Michigan Economy, Research Paper Example

The U.S. economy is forecasted to expand at inflation-adjusted GDP growth rate of 2.4% in 2011, 2.8% in 2012, and 3.1% in 2013. By contrast, Michigan’s economy is expected to grow at inflation adjusted rates of 1.7%, 0.2%, and 2.5%, respectively during the same period. The average U.S. general price levels are expected to increase by 2.85, 2.1% and 2.9, respectively in 2011, 2012, and 2013. In Michigan, the similar general price level increases will be 2.7%, 1.8%, and 1.8%, respectively. If the above statistics turn out to be accurate, it would mean that not only the economic activities will resume more slowly in Michigan as compared to the national average but even the consumer demand will be low, thus, resulting in lower inflation rates than the national average (Senate Fiscal Agency, 2011). Thus, it is not a surprise that while U.S. population increased by a cumulative 9.5% from 2000 to 2010, Michigan’s population actually declined by 0.6% during the same period (U.S. Census Bureau). The decline shows that employment opportunities have been declining and as a result, not only the state has been failing to attract outsiders but even its own residents have been leaving to look for economic opportunities elsewhere.

One of the reasons of Michigan’s economic decline has been its strong reliance on a single industry which is automobile sector. Michigan’s economic fortunes have been closely tied to sale of domestically-produced light vehicles. As of March 2011, Michigan had lost about two-thirds of the jobs in transportation equipment industry that existed during the peak of July 2000. Michigan is not expected to reach the same level of employment in the transportation equipment industry at least before 2035 (Senate Fiscal Agency, 2011). The Big 3 U.S. automakers had a combined market share of 56% in 2005 which had fallen to 44.2% by 2010 while foreign automobile manufacturers gained market share during the same period (House Fiscal Agency, 2011). The strong relationship between the performance of the state’s overall economy and its auto industry is shown below (Senate Fiscal Agency, 2011):

The chart above shows that average income per person in Michigan as a percentage of national average has closely mimicked the light vehicle production levels in Michigan and as the industry declined, so did the income levels, possibly due to lower employment levels. Even though the sales of light vehicles is expected to increase but it will not help the state much in improving its employment rate because the additional demand could be met with existing workforce (Senate Fiscal Agency, 2011). Thus, the economic outlook of Michigan is worse than the national average and it seems the economic recovery will take place at a slower pace than the national average.

Michigan Governor Rick Snyder pushed through the state legislature, a tax cut of $1.7 billion this year which may help recover some of the 857,000 jobs the state lost from 2000 to 2009. Another surprising fact has been the state’s economic recovery since 2008 which only lags behind the oil-rich North Dakota. Surprisingly, much of the recovery has been led by the auto industry (Haglund, 2011). The troubling trend is the state’s worsening fiscal situation. Michigan incurred a budget deficit of $1.4 billion during the current year and it owes the federal government about $3.96 billion that it borrowed to pay unemployment benefits in the past. The state is in such a bad financial shape that it has decided to cut unemployment benefits (EconPost, 2011). The funds to pay the federal debt will likely come through taxes on the employers which will only hurt the economic growth as well as employment levels.

Another disturbing trend is the lower ratio of individuals 25 years and younger who have a four-year college degree as compared to the national average. The U.S. average was 27.5% during the period 2005-2009 while Michigan’s was only 24.5% during the same period (U.S. Census Bureau). If there is one thing Michigan should learn from the recent financial crisis, it is this that it cannot rely on low pay job for economic growth any longer. This would have been true even without the crisis because the factors of production have been extremely mobile due to globalization and they will always move to areas with low costs of production. This is why jobs have been moving from developed economies to developing economies where labor costs are low. Thus, the future of the Michigan will be best served by a higher ratio of educated labor force as well as the growth of the service sector. Many service sector jobs require face-to-face interactions with the customers, thus, they are difficult to outsource.

Michigan can try various solutions to improve its economy. First thing, the state should do is to diversify its economy. Auto industry has served the state well for many decades but times have revealed the weakness of such a major reliance on a single industry. The recent financial crisis has also affected other states but states such as New York which are home to numerous sectors including finance, journalism, fashion, arts, and media have fared better than Michigan because their fortunes were not heavily reliant on a single industry. Michigan should also take steps to promote knowledge-based sectors because they are difficult to outsource and in addition, are usually well paid. If the state takes steps to promote knowledge-based sectors, it will also have to introduce policies to attract educated workforce. The combination of knowledge-based sectors and an educated workforce will not only stabilize employment levels but will also increase the state government’s tax revenues. The state should also invest in education in addition to attract educated workforce from the outside.

I would probably pursue employment opportunities outside Michigan because the state government has not shown me that it has really learnt from the recent crisis. I fear that the recent economic recovery which is being aided by the auto industry to some extent as well, may make the state legislators relaxed once again as well as over-optimistic about the future of auto-industry. All the economic forecasts indicate that Michigan will grow slower than the national average in the next fear years and the employment levels will also rise at a lower than the national average rate. Thus, I would have a higher job security in some other state where there are thriving knowledge-based sectors as compared to Michigan.

References

EconPost. (2011, March 31). Michigan cuts unemployment benefits beginning 2012. Retrieved December 13, 2011, from http://econpost.com/michiganeconomy/michigan-cuts-unemployment-benefits-2012

Haglund, R. (2011, November 27). Rick Haglund: Michigan economy slowly moving in the right direction. Retrieved December 12, 2011, from http://www.mlive.com/business/index.ssf/2011/11/rick_haglund_michigan_economy.html

House Fiscal Agency. (2011). Economic Outlook and Revenue Estimates for Michigan. Lancing, MI.

Senate Fiscal Agency. (2011). Michigan’s Economic Outlook and Budget Review. Lansing, MI.

U.S. Census Bureau. (n.d.). Michigan. Retrieved December 13, 2011, from http://quickfacts.census.gov/qfd/states/26000.html