by Lou Glazer
April 16, 2009

It’s obvious that the Michigan economy has been dreadful this decade. We’ve suffered an unprecedented eight consecutive years of job losses and are at the bottom of the national rankings in both employment and per capita income growth. During the just-ended national expansion, many referred to it as a single state recession. In reality it’s far better characterized as a single industry recession. Despite all our efforts for decades to diversify, the domestic auto industry is still the engine that drives the Michigan economy. What we are working on at the think tank I lead, Michigan Future, Inc., is what comes next. Our goal: a high prosperity Michigan, where per capita income here is above the national average during both expansions and contractions. It’s a status we enjoyed for most of the last century.

But as we found in our just released progress report on Michigan’s transition to a knowledge-based economy (available at michiganfuture.org), what made Michigan prosperous in the past is no longer a path to prosperity. National data make clear that high prosperity is occurring chiefly in those places where knowledge-based enterprises across many sectors are concentrating. They are concentrating in areas with a high proportion of adults with a bachelor’s degree or more.

In 2000, at the end of the boom years, Michigan still ranked 16th in per capita income. We were 34th in four-year degree attainment. In many ways, 2000 marked the end of an era when you could have high prosperity with low education attainment. No more! In 2007 Michigan ranked 33rd in per capita income — 11 percent below the national average, our lowest since the federal government started keeping statistics in 1929.

In last year’s report we wrote that our best guess was that unless we substantially increased the proportion of college educated adults in Michigan, the state would continue to trend downwards in the per capita income rankings towards the mid-30s. That prediction came true in one year. Unfortunately, with the continuing decline of the domestic auto industry, it’s almost a certainty that Michigan, in the next few years, will fall to the bottom 10 in the nation. This is a stunning collapse of what historically was one of the most prosperous states in the nation.

Our basic conclusion: what most distinguishes successful areas from Michigan is their concentrations of talent, where talent is defined as a combination of knowledge, creativity and entrepreneurship. Quite simply, in a flattening world where work can increasingly be done anyplace by anybody, the places with the greatest concentrations of talent win. States and regions without concentrations of talent will have great difficulty retaining or attracting knowledge-based enterprises, nor are they likely to be the place where new knowledge-based enterprises are created. The knowledge-based economy is now the path to prosperity for Michigan.

There are some hard truths that Michiganians needs to confront:

• Michigan’s prosperity last century was built primarily on good-paying, low-skill jobs. Those job are gone forever.
• The auto industry will never again be the major engine of prosperity in Michigan. If — and it’s a big if — the domestic auto industry survives the current downtown, it will be substantially smaller, employ far fewer and will pay its workers less with fewer benefits.
• The decline in autos is part of an irreversible new reality that manufacturing (work done in factories) is no longer a sustainable source of high-paid jobs. Nor is it a source of future job growth. Manufacturing makes up about 10 percent of the American workforce today and is declining. Its average wage nationally is about $35,000. Michigan factory work in the future will pay around the national average. So whether it’s traditional Michigan industries like autos and furniture or new industries like alternative energy, factory jobs will not be a source of new high-paid jobs for Michiganians.
• The other industries that are widely believed to be drivers of the Michigan economy — farming and tourism — are also not a source of lots of good-paying jobs. Less than two percent of Michiganians work on a farm and, on average, the work is not high paying. And tourism, although a likely source of job growth, is a very low-wage industry.

To be clear, we are not advocating that Michigan abandon these industries. They are and will be important parts of the Michigan economy — especially in rural communities — and as such deserve support. But they are not a path to high prosperity or a broad middle class. If the Michigan economy of the future is built on a base of factories, farms and tourism, we will be a low-prosperity state.

Michigan has lagged in its support of the assets necessary to develop the knowledge-based economy at the needed scale. The assets that matter most: a quality and agile higher education system and big metropolitan areas, anchored by vibrant central cites, where talent want to live and work. These are two areas the state has been disinvesting in this decade. Not smart!

As I talk to audiences across the state about the Michigan economy, the most frequent question, by far, is: “why isn’t Lansing working on this agenda?”

My answer: most Michiganians appear to believe/hope that we can recreate a high prosperity Michigan built on good-paying factory jobs. What they want from policy makers is their old good-paying, low-skilled jobs back. And the organized business community — which predominantly represents the old economy — also is largely focused on preserving the past.

We have come to define ourselves as a place that makes things. For most Michiganians it seems that it is unimaginable that we could be anything else. It’s as if we believe that we can’t make the transition that Massachusetts has from textiles or metro Pittsburgh from steel.

The irony is that what made Michigan prosperous last century is that we were the creators of the new economy of the 20th Century. The ability to leave behind the past and create what’s next is as much a part of our history as is making things. We made the transition once before — and it enriched us — and we can do it again.

The world has changed fundamentally. The choice we face is this: do we do what is required to build the assets needed to compete in a knowledge-based economy or do we accept being a low-prosperity state?

Lou Glazer is president of Michigan Future Inc., an Ann Arbor think tank that focuses on how the state can succeed in a knowledge-based economy.