spots of the Michigan economy in recent years has been the growth of automotive high-technology research. In their chapter in Michigan at the Millennium, Abel Feinstein, George Fulton, and Donald Grimes show that Michigan has become the world center for automotive engineering, research, and design. (On the other hand, information technology and biotechnology in Michigan have lagged somewhat behind the rest of the country.)

Where else might Michigan find opportunities for growth? First of all, Michigan's economy will be greatly strengthened if we can continue to be a center for industrial high technology, while increasing our share of biotechnology and information technology. The "Life Sciences Corridor" has already begun to reap benefits, and it has tremendous potential for the future.

Alternative energy is another area that is almost certain to grow. Michigan will benefit by increasing its role as a center of alternative-energy research, development, and production. It is hard to say for certain what America's energy system will look like in 20 years. Hydrogen, solar power, wind power, and even fusion may be much bigger players than they are now. But it is safe to say that we will rely less heavily on petroleum than we do now.

One type of alternative energy that bears special mention is bio-based fuel. Corn-based ethanol has great potential for Michigan. Michigan's farmers know how to grow corn, and lots of it. If ethanol were to become a dominant source of energy in the future, it would help to breathe new life into Michigan's agricultural sector. In addition, the technologies for processing and distributing biofuels are certain to continue to change. These ongoing changes will require scientists and engineers. Michigan has an opportunity to grab this bull by the horns, in a way that can provide a significant boost to our economy. But it will not happen unless we make it happen. If Michigan's business and government leaders act boldly and decisively, we have a good chance to grab an important share of the future biofuels economy. However, if we don't step up, other states and other countries would be happy to leave us behind.

If we glance again at table 1.1, we can see some other sectors that would make good candidates for future economic growth, and some that probably would not. The service sector has been growing rapidly for decades, both in Michigan and in the rest of the country. Many people have an unfavorable impression of services, because some service-sector jobs pay low wages. (The stereotypical job involves flipping burgers at a fast-food restaurant.) However, we should remember that doctors, lawyers, and other highly paid professionals are also in the service sector. Services are likely to continue to grow. If Michigan can capture an increased share of the more highly skilled service jobs, it will be to our benefit.

(Continues...)

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Excerpted from MICHIGAN'S ECONOMIC FUTURE by CHARLES L. BALLARD Copyright © 2006 by Michigan State University Board of Trustees. Excerpted by permission.
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