A FREE PRESS CONVERSATION Is Michigan aiming for the
WRONG TARGET?
Michigan Future’s Lou Glazer says improving state’s business climate may not yield dividends some expect
Gov. Rick Snyder predicts that his administration’s efforts will soon secure Michigan’s place among the nation’s top 10 states for business climate. But in a pair of essays getting wide circulation in the business community, Lou Glazer, the cofounder and president of the nonpartisan think tank Michigan Future, warns that achieving that distinction may not translate into high standards of living for most Michiganders.
Last week, in a conversation with Deputy Editorial Page Editor Brian Dickerson, Glazer explained why policymakers should set their sights on a different top-10 list, and what Michigan must do to make the grade.
QUESTION: You’ve argued that Gov. Snyder and others who want to make Michigan a top-10 state are focusing on the wrong top-10 list. What list is that?
ANSWER: If you look at the public statements of a lot of our policymakers, including the governor, they’re looking at the top-10 states in business cost rankings. Particularly, they cite the well-respected Tax Foundation rankings of business climate.
Q: What do those rankings measure?
A: It’s the overall tax burden, but with a pretty strong focus on the business tax burden. The point that we’ve been trying to make is that Michigan residents can’t pay their bills or pay for college or retirement based on the business climate. What matters to them is: Do they have a job? And how much do they earn?
So what I tried to do is see if the business climate rankings correlate at all with whether a state is prosperous or not.
Q: You’re talking about per capita income? A: Daniel Grimes at the University of Michigan and I think something called private sector employment earnings is the more important metric. It’s how much citizens of this state are earning in both wages and benefits from private sector employers, because that’s really what’s driving the economy.
Q: And when we look at the top-10 states for business climate and the top-10 states for private sector earnings, we’re looking at two different lists?
A: There is basically no crossover.
We compared the states that are in the Tax Foundation’s top 10 and bottom 10 for business climate. The 10 states that ranked best in the business climate had an average ranking of 21.8 in per capita income, while the 10 worst business climate states had an average ranking of 15.7.
So the states that had the worst rankings had, on average, higher per capita income than the states with the best business climate rankings. And when you see that, you have to ask: Why are you focusing on that top-10 list if it doesn’t translate into a higher standard of living for the resi- dents of your state?
Q: But obviously somebody is providing good jobs in the high per capita income states. Why do employers stay in those states if they offer such a poor climate in which to do business?
A: At the moment, there are two paths to get on the high per capita income list:
The first path, for a very small number of states including North Dakota, Alaska and Wyoming, is that you have a lot of oil and natural gas in an era of high energy prices.
But if you take natural resources earnings off the list, all the other high-income states have a high proportion of adults with four-year degrees. That is now the single biggest predictor of high income for both individuals and states.
The second core characteristic of high per capita income states is that they’re overconcentrated in knowledge sectors of the economy.
Q: And those are?
A: Health care, education finances and insurance, professional and business services, which is corporate headquarters, law firms, architecture firms, marketing firms and accounting firms. Also, the category called information, which is old and new media, software and telecommunications.
Q: Are employers like people who tell the computer dating service they’re looking for someone who’s sexy and wealthy, but end up marrying somebody who’s kind and reliable?
A: Economic developers who court businesses tell me the first question companies ask is always about the availability of skilled workers. So when they’re doing business location decisions, they start with talent. But when they lobby, they lobby for low business costs.
Q: So if you can’t answer the talent question, you may not get to the business cost question?
A: Well, the hope is that you get a highly educated workforce and low business costs. The problem is that it’s almost impossible to find states that provide you with both.
Q: Are there policy initiatives that improve a state’s ranking on lists that measure business costs but actually depress the state’s overall standard of living?
A: If you look at that list of the top-10 states in private sector employment earnings per capita — Massachusetts, Connecticut, New York, New Jersey, Minnesota, New Hampshire, Illinois, Delaware, Colorado and California — there are no right-to-work states. Except for New Hampshire and Colorado, maybe, nobody would classify those states as low-tax states, either.
Q: So whence the conventional wisdom that low taxes and weak unions yield prosperous state economies?
A: The analogy I use is the preseason college football rankings. This past season, the experts didn’t even rank Notre Dame among the top-25 teams, and they ranked Southern Cal No. 1. But when the season ended, it was exactly the opposite: Notre Dame was No. 1 and Southern Cal was no longer in the rankings at all.
The pre-season college football polls are really the equivalent of the Tax Foundation list, or any of these other business climate rankings where experts guess at what matters.
Ultimately what football fans care about is not what some expert thought was going to happen, but what actually happened. And when you look at what actually happened, there’s nobody in their right mind who wouldn’t rather have Minnesota’s or Massachusetts’ economy than one of these states that does well in the Tax Foundation’s business climate rankings.
Q: But that doesn’t mean Michigan should raise business taxes to the same level as Massachusetts’, does it? A: No, no, no. The lesson is that state policy needs to be focused on both doing a better job of preparing talent — that’s education and training — and retaining talent, because talent is mobile.
What Michigan did through the Engler, Granholm and Snyder administrations was that it made a big bet on tax cuts in particular as a way to drive the economy. The two things that got slaughtered in the budget process were higher education, which is about preparing talent, and support for local government, which means we haven’t been creating the quality of life needed to retain and attract talent.
If you end up raising taxes and using that money to do the things you need to do to prepare talent and retain it, that’s probably worth a bigger long-term economic payoff than tax cuts. But simply raising taxes isn’t going to help you unless it leads to higher concentrations of talent.
Q: Gov. Snyder says that he intends to focus on talent in the year ahead. How will we be able to tell if he’s serious? A: The asset that Michigan has today that is the most important in an increasingly knowledge-driven economy is this terrific public higher education system that we built in the 20th Century, when it didn’t really matter. But now that it does matter, we’ve been disinvesting in it in the past decade, including the first two years of Gov. Snyder’s term.
So I think the first thing would be implementing something like the Business Leaders for Michigan plan for reinvesting in higher education. They’re calling for a billion-dollar increase over a decade — $100 million each year over what’s being spent — which would basically just get us back where we were in 2000.
The second thing would be investments in revitalizing Michigan cities — particularly Detroit, but also Lansing, Grand Rapids and others, because mobile talent, and particularly young mobile talent, is increasingly choosing to live in vibrant neighborhoods in big central cities, like Chicago, after college.
There is some indication that this administration is now defining talent not as adults with a four-year degree or more — which is what correlates with economic prosperity — but is defining it as people with skills and jobs where there are immediate vacancies. I know the governor’s been saying that machinists and truck drivers would be on that list, and there’s this notion that you want schools to begin to produce people for those specific jobs.
Q: Isn’t driving a truck better than not having a job?
A: Sure it is. But that’s a completely different definition of talent that, from our prospective, would not be good either for the economy or for students.
ERIC MILLIKIN/DETROIT FREE PRESS
Lou Glazer
What’s next for state is on the table
OK, so what’s next for Michigan’s economy, now that Lansing’s lame-duck lawmakers have made us a right-to-work state and begun phasing out personal property taxes on business, while the wise owls in Washington, D.C., walked the nation to the fiscal cliff’s edge before backing away?
We’ll talk about that Tuesday at a Detroit Economic Club luncheon, where I will moderate a discussion involving:
• David Baker, whose Baker Strategy Group of Ann Arbor has spearheaded a new survey of 3,000 professionals and willshare results on their outlook for the state’s economy and business climate.
• Michael Finney, president and CEO of the Michigan Economic Development Corp.
• Charles Ballard, professor of economics at Michigan State University.
Lest anyone think there is any certainty about Michigan’s future direction, chew for a minute on a few mixed messages from Baker’s e-mail survey conducted from Nov. 12 to Dec. 7 among members of 70 business groups, including chambers of commerce from Detroit and Dear-born to Grand Rapids, Grayling, Lansing and Lake Superior.
Take the issue of right-to-work laws, which forbid any mandatory union membership or payment of union dues as a condition of employment.
Respondents to the survey indicated they perceive right-to-work states as more “business-friendly” and more likely to be “on the right track” than non-RTW states. The survey was completed a few days before Michigan’s right-to-work votes and Gov. Rick Snyder’s signature on the new law.
But the perceptions tilted the other way when people were asked about “great states for young professionals,” with RTW states ranking lower on that question.
The mixed message appears to lend support to the argument made last week by Lou Glazer, president of the Michigan Future think tank, that Michigan should worry less about “business climate” rankings that tend to go to states with lower taxes and wages and instead strive to emulate states that are Top 10 in private-sector income and education level, such as Massachusetts and Colorado.
Michigan ranks 36th in private sector income per capita and 34th in educational attainment, Glazer said.
Baker’s firm has conducted surveys of Michigan manufacturers for the past four years, and those have shown strong gains in sentiment about the state’s business climate and the manufacturing firms’ own futures.
This year, with encouragement from Detroit Regional Chamber President Sandy Baruah, Baker decided to broaden the survey to include not only private businesses (65% of the sample) but also people from nonprofits (15%) and public-sector employers (25%).
Initial analysis of the results, he said, shows that Michigan, while on the rebound, is not yet considered a great place to start or grow a business.
Its top imperative is to attract and retain talent, while major challenges include the costs of health care and employee benefits.
There are still tickets available for Tuesday’s noon DEC luncheon at MotorCity Casino Hotel in Detroit.
Tickets — $45 for DEC members, $55 for guests and $75 for nonmembers — can be purchased online at www .econclub.org .
• CONTACT TOM WALSH: 313-223-4430 OR TWALSH@FREEPRESS.COM
TOM WALSH PREVIEWS A DETROIT ECONOMIC CLUB DISCUSSION HE’LL LEAD
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