‘One-state’ Recession’ Hampers Michigan

By: - April 11, 2007 12:00 am

The drumbeat of bad economic news out of Michigan keeps pounding.

The Great Lakes State has lost jobs for six consecutive years, Michigan’s longest run of  workplace shrinkages since the Great Depression. Automakers are laying off tens of thousands. Pharmaceutical giant Pfizer is closing up shop in Ann Arbor and Kalamazoo. The state ranks among the top three in the country for home foreclosures and mortgage delinquencies.
Analysts at Comerica Bank, which is moving its headquarters from Detroit to Dallas, say Michigan is stuck in a “one-state recession.”
The state’s political leaders are under pressure to soften the economic blows, but the downturn in the economy means there’s less money in state government’s coffers to fight back.
The state is nearly broke and is bracing for a possible partial shutdown in May. Gov. Jennifer Granholm (D) and Republicans legislators in charge of the state Senate are at odds over how to turn the ship around. The governor stresses investing more in education and job training to develop a talented work force, funded by a new tax on services, while GOP leaders are calling for tax cuts and a leaner state government to lure more business.
Most observers expect a mix between the two approaches to emerge at the Statehouse. But the longer it takes to forge an agreement, the more the state could suffer. The state’s credit rating has slipped on Wall Street, and uncertainty over the tax climate threatens to scare away new businesses until the budget crisis is solved.
“No CEO wants to commit to a state that cannot get its fiscal house in order. And no business can afford to make investments in a place where education, public safety and health care risk being gutted by deep cuts,” Granholm said in her radio address last week.
Republican legislators have balked at Granholm’s plans to tax services such as legal work, cable TV and even bowling at 2 percent. They’re calling for cuts in funds for schools and local governments, reductions the governor opposes.
“At some point in time, people are going to have to accept the fact that we don’t have money. We just don’t have the kind of money (Granholm) wants to spend,” Senate Majority Leader Michael Bishop (R) said in a telephone interview Tuesday (April 10).
Both sides are trying to revive a moribund economy that, unlike the national economy, never recovered from the 2001 downturn.
The main reason for the sluggish economy is that the Big Three automakers – General Motors, Ford and DaimlerChrysler – are losing ground in the U.S. market, said Dana Johnson, the chief economist for Comerica.
Indeed, the domestic automakers claimed 53.7 percent of the market in 2006, compared to 73.7 percent in 1993. In the last six years, Michigan’s vehicle production dropped 27 percent, enough to account for 120,000 lost jobs.
Past downturns in the auto industry led to higher unemployment rates in Michigan, but they didn’t last as long and the job losses weren’t permanent, as they likely are this time, said Douglas Roberts, director of Michigan State University’s Institute of Public Policy and Social Research.
Previous contractions came when Americans stopped buying cars generally, but, this time, the layoffs are the result of Americans buying fewer domestic vehicles, he explained.
Comerica’s Johnson said that state government could help Michigan’s economy recover but that 80 percent of the task will fall to private business.
He said the most important thing for political leaders to do is provide certainty for businesses by deciding how it will tax corporations after Dec. 31.
Last year, Republicans, who then controlled both the House and Senate, pulled the plug on the state’s main business tax without figuring out how to replace the $1.9 billion it generated every year. So starting in 2008, the tax cut will leave a gaping hole for a state that spends $41.7 billion a year.
Even sooner, lawmakers must figure out how to find $686 million in cuts or new revenue to keep the state in the black for the current fiscal year, which ends Sept. 30. The state is running out of quick fixes.
During the downturn, legislators in recent years already have resorted to several one-time solutions, including depleting the state’s rainy day fund, refinancing bonds, renegotiating employee benefits and raiding accounts set aside for special purposes.
“Not only are we running out of those one-time or short-time solutions, but we’re finding they’re not even coming close to covering the size of the shortfalls,” said Greg Bird, a spokesman for Granholm’s budget office.

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