It’s Not all Negative in Michigan

Allen C. Goodman

Sales and Marketing Council

October 24, 2007

Introduction

• I was asked to talk about succeeding in the Michigan Economy

• I was urged not to be negative.

• This could be a short talk …

Let’s Be CandidNon-Farm Employment

Loss of over 350,000

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=SMS2600000000000001&data_tool=%2522EaG%2522

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=LASST26000003&data_tool=%2522EaG%2522

Let’s Be Candid

Table B. States with unemployment rates significantlydifferent from that of the U.S., 2006 annual averages------------------------------------------------------State | 2006-----------------------------|------------------------United States................|4.6

Alabama .....................|3.6 Nevada ......................|4.2Alaska ......................|6.7 New Hampshire ...............|3.4Arizona .....................|4.1 North Dakota ................|3.2Arkansas ....................|5.3 Ohio ........................|5.5California ..................|4.9 Oklahoma ....................|4.0Delaware ....................|3.6 Oregon ......................|5.4District of Columbia ........|6.0 Rhode Island ................|5.1Florida .....................|3.3 South Carolina ..............|6.5Hawaii ......................|2.4 South Dakota ................|3.2Idaho .......................|3.4 Tennessee ...................|5.2Iowa ........................|3.7 Texas .......................|4.9Kentucky ....................|5.7 Utah ........................|2.9Maryland ....................|3.9 Vermont .....................|3.6Michigan.....................|6.9 Virginia ....................|3.0Minnesota ...................|4.0 Wyoming .....................|3.2Mississippi .................|6.8Montana .....................|3.2

http://www.bls.gov/news.release/srgune.nr0.htm

But, it’s been far worse …

Labor Force Size is Stable

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=LASST26000006&data_tool=%2522EaG%2522

House Prices are OK

Freddie Mac Housing Index

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

0 20 40 60 80 100 120

Quarter (1975.01 = 1)

Ind

ex -

198

7 =

100

IL

IN

MI

MN

OH

WI

Price Changes are not Volatile

Quarterly % Change in Freddie Index

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

0 20 40 60 80 100 120

Quarter (1975.01 = 1)

% C

ha

ng

e

IL

IN

MI

MN

OH

WI

Foreclosures are high, but others are worse

Foreclosures Preforeclosures Bankruptcies FSBOs Tax Liens

California 39,518 104,874 23,438 1,615 255,699Illinois 11,169 44,765 22,437 4,379 23,138Indiana 7,040 123 11,329 1,223 13Michigan 16,501 1 18,612 2,324 4Ohio 18,873 198 24,203 1,769 25,600

US 231,428 304,788 336,871 55,534 629,325

Source: http://www.foreclosure.com/

How to Succeed?

• Wealth is created by Capital and Technology.– Industrial Revolution (England was not

awash in natural resources) … but they had Capital & Technology

– Silicon Valley is not awash in natural resources …

• Contrast this to West Virginia depended on coal a half century depression.

How to Succeed?

• Michigan has had capital and technology!

• There are some recent studies that point to the first 20 years of twentieth century Detroit as a unique era.

• The auto industry could have centered elsewhere … it centered here!

In our lifetime …

• Cities like Detroit, Flint, Pontiac, and Saginaw were wealthy places.– High capital/labor high wages.

• The environment has changed – it’s not fair, but it’s changed.

Manufacturing?

• Not necessarily. Manufacturing is declining EVERYWHERE as a share of the economy.– We are increasingly a service economy. We must

provide services more efficiently.

• We must avoid gimmicks. – What kinds of value-added do casinos bring?

• Protectionism won’t work.– Others WILL retaliate.– These days the Canadians are propping up the

retail sector in SE Michigan.

Infrastructure

• Goods provided by the public sector, including education, roads, fire protection, police protection, and amenities, are intrinsically no less desirable than private goods.

• The price of public goods is taxes. Although we all seek efficiencies in production, reduced taxes reduced public goods.

State Government

• Economic movers and shakers can’t do business in a place where the state government behaves like characters from a Marx Brothers movie.

• Taxes are not “bad” in and of themselves. Most of the “business climate” studies aren’t worth reading.

• If higher taxes buy productive things, there is no reason to oppose them.

Our New Taxes

• The Single Business Tax (SBT) wasn’t awful but it was different from what businesses saw elsewhere. Replacing it with something else is OK. Not replacing it would be a bad idea.

• The increased income tax is OK, but a second (higher) level would be better.

• Service taxes will be difficult to phase in, although, in fact, many states have them.

Housing and Real Estate

• In perspective, Michigan isn’t much worse off than elsewhere, and may in fact be a little better off, because prices did not run up as fast as they did elsewhere.

• There were “little bubbles” in places like Huntington Woods, Birmingham.

• You are NOT seeing the seismic readjustments here like they are seeing in Florida or California

Housing and Real Estate

• Foreclosures are a problem here … as they are, elsewhere.

• It was unconscionable to put some people into the mortgages that they sold.

• About 3 years ago, I told my wife, “in a couple of years, we’ll see some real problems” … regrettably, I was right.

When will real estate turn upward around here?

• Well, it depends!• In places that are built up, I think you’ll

see a turn in spring 2008 – it will be about 8 quarters since we “hit the wall” in Spring 2006.

• In places with lots of unsold inventory, like northern Oakland and Macomb counties, it could be a couple of quarters longer, and … possibly into spring 2009.

Remedies!

1 – Mortgages

• Mortgages– There is nothing intrinsically wrong with

adjustment payment mortgages … but the wrong people were getting them.

– There will have to be some negotiated resolution.

• People need homes.• Financial investors don’t want to have to hold

vacant properties.

2 – Property Taxes• Michigan’s property tax is a tax on mobility (and, as

a colleague keeps telling me, a tax on divorce).• It stands in the way of people’s abilities to move to

better homes, and builders’ abilities to build them.• It stands in the away of appropriately permitted

home improvements.• It is fundamentally unjust, unwise, and unprofitable,

to have identical houses on a block with property tax burdens varying by 100% or more, depending on how long the resident has lived there.

Ironically

• Those who fought government control ceded control to Lansing.

• This is not unique – it has happened just about everywhere that property tax controls have tried to undo the laws of supply and demand.

3 – Development

• Local regional authorities (at whatever level) must get “out of the way.

• Simplify parcel assembly and permitting. • Successful urban economic

development is a “bottom up” rather than a “top down” undertaking.

• Local regulations have their purposes (no one wants a slaughterhouse next door), but they cannot be punitive.

SO …

• In perspective … much of the Michigan problem is related to regional issues.

• These issues have affected our neighboring states as well.

• We can grow out of our current problems … but we must concentrate on fundamentals … not tricks!

I’d be glad to take QuestionsI’d be glad to

take Questions