Thinking Beyond the Current Crisis

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Thinking Beyond the Current Crisis
Prepared forState of Michigan Board of
Education October 26th, 2009Lansing,
MI Patrick L. Anderson, PrincipalAnderson
Economic Group, LLC
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Outline

1. Introduction
2. Michigan The 8-year recession
3. Michigan No coherent strategy The price of
   negligence
4. Re-thinking Michigan Avoiding senseless
   debates Elements of a success plan

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I. Introduction Anderson Economic Group LLC

• Consulting firm headquartered in East Lansing,
  with offices in Chicago and Los Angeles. Clients
  include businesses, associations, non-profits,
  state and local governments throughout the United
  States.
• Recent AEG projects include
• Assessing the technology and life sciences
  industries in Michigan and in West Virginia
• Estimate the economic impact of Michigans
  University Research Corridor and benchmarking it
  against competitors in NC, CA, IL, and MA
• Helping MSU win federal funding for the FRIB
• Surveying business tax incentives in Michigan for
  the Michigan Education Association
• Completing the third annual 50-state business tax
  burden study published in the State Economic
  Handbook
• Extensive business tax reform analyses for
  Detroit Renaissance
• Past efforts have resulted in change in sales
  tax law (1998) reform of laws on reversion
  (1999) creation of an IPPT credit (2005) repeal
  of the SBT (2006) the creation of a Michigan
  EITC (2008).

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II. Michigan The 8-year Recession

• The United States emerged from brief recession in
  2001, and grew steadily until the Great
  Recession began in early 2008.
• Michigan never emerged from the 2001 recession.
• Michigans unemployment was already at 7 when
  the Great Recession began it has now exceeded
  15 for months.
• Numerous Michigan cities have unemployment rates
  over 20, and at least two have unemployment over
  30.
• By comparison, other Midwestern cities with
  manufacturing industries (Milwaukee, Cleveland,
  Chicago, Indianapolis) have unemployment rates
  near 9.

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Historical Unemployment Rate Trend
Mid 1990s MI gets better than the US
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III. Michigan No Coherent Economic Strategy

• We have no coherent economic development
  strategy.
• Our tax policies are confusing, and actively
  discourage business investment.
• Since 2005 repeal SBT repeal create new MBT
  increasing tax burdens impose bizarre excise
  tax repeal that and impose MBT surcharge
  increase individual income taxes but create
  film-industry-only tax credit.
• Our base tax revenue has been declining even as
  we increased business and personal tax rates.
• Hard to squeeze more tax revenue from a shrinking
  stone.
• Structural deficit, but no structural reforms,
  means no sustainable spending priorities.

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No Coherent Strategy, continuedThe price of
negligence

• We are paying the price for our negligence
• We cannot assume that K-12 education funding,
  organization structure, or pay and benefits can
  be sustained over the next few years...or even
  the current fiscal year.
• The 2000-2009 period for the state represents a
  lost decade during which we failed to address
  structural problems.
• Unfortunately, no sector can escape the damage
  from this negligence...including K-12 education,
  which has historically been the states top
  funding priority.

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No Coherent Strategy, continuedThe old order is
gone

• The Old Order is irrevocably gone.
• No Big 3 anymore we are trying to hold on to a
  Detroit 2 and currently have only one
  unencumbered OEM.
• Huge drop in manufacturing employment.
• Losing valuable professional technical
  employees.
• Need to re-think
• Tax policy
• Education policy
• Spending priorities

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IV. Re-thinking Michigan1. Avoid Senseless
Debates

• No benefit to arguing that taxes dont matter.
• Everyone that hires workers and pays taxes thinks
  they do...and they are the ones that really
  matter.
• No truth to the claim that Michigans tax burden
  is the worst in the country.
• Business tax burden is about 26th in most recent
  50-state survey but perception of business
  investors is much worse.
• No advantage in saying that discussing reforms is
  education bashing.
• When your ship is sinking, you dont shoot those
  that are bailing fast.
• Reality we are losing tax base, and need to
  reform.
• Hold the senseless debates for a future date.

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IV. Re-Thinking Michigan2. Identifying a
Success Plan

• Emphasize valuable assets
• Technical knowledge for manufacturing, life
  sciences, chemicals, electronics, defense, other
  high-tech industries...
• Excellent colleges and universities, starting
  with University Research Corridor and extending
  to other private and public colleges
• Excellent quality of life outstanding beauty
  incredible natural assets
• Michigan is really good at certain things...start
  with those.

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2. Success plan elements--continued

• Must reform to survive
• Tax revenue of the past will not return any time
  in near future must choose path or have disaster
  thrust upon us.
• Need to re-think redundancies in the school
  system need to reconsider governance
  maintenance of 500 units contracts unfunded
  liabilities accountability measures.
• Need to continue effort to create, maintain, and
  enforce performance standards.
• No coherent success plan avoids reform ignores
  K-12 education or treats education as primarily
  a funding question.

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2. Success plan elements--continued

• Thoughtful reform plans have been proposed by
  experts outside of government...but ignored
• Governors emergency financial panel
• Center for Michigan
• Detroit Renaissance (Business Leaders for
  Michigan)
• Other reform plans have concentrated on tax
  policy, education governance structure, economic
  strategy...those mostly ignored, too.
• Much better to pick a coherent plan than to watch
  ship sink further.

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2. Success plan elements--continued

• Any success plan must develop an educated
  workforce because the 21st century economy
  demands it.
• Without improving its education system, Michigan
  will decline.
• By the way, the 21st century is already
  here........and weve not been doing very well
  in it.

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Contact Information

• Patrick AndersonPrincipal CEO, Anderson
  Economic Group, LLC
• East Lansing Chicago Los Angeles
• Reports and company information may be found at
• www.AndersonEconomicGroup.com
• Reports Cited in Presentation
• 2008 State Business Tax Burden Rankings, 3rd
  Annual Report (Mar. 2009)
• Michigans University Research Corridor (Sept.
  2008)
• Automation Alleys 4th Annual Technology
  Industry Report (Nov. 2008)