Thursday, November 12, 2009

From Grief to Acceptance: Adjusting to a New Normal in Michigan

Tell us something we don't know. The Pew Center on the States delivered a diagnosis for Michigan that has been apparent to our economists for quite some time: the collapse of the auto industry and subsequent loss of jobs, a manufacturing based revenue system, our aging population, special tax breaks to business and retirees that pay out more than we are taking in at this point, all mixed with the Great Recession, "will make Michigan one of the nation's 10 poorest states for the foreseeable future". That is the bottom line, and we are there. The Center predicts that the jobs lost in this decade will not return for 15 to 20 years as the state continues to work towards diversifying our economy. And, although they don't explicitly mention it, you have to throw in the political gridlock that has occurred in Lansing this past decade when it comes to reforming our government and our tax system; partisan differences have slowed our ability to adjust to this new reality. Given the size of the storm that hit us though, you start to wonder if that would have made any difference. Democrats, Republicans, it doesn't matter who was in charge; maybe the boat was destined to be swamped anyway as manufacturing jobs took a huge hit all across the nation, and we were standing at Ground Zero.

This is it, folks. This is the "new normal" for Michigan.

Michigan is still the eighth-most-populous state—but it has yet to come to terms with no longer being one of the most prosperous, said Donald Grimes, a senior research specialist at the University of Michigan and an expert on the Michigan economy. In 2008, Michigan ranked 37th for per-capita income, with peers that include Georgia (38th) and Montana (39th).

“The state of Michigan still has to learn all the things that being a poor state means,” Grimes said. When the federal Bureau of Economic Analysis releases finalized 2009 data, Grimes said, he expects Michigan to be among the 10 poorest states.

Accepting this new reality has been almost like watching a natural grieving process throughout this decade. First, you had denial. The Engler administration raided the rainy day fund and curtailed our revenue with more tax cuts in a misguided attempt to deal with initial downturn starting in 2000, the Granholm administration walked into a deficit of $1.8 billion to start and has been adjusting the books ever since in the hopes that things would turn around. Not knowing what was coming though, you can defend both of these actions to some extent. It's hard to see the storm when you are right in the middle of it, and you do the best you can to ride it out. Most states did, and we did the same.

Michigan’s structural deficits can be traced to its reliance in recent years on temporary solutions to its budget shortfalls. During the last recession, Michigan, like many states, tapped its rainy day fund and resorted to short-term fixes such as accounting changes, fund transfers and bond refinancing that exacerbated the state’s structural problems. According to data from the Citizens Research Council of Michigan, a nonpartisan research organization, the state over the past decade has relied on $8 billion in one-time measures to meet its constitutional balanced budget requirement.

Next comes anger, and that has been growing steadily over time due to both the political gridlock and the desire to find scapegoats in the form of the governor, or the legislature, or the unions, or the anti-tax crowd, or whoever-the-finger-points-at-today, to find someone or something to blame for our woes. The examples of that are numerous, and it's not worth getting into here. It's normal, and to be expected. It will continue, and it will get worse with the 2010 election. Count on it, but pray we can rise above it.

Bargaining has been a huge part of Michigan's attempts to deal with this crisis. Pew is focusing on the fact that we are currently giving out more in tax credits than we are taking in for revenue. While that is a problem at this narrow point in time, given that we do need to attract new business and diversify into the high-growth areas of a new national economy, and, given the fact that almost all the other states are offering these sweet deals to businesses, we really don't have much choice in the matter. Pew cites our focus on the film industry, tourism (apparently no one told them we just slashed funding for that back down again), and the 10.7% growth in "clean tech" jobs, as examples of how we are moving away from relying on the solely on the auto industry - but it has come at a price.

Still, the state foregoes revenue through such programs. As of 2008, the state offered $6.3 billion more in total tax exemptions, credits and deductions than it actually collected in taxes So while tax incentives have played an important role in helping Michigan compete with more prosperous states for jobs, they take a toll on the state’s pocketbook. A decade earlier, in comparison, the state was taking in $6.8 billion more in taxes than it was exempting.

Kleine, the state treasurer, said that Michigan was creating jobs outside the auto sector before the latest recession hit, but that the gains were canceled out by auto job losses. “The good news for us is that the auto industry has become so small in Michigan that it’s kind of lost its ability to hurt us,” he said. “When we come out of the national recession, we’ll be creating jobs again like any other state, and the auto sector won’t have the ability to offset those.”

Coming out of the national recession is going to take quite a bit of time, not only for us, but for everyone. State budgets all across the nation are in for a huge jolt when the recovery money runs out, and most states are starting that 2011 budget work right now, slashing services and looking at raising taxes. While Pew has focused on the 10 states that face the deepest peril, the fact is the entire national recovery is at risk according to the Center on Budget and Policy Priorities. The Pew study made the bigger splash in the news, but the CBPP gave us the entire picture yesterday as they indicate that more federal relief is going to be needed until lagging state budgets catch up with the leading economic indicators.

Presuming they will get no more fiscal relief, states will have to take steps to eliminate deficits for state fiscal year 2011 that will likely take nearly a full percentage point off the Gross Domestic Product. That, in turn, could cost the economy 900,000 jobs next year. Mark Zandi, Chief Economist of Moody’s, recently warned that these state budgetary actions “will be a serious drag on the economy at just the wrong time.”

Phrases like "budget gaps of stunning magnitude" and "largest shortfalls on record", and that actions taken by state lawmakers in the face of that may "impede recovery and cause significant economic damage", permeate that report. If the national economy starts to backslide, Michigan's fragile recovery will go with it. We are not an island here. The best we can do is try to get our own fiscal house in order to best deal with what comes next - and that will be the hard part. We may not have time to wait on the next election. Major changes to our government and tax structure need to happen now if we have any hope of keeping any semblance of order in this state. "More cuts" to basic services like public safety, education and health care may destroy our ability to recover at all, and "fifteen to twenty years" may turn into decades if we don't handle this right.

Since 2001, the state has made a litany of cuts, including in aid to local governments, payments to Medicaid providers, and funding for higher education, state agencies, prisons, libraries, zoos, orchestras and day-care programs. “We’ve gotten to the point where I don’t know what else we’re going to cut,” said Michigan Treasurer Robert Kleine. “You’re going to be looking at things that can
cause long-term damage to the state’s future.”

We are already doing "more with less" here in Michigan. Startling numbers: a 16.9% cut to classified state employees, a 42% drop in general fund revenue since 2000. One million jobs lost in the decade, a third of those coming in 2009. 268,000 jobs from the auto industry. And the reverberations from the Great Recession are just starting to hit now, with massive budget cuts to schools and other services - as you are starting to see in reports from all over the state. It's just the beginning. With indications that we are in the hole to the tune of another $1.6 billion for FY 2010-11, and threats of another "$500 per pupil cut" being bandied about, the squabbling over the $184 million in remaining stimulus looks pretty petty now, doesn't it? You betcha. Depression starts to take hold as the enormity of the situation reaches in and touches your every day life. Things will never be the same again, and we have to get used to this new reality. It's a hard adjustment to make.

Question now is: What are we going to do about it? As we come to accept our situation, slowly but surely, hope will start to dawn in the population as we look forward at building our future. Unfortunately, we can't remove the politicians from the equation (wouldn't that be nice?), and this next year will probably be filled with more obstruction, and foot-dragging, and finger-pointing, as the Republicans try to capitalize on this situation for the sole purpose of regaining power. These studies and reports never mention that perhaps the biggest problem in coming to some form of acceptance and clear direction forward in this state (and probably others as well) is the fact that we have people who absolutely refuse to compromise on their political and economic theories - and that may be the thing that does the greatest damage to Michigan in the end, as we lose even more time due to the political process.

"Change" will still be the buzzword in 2010, and "change" is going to occur, is occurring now, whether we like it or not. It's what we choose to do next that will make the difference on whether we struggle for decades to repair any further damage done to our state, or, we start repairing the damage now, with the goal of building back to prosperity. Stay in denial, or come to acceptance. It's just that easy, and just that hard, all at the same time.

Let's hope we go big, and let's hope we get it right.

Ballot proposal, anyone?