Desperate for Diversification

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Desperate for Diversification

A brief history of Michigan’s economic development strategies

January 16, 2010
Michigan was in big trouble as the decade of the 1980s dawned. Detroit’s automakers, collectively known then as the muscular Big Three, were beginning to see their dominance challenged by imports from upstart Japanese automakers. They were unprepared, and so was their home state.
Many iconic Michigan companies besides the automakers were struggling. Hudson’s downtown Detroit department store, once one of the world’s largest, would soon close. So would historic manufacturing operations of the Stroh Brewery Co. and Vernor’s Ginger Ale. Decline and decay of Michigan’s urban centers accelerated. Workers lost their jobs in record numbers and looked to sun-belt states for new ones.
State government had been engaged in some form of proactive economic development since the 1940s. But the growing threat to the state’s economy, accelerated by the worst economic downturn since the Great Depression, drove then-Gov. William Milliken to expand business attraction efforts to an unprecedented level. Job training, tax incentives for companies investing in the state, aid to cities and a variety of technical economic development tools were launched by Milliken. It marked the beginning of the modern age of Michigan’s economic development strategy.
“The original intent was instant gratification,” said Keith Molin, who served stints as director of the Labor and Commerce departments under Milliken. “It was a learning experience. The 1970s and 1980s were the initial period in the transition to a global economy.”

Molin said state government’s economic development goal then was remarkably similar to its objective today: diversifying the state’s auto-driven economy while trying to hang on to as many high-paying auto manufacturing jobs as possible.
“Most of the issues we were wrestling with in the late 1970s and early 1980s are still in existence today,” said Molin, who prefers full-time work to retirement and returned to state government last year as executive director of the Michigan State Housing Development Authority.
Results mixed
The results of the state’s decades of diversification efforts have been decidedly mixed. Debate still rages over whether the billions of dollars spent over the years in tax breaks, job training and other handouts made any difference to the state’s economy.
Conservatives and free-market think-tank types say the money spent on economic development programs largely has been wasted. They say Michigan would have been much better off by cutting taxes across the board for all businesses, rather than offering targeted tax breaks.
“If these programs actually worked, we’d be fully diversified by now,” Michael LaFaive, director of fiscal policy at the Mackinac Center for Public Policy, wrote in 2005. “Instead, we continue to lose the race for jobs while politicians concoct new economic chimeras.”
But an increasingly costly war among the states for jobs demands that Michigan offer tax breaks and other incentives to keep and attract jobs. Virtually no company will make a significant investment without state and local tax incentives. And corporations considering expansions or new headquarters won’t hesitate to bolt from their home state when another state dangles a tasty financial carrot in front of them.
“Politically, we’re in the either-or position of lower taxes and a better business climate, or using incentive programs,” said Greg Main, president of the Michigan Economic Development Corporation. “You need both.”
Michigan found that out the hard way when General Motors closed its Willow Run assembly plant in 1992, eliminating 4,300 jobs, at a time when the state had scaled back its incentive programs. (More about that later.)
From an employment pie-chart standpoint, Michigan’s economy is far more diverse than it was in 1980, when manufacturing was Michigan’s largest employment sector. Manufacturing, including autos, now employs just 12 percent of the state’s nonfarm work force, down sharply from 25.2 percent in 1980. Services, retail trade and government each employs a bigger share of today’s work force than manufacturing.
But that diversification has come about more by shedding auto-related jobs than by adding new, well-paying, non-auto jobs to the formerly strong base. That type of diversification, therefore, couldn’t insulate the state from the pain caused by the domestic auto industry’s rapid decline over the past decade.

Michigan lost jobs every year in the last decade in a pattern that eerily paralleled the decline in sales by the Detroit Three automakers during that period.
“This suggests that a stable auto base is needed in the current structural environment to support a growing [state] economy overall,” University of Michigan economist George Fulton said in his annual November economic forecast. “Thus, either the industry must be stabilized or the environment must be changed.”
And while state economic developers have attracted high-wage jobs in life sciences, advanced manufacturing, information technology and other areas, those efforts have not done nearly enough to offset the loss of high-wage manufacturing jobs.
The result is that the state overall is getting progressively poorer. Michigan has fallen from a ranking of 20th among the states in per capita income in 2001 to 37th in 2008. Fulton said he expects Michigan to drop to 40th when the federal government releases 2009 per capita income figures later this year.
New efforts
To their credit, state policymakers saw trouble ahead for the auto industry decades ago, although no one could have predicted back then that General Motors Co. and Chrysler Group LLC would fall into bankruptcy, as they did last summer. (Although Chrysler came close as 1980 began before being rescued by a federal loan guarantee package pushed by charismatic CEO Lee Iacocca and a young congressman named Jim Blanchard).
Milliken launched a multipronged economic development effort to boost the state economy as a deep recession was about to take hold in 1980. The state stepped up its use of tax incentives to try to lure new businesses to Michigan. Milliken also created a High-Tech Task Force to make recommendations on how Michigan could capture jobs in emerging sectors, such as factory automation and computer technologies.
And the Milliken administration tried to save some troubled iconic businesses, such as the Sander’s candy company, by making direct loans to them from the state treasury and pension funds.
“We were the lenders of last resort,” Molin said.
New era
Gov. James Blanchard’s election in 1982 ushered in a new era of economic development strategy, part of a broad and often innovative jobs agenda. It included trying to create the next Microsoft in Michigan by using state pension money for venture capital, a little-known investment tool in a state where conventional bank financing was the norm.
The state rebounded more quickly and strongly than much of the rest of the nation and there were even a few modest successes in the venture capital arena, such as Perceptron Inc., a Plymouth manufacturer of sophisticated factory measuring and inspection equipment. But there also were some well-publicized failures, including the Vixen Motor Co., a manufacturer of fuel-efficient recreational vehicles.
Blanchard also created several other state-backed financing efforts that attempted to leverage private investment to help young, technology-based businesses grow in the state.
“It was the first attempt to think about something beyond the typical economic development strategies other states were using,” said Main, who was a deputy director in Blanchard’s Commerce Department.

Availability of venture capital to finance promising start-up companies remains a challenge today. But the venture capital industry in the state has grown from just one company (EDF Ventures in Ann Arbor) during the early Blanchard years to nearly 30 operating in the state.
Blanchard’s administration figured that universities also could play a critical role in modernizing the state’s economy. His initial effort in drawing universities into economic development was in the establishment of three so-called “Centers of Excellence,” created by 1981 legislation passed at Milliken’s urging.
The Industrial Technology Institute worked with faculty at the University of Michigan on developing advanced manufacturing processes. The Michigan Biotechnology Institute joined forces with Michigan State University to grow the budding biotech industry. And the Metropolitan Center for High Technology, housed at Wayne State University, dealt with issues related to creating technology-based industries in urban cores.
Today, only the Michigan Biotechnology Institute, now known as MBI International, remains. But Blanchard was correct in believing that the vast resources inside Michigan’s top-notch research universities could be unlocked to enrich the state’s economy.
It’s an idea that the universities themselves were slow to embrace. Many professors felt their only jobs were to teach students and conduct basic research. The idea of commercializing research into products that could earn a profit was abhorrent to them.
But as Michigan’s economy began to seriously falter at the turn of the millennium, university presidents saw it was in their best interest to play a larger role in economic development. Appropriations from a cash-strapped state government were being cut, making it more difficult for universities to hire top-notch faculty, attract the best students and maintain critical research.
U-M, Michigan State and Wayne State formed the University Research Corridor to broaden economic development efforts — and to lobby for more state funding.
“We came together as the URC because we believe in the unlimited potential of our state to expand upon a rich heritage of invention and to establish itself as a world leader in innovation and creativity,” U-M President Mary Sue Coleman told the state Senate Appropriations Subcommittee on Higher Education in May.
Last year the URC hired Jeff Mason, a long-time official of the MEDC, as its first executive director, demonstrating the emphasis the URC is placing on economic development.
“These (URC) institutions are producing both innovation and new company spinoffs that rival other major research regions of the nation and returning $16 for every dollar the state invests,” Mason said recently.
Every one of the state’s 15 universities, not just the big three in the URC, now touts efforts to boost the economies of their local communities and regions.
In his eight years as governor, Blanchard also tried to craft an image of Michigan as a state that was moving beyond basic manufacturing into an economy that would reward brains far more than brawn.
He even held a hokey funeral ceremony at the Henry Ford Museum (now called The Henry Ford) that drew dozens of top corporate executives and well-known trend-spotter Faith Popcorn to “bury the Rust Belt.”
Different direction
John Engler, who unexpectedly defeated Blanchard for governor in 1990, regarded Blanchard’s economic development apparatus as little more than a public-relations scheme to ensure his political future.
To the astonishment of many local economic developers in the state, the former Senate leader quickly abolished the Commerce Department and took Michigan out of the business of luring companies with tax incentives.
“We’re going to find out what causes businesses to invest,” Art Ellis, a long-time Engler pal chosen to shut down Commerce, said at the time.
Engler strongly believed that what businesses really wanted was lower across-the-board tax rates, a top-notch education system and less regulation. He followed through on all three, cutting taxes, shrinking the state’s business regulatory structure and getting voters to approve an overhaul of public school financing.
But Engler’s belief that an improved business climate would negate the need for targeted tax incentives was betrayed by GM in its decision to close the Willow Run assembly plant in 1992.

GM pitted the Michigan plant against an assembly plant in Arlington, Texas, as part of a plan to eliminate 74,000 jobs. Although GM said its decision of which plant to close would be based on internal business factors and didn’t ask for incentives, Texas Gov. Ann Richards offered a rich package that included $2 million in tax breaks and $1 million in job training to keep the Arlington plant open.
Michigan didn’t offer a specific incentive proposal, but Engler said the state would match anything Texas offered. In an appearance on the Today show, Engler said he was confident that GM’s decision wouldn’t be based on incentives and that the automaker would choose Willow Run to survive.
But in a crushing blow to the state’s recession-wracked economy and Engler’s political calculation, GM decided to shutter Willow Run, destroying 4,300 jobs.
Engler responded by creating an economic development operation that rivaled — and in many ways mimicked — what Blanchard had built. He replaced Blanchard’s Commerce Department with the Jobs Commission, which housed economic development and job training functions. Engler also put the state back into the financial incentives game, and quietly reinstituted some of the venture capital and business financing programs that Blanchard had pioneered.
But Engler’s most enduring business development achievement was the MEDC, which he established in 1999 to replace the Jobs Commission. Established as a public-private partnership that operated largely outside the strictures of state government, the MEDC was — and remains — governed by an executive committee made up largely of business leaders and local economic developers.
The idea behind the MEDC was to establish an organization that would be insulated from politics and provide Michigan with economic development continuity, regardless of which political party controlled the governor’s office.
That goal has largely been met, although the MEDC has not been immune from political controversy.
In the early years, the MEDC and its hard-charging president, Doug Rothwell, were regularly criticized by lawmakers for running roughshod over the legislature, which provided most of the MEDC’s funding.
And although the MEDC’s executive committee is charged with hiring the corporation’s president, the reality is that the governor plays a major role the selection process. Rothwell, for instance, was recruited to Michigan from the East Coast by Engler. Rothwell’s wife, Sharon, served as Engler’s chief of staff.
Engler, with approval from the legislature, also armed Michigan with one of the nation’s most powerful business attraction weapons — the Michigan Economic Growth Authority.
MEGA has offered companies billions of dollars in tax credits for investing in the state since the authority was started in 1995. Ironically, its creation was vehemently opposed as a costly give-away program by many of Engler’s fellow Republicans, including then-Senate Majority Leader Dick Posthumus, who later became Engler’s lieutenant governor.
The Mackinac Center for Public Policy, a free market think tank in Midland, was an early and continuing critic of MEGA, saying that the state would be far better off by lowering taxes for all businesses instead of offering targeted tax breaks.
But Engler, as he often did as governor, shrugged off the criticism and plowed ahead.
“The Engler years were marked by taking programs and, through the sheer force of his political will, putting them into practice,” said Molin.
To his credit, the MEDC and MEGA program are considered to be models of economic development that other states, including Indiana, have emulated.
While Republicans generally oppose government efforts to pick “winners and losers,” Engler made several large bets on industries he thought would help diversify the economy.
He established the Life Sciences Corridor and pledged to spend $1 billion of the state’s share of federal tobacco litigation settlement money on research and commercialization in the health, medicine and biotech fields.
Engler also gave millions of dollars to U-M to help a company owned by recently deceased Detroit Pistons’ owner William Davidson develop flat-panel computer and television screens in an attempt to create a new industry for the state. But the effort ultimately was unsuccessful.
And Engler’s administration also failed to capture any of the Japanese auto plants that popped up in the United States during his tenure as governor. The success of those operations has resulted in Michigan’s automakers cutting hundreds of thousands of jobs.
Like many governors before him, Engler presided over a state economy that rebounded from recession and grew tens of thousands of new jobs, only to begin shedding them as the economy reversed toward the end of his stewardship.
Alternative energy
Gov. Jennifer Granholm, a Democrat who succeeded Engler in 2003, maintained many of the Engler initiatives and expanded on some of them.
She turned the Life Sciences Corridor into the Technology Tri-Corridor, which split tobacco settlement funds among life sciences, homeland security and advanced automotive technologies.
The move was sharply criticized by leaders of the life sciences sector, who believed the state didn’t have the resources to adequately fund three major business sectors. They proved to be correct as budget problems grew and Granholm cut back on Engler’s financing commitment to the life sciences.
Granholm later merged the Technology Tri-Corridor into an “emerging sectors” strategy that added alternative energy to the mix. The development of an alternative energy industry, including advanced auto batteries, biofuels, and wind and solar power, has become the central focus of Granholm’s economic development efforts.
Greg Main, the current MEDC chief, said Michigan will see groundbreakings involving $6 billion of previously announced alternative energy projects this year, all aided by MEGA tax credits. That will make Michigan one of the nation’s leaders in that sector, according to Main, who said that six of the eight new lithium-ion battery plants opening in the United States this year will be in Michigan.
“We’re going to be the epicenter of it,” he said.
But Granholm has been criticized for wavering in her economic development strategy and for failing to secure funding for what she claims are her top priorities.

In 2004 Granholm said she wanted to improve the quality of the state’s workforce by doubling the number of college graduates in the state, including two-year associate’s degrees, over the next 10 years. But she has consistently approved steep budget cuts for higher education as state revenues have plummeted.
Improving Detroit and other cities to maintain and attract smart young professionals, who experts say want to live in vibrant urban settings, was an early aim of Granholm’s administration.
Her “Cool Cities” initiative was launched in 2003 and provided cities with annual neighborhood revitalization grants. But the grant program has been suspended and Granholm rarely speaks publicly about “cool cities.”
To her defense, severe state budget problems have prevented Granholm from funding an urban revitalization strategy, college scholarships and other programs that could have benefitted the state economically.
In many respects, as Gov. Granholm prepares to leave office and voters prepare to elect a new governor in November, Michigan’s economic challenges are similar to those of the 1980s. The state faces severe joblessness while trying to recover from a disastrous recession.
Michigan’s unemployment rate in November was 14.7 percent, nearly matching the 14.6 percent annual unemployment rate in 1983 as the state was emerging from a steep economic downturn.
Economic developers are touting their diversification efforts, while simultaneously trying to ensure an automotive future by aiding automakers’ electric- and hybrid-vehicle initiatives. But Molin, the former state Commerce Department director, said Michigan must finally shake its stubborn belief that the auto industry and manufacturing will again restore the state’s fortunes.
Economic development efforts must be more focused, he said, on creating a post-auto-industry future.
“We haven’t [as a state] begun to explore what the new economy is going to look like,” he said. “There has to be the ability to see the old is passing away.”
Rick Haglund is a former business writer and columnist for Booth Newspapers who has covered state economic development policy for three decades.

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Bob Leonard
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Very informative, well done.
Here is a recent report
http://hbr.org/2010/07/the-secret-to-job-growth-think-small/ar/1
by folks at Harvard on Econ Dev strategy

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