Opinion | Fix the damn roads? Sure. But Whitmer can’t control the damn economy.

Charles Ballard (left) is a professor of economics at Michigan State University. Ronald Fisher (right) is a professor of economics at Michigan State University.

Congratulations to Governor-elect Gretchen Whitmer. Now comes the hard part – achieving the goals she and all of the voters have for Michigan. Of course, it is important for all citizens to recognize what governors and state governments can, and cannot, do.

Some hope a governor can strengthen the state’s economy through increasing jobs and income. However, changes in the Michigan economy are driven largely by what is happening in the United States (and world) economy. This is particularly the case because the automobile industry, and many of our other industries, are sensitive to consumer income, interest rates and international trade. These factors are affected by national (and even international) economic conditions and policies.

This connection is shown clearly in the chart below, which depicts the relationship between the unemployment rate in Michigan and national periods of growth and recession. The Michigan unemployment rate increased as a result of the small national recession in 2001, and then remained consistently around 7 percent until the financial-market crisis and Great Recession hit in 2007. Michigan’s unemployment rate began to increase in the spring of 2008, just after the beginning of the national Great Recession. It peaked at 14.6 percent in June 2009 during the last year of the Great Recession, and then declined as the national economy improved and recovered.

These trends sometimes help and sometimes hurt gubernatorial administrations.

Look at the history.

Unemployment increased during the last two-plus years of the administration of former Republican Gov. John Engler, as the national economy hit a recession after the boom years of the 1990s. The unemployment rate stabilized at the end of the Engler administration and in the first five years of the administration of Engler’s Democratic successor, Jennifer Granholm. Then the national financial crisis and Great Recession occurred during the Granholm administration, and unemployment shot up.

The Michigan economy performed very badly during the Great Recession, when Granholm happened to be governor. If term-limited Gov. Rick Snyder or Whitmer, Bill Schuette or anyone else had been governor at that time, the Michigan economy would have performed very badly.

Of course, the financial crisis and Great Recession weren’t caused by policies enacted in Michigan. They were caused by actions on Wall Street and in Washington. Similarly, the decrease in unemployment that began in 2009 occurred as a result of the national economic recovery that included the last two years of the Granholm administration as well as the Snyder years.

Supporting the state’s important industries also is a cooperative venture.  The rescue of General Motors Corp. and Chrysler was especially important to the recovery. This action was the combined result of action by the Obama administration, the Michigan congressional delegation, Granholm, congressional representatives from other states, and the private financial markets. If these companies had been allowed to crash and burn, there is a very real possibility that the entire automotive supply chain would have imploded, causing hundreds of thousands of additional job losses, many of which would have been in Michigan.  

If state governments are limited in affecting overall economic conditions, what can they do?

In fact, they can do a lot. Policies advanced by governors and adopted by states affect healthcare options for citizens, educational opportunity for kids and college students, the quality of roads, bridges, and water and sewer systems, protection of natural resources, care for our neediest families, and public safety, among many other important public services.

Indeed, these are many of the issues that were prominent during this year’s election. Governors can make a real difference focusing on these crucial public services that impact all citizens in their day-to-day lives, for which state government has a direct role.

However, there are limits to what any governor can do concerning the overall state of the economy. The Michigan economy is greatly affected by events beyond our borders, over which we have little or no direct control.  

Whitmer will be governor of a state that is greatly affected by outside events. We hope the national economy doesn’t slip into another recession soon, but it almost certainly will at some point.  It makes sense for the state to prepare for such eventualities with prudent financial policies and appropriate savings. But, when it does occur, no governor will be able to keep Michigan from feeling some economic pain.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

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Comments

Matt
Tue, 11/27/2018 - 8:07am

Fair assessment. The recession cards are always in the deck and do get dealt but Governors and political actions can and do impact how well we work through a recession or a recovery for that matter. Businesses applaud Trump by increased investment spending that may not have been spent to the same extent under Clinton. Whitmer and her many leftist proclivities don't leave the general business community in general feeling great excepting the fact that she's largely powerless.

Don
Sun, 12/02/2018 - 3:23am

OK and GM is closing how many plants due to Trump and how many farmers are losing their farms due to tRUMP!!!

Don
Tue, 11/27/2018 - 8:55am

What the democrates need to do is get the money back from Engler and Grandmold that they got in kick back for no bid contracts to the road contractors like Carlo!!

YK
Tue, 11/27/2018 - 8:59am

Wow, she hasn't even taken office yet and the "nonpartisan" media is already making excuses for her. So if the Michigan economy falters it'll be because of national economic conditions beyond her control, but I'm guessing she'll get all the credit if she succeeds.

Steve
Tue, 11/27/2018 - 12:39pm

Yeah, I don't necessarily disagree with their points, but this is a bit strange. I know Charles Ballard favors pretty progressive government/economic policies, but I think he's straining just a bit too hard to try to give some prospective cover to our Gov-elect.

Maureen
Tue, 11/27/2018 - 1:34pm

My first thoughts exactly. It figures.

Joe
Tue, 11/27/2018 - 9:44am

I’m with YK ! How is it you are making excuses for the new governor before she even takes office. The $ is there, the new governor just needs to make it a priority! Michigan has always had a volatile economy, yet we have one of the highest gas taxes, insurance rates and state tax compared to less volatile states.

David Waymire
Tue, 11/27/2018 - 9:14pm

Joe, you are wrong. Our gasoline tax is not one of the highest in the country. You apparently don’t understand the difference between the gasoline tax and the sales tax on gasoline, the second of which goes primarily to schools. And our overall tax rate is now one of the lowest in the Midwest. Which is a major reason why our roads, cities, water systems and schools are failing.

Matt
Wed, 11/28/2018 - 3:05pm

Dave, very few states charge both a per gallon tax and a sales tax on fuel purchases. I suspect you know this. But this makes the tax paid per gallon in Michigan one of the highest, (depending on current prices), especially excluding the left coast states. I'd also challenge your assertion that we're one of the lowest tax states, most of my info says we're pretty middling on tax burden %, although this is very dependent on individual circumstances. I'd love to see your source for this claim. For mine I just Google, states with highest and lowest tax burdens and find this middle position claim to be pretty consistent across the board. Although even this excludes hidden taxes (our costly insurance requirements).

Don
Sun, 12/02/2018 - 3:33am

But not to public schools like OUR laws state but to charter schools which the new AG needs to take to court and put a stop to!!

sammelvin
Sun, 12/09/2018 - 2:45pm

Taxes or Schools + michigan lottery"pays" ..
roads....
gasoline taxes? gas is below $ 2.00 in Ohio
China and Russia building the New Silkroad ..and trains ......save over 6-8 weeks... by seas.also builds news towns and business along the Road, thourgh kazastan.Turkistan.afghanistan. Iran .trukey...yes there is life in Asiasee Youtube.com

sammelvin
Tue, 12/04/2018 - 1:04pm

GAS TAXES gasoline in OHIO under 2 $$$$$$$$$$$$$$ michigan?

Thomas E Graham
Tue, 11/27/2018 - 9:48am

So where was this article before the elections?

Charles Skinner
Tue, 11/27/2018 - 10:18am

Cause and effect are still an economic law. Your comments make it sound like MI has no control over the business cycle but when everything you do makes business more difficult and you oppose efforts to improve the situation, the business environment will dictate the results. Passing recreational marijuana when we already have 100,000 jobs we can't fill is probably the worst thing we could do for MI business. Raising business taxes, raising the minimum wage and requiring sick leave benefits will raise the cost of doing business in MI significantly. And opposing Trump's efforts to achieve fair trade with other countries is leading to a significant cutback in car sales which already is leading to cutbacks in employment in MI. It is amazing to me to see all the foreign make cars people are buying apparently not realizing the impact on MI economy.

kathy
Tue, 11/27/2018 - 3:35pm

i prefer a car that doesnt break down all the time,therefore i buy imports. gm is thick headed and never inovative . rents are too damn high and no one cares. you can keep those 1000,000 jobs, they dont pay insurance anyway.

Ann Farnell
Tue, 11/27/2018 - 11:29am

Matt, businesses are not investing as much as buying back which is why the market is so volatile right now. All indicators are that the current upward trend is the expected projections of the Obama fiscal policies. Trump inherited a growing economy. You give Trump credit where it isn’t due. To the contrary, he has caused so much uncertainty that wise financiers are hedging their bets. Anybody with any sense can see that this administration is a deck of cards led by a joker who really isn’t funny!

Matt
Wed, 11/28/2018 - 3:15pm

Ann the growth rate jumped 50% from 2% to 3% that's a big jump - 50%. Simply businesses spend and invest more when they have confidence that the government won't act against their interests, right or wrong. Businesses do like the new tax law also with moves to making our code more comparable to international competitors. Haven't seen any corporate inversions lately have you? I'm not a big MAGA guy and definitely not happy with all his acts, but credit given where due.

Mari and Kevin ...
Tue, 11/27/2018 - 12:44pm

Michigan is a mess. We had enough of the high car insurance, fees, taxes on everything and the crumbling roads. Whitener will not be able to fix the roads without asking the citizens for more money because Snyder has squandered the money that was earmarked for road repair. The Flint water mess and the Larry Nasser scandal is going to cost Michigan tax payers millions. Our advice, get out of Michigan and protect yourself from losing your hard earned money.

Paul
Tue, 11/27/2018 - 1:18pm

Good article. People tend to pin all their hope (and blame... and credit) on the chief executive, in this case a governor. Whitmer has good ideas, and so do these authors.
When times are good, do a little saving, because there is usually some kind of recession, of varying severity, about every decade. The economy has been humming along for many years now. It would be a good time to put away some emergency funds and make long-term investments that are simply too painful during recessions: roads and education.

A brief reply to Charles Skinner - increasing the minimum wage means employees have more money to spend as consumers. Businesses like consumers spending money, so, on its face, it is not clear that min wage would be bad for business. I would agree that raising it to an absurd, employment-distorting level would be unwise. The bulk of the economic evidence finds little effect on total employment (which is what you'd expect if, as we have in Michigan, a low ratio of employers to employees). Just food for thought.
In addition, Prop 1 was not a Whitmer policy (she has not taken office yet). If you want to create new opportunities for entrepreneurs, which you seem to want to do, Prop 1 does so. You can critique marijuana laws on other grounds (safety, optimal level of taxation, etc). Besides, late night pizza places are probably thrilled to have more customers with the munchies.

I wonder if Michigan can get away from the issue that the authors of this article raised. That is, I wonder what policies Michiganders' reps could put into place that might help Michigan be less buffeted by external forces. Encouraging industries that are not quite so tied to things we cannot control? Curious if others have bright ideas. Thanks for reading.

Matt
Wed, 11/28/2018 - 3:30pm

Econ 101. Increasing the minimum wage doesn't create additional wealth/income as you suppose, that requires increased productivity to go with it (not likely).. Instead it just forcibly reallocates income which doesn't increase the size of the pie as you suppose. This in turn sets off a cascade of increased prices and elimination of current and anticipated jobs or businesses just closing. A few minutes studying a P&L statement would make this clear.

Paul
Wed, 11/28/2018 - 4:31pm

Econ 101, Matt. That's where you stopped studying economics, and it's why your intuition is wrong.

Here is some more information. Econ 101 falls apart very quickly, because it doesn't reflect reality most of the time. The neoclassical model you're describing is correct when the many idealistic assumptions of a competitive marketplace hold (perfect information; many buyers; many sellers; homogeneous products). Does that sound familiar so far?

Instead, most labor markets are far, far from these assumptions. This can lead to serious misallocation of resources - including, most notably, that underpaying workers leads to chronic underemployment (remind you of 2010-2015?) AND chronic underproduction. Correcting that input price (wage) can create higher employment and higher output, which is what we'd like to have.

Here is some context showing how inapplicable Econ 101 is to modern labor markets: https://publicpolicy.wharton.upenn.edu/issue-brief/v6n3.php. Look especially at Figure 2. In the yellow and red zones, the labor market is broken. If the whole map of the country were blue, then your point would be closer to correct, but the overwhelming majority of the country, and Michigan, is in bad shape.

Here is a recent article on the minimum wage using some cutting edge econometrics: http://ftp.iza.org/dp8944.pdf. In short, they find relatively high wage elasticities and near-zero employment elasticities. Translation: minimum wage increases wages, but does not really hurt employment , with is consistent with my original comment and with many other formal studies of the topic.

Lastly, your point about productivity is a good one. As productivity rises, by cause and effect, wages should too! In fact, a 10 percent increase in productivity should lead to EXACTLY a 10 percent increase in compensation in a properly functioning market. If, however, we observe a divergence between wages and productivity, then the market isn't working. Take a look at the graph in this article:
https://www.epi.org/productivity-pay-gap/
or this one:
https://piie.com/blogs/realtime-economic-issues-watch/growing-gap-betwee...

We see productivity skyrocketing (think: the age of computers and internet, productivity rises by 70-100+ %) but wages barely creep up (somewhere between a LOSS of 7 percent and an increase of about 12 percent) - which is crazy.

This suggests employees are compensated at sub-optimal levels. This can be partly remedied through wage floors. Of course, one response is that even though wages did not rise, overall compensation did - well enough, but even accounting for total compensation (an increase near 30 percent), productivity still soared by triple.

The evidence is pretty clear: wages are too low for optimal economic performance. One step toward correcting that problem is a minimum wage.
If you want to think more about this issue, I'd begin here:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3129221

The long and short of it is that many of our economic woes in the last 30 years can be attributed to excessive employer power relative to employee power, including economic inequality, decreasing share of labor to capital, underproduction, underinnovation, and unemployment.

This makes a very strong case for raising the minimum wage and doing more to promote competition among employers. Make our economy innovate again.

I learned this while getting my PhD in economics. It's fascinating stuff, sometimes even counter-intuitive. If I have one major critique of the early-stage curriculum of economics, it's that no one does a proper job explaining just how badly the simplistic assumptions can fail, and that it is easy to develop an incorrect intuition when they do.

Matt
Wed, 11/28/2018 - 9:28pm

Paul, a lot to respond to. But I took enough econ beyond 101 to recognize then and especially as years passed what a time waste much of it was, especially Macro. And that much of what was treated as fact then resides in the dust bin today. The Phillips Curve for example! My condolences. But first seems that you imply that productivity will increase based on higher pay? Yes it may, only in that I as an employer begin to terminate the least productive employees when faced with increased costs of that employee. And for many that will often be permanent as their abilities can't justify the wage you've picked for them. Is that the solution you seek? Not so strangely, this is consistent with the studies of Seattle's $15 minimum wage increase where the bottom tier of wage earners saw their hours cut in spite of a booming economy there. Maybe this is the innovation you speak of, employers eliminating bottom tier employees by use of technology? As an employer I see that as the most likely result since increasing wages overall (inflation) doesn't camouflage the increased cost for this small segment of the work force. Clearly I get the strong impression you've never worked in a business which is a shame because it would've given reality punch to some of the notions I see here. "A 10% increase in productivity should lead to a 10% increase in wages"!! Aside from the question of whether you are talking about wages as take home pay or total employee expenses or the buying power of those wages, a whole other discussion, that idea is absurd unless you're coming from the school of "Profit is theft" and the employer's investment in equipment the employee uses should receive no return? Again I say forget your econometric models as you literally can find one to verify anything. From just studying a typical business' (not Amazon or Alphabet) P&L it's very clear the impact of rapidly rising wages as you propose is businesses raise prices what ever extent they can and eliminate labor as much as they and their capital can afford or shut their doors when the investment financial or other wise can't be justified, very few businesses have seen the out sized return on capital you describe . And you can't say wrecking a substantial percentage of enterprises somehow leads to an over all economic paradise. There are no other options and the world you and your models describe doesn't exist. The laws of supply and demand like it or not is just as real as the law of gravity.

sammelvin
Tue, 12/04/2018 - 1:27pm

increase employment/job.
bring back our grocery stores..so we can shop for our food .what we want and like.:
the foodpantries have only volunteers that don't get payed .....
donation goes ..lost of donated food in hugs bag/bundles .
eldery donot eat or like cereal in boxes.: all this is found /created by Wallstreeet .see Foodbubble.Economist/ mag, 2016
want more JOBS>have foodstamps updated for all senior and veteran(some donot qualify)
Foodstamps accepted in all local restaurants(senior hour 2-5)save dinner hour for customers
Senior living alone need to get out and socially.plus they cannot lift have cooking pots/pans,so they eat ...itema in boxes or cans.

Todd
Tue, 11/27/2018 - 2:58pm

Hilarious!!! making excuses already. The democrats once again pulled the wool over your eyes. Too bad voters weren't required to pass an IQ test. Whitmer would never have won. What a con job.

Noah Schall
Wed, 11/28/2018 - 3:46pm

Todd, respectfully, nobody is making excuses for anyone - the authors are actually challenging Whitmer's main campaign promise, so they are hardly sympathetic to her.
Most experts expect a national recession sometime in the next 2-4 years, and national recessions don't care who sits in the governor's seat in Michigan. It'll smack us hard no matter who's there. And that's the point - Michigan does not have much control over national economics.

I was hoping Schuette could win it in a long shot, but he had basically no plan for fixing the roads. Voters saw through that. The sad fact is, he was dumber than Whitmer when it came to the roads question, so if anybody was trying to pull off a con job, it was him. Flawed candidate - find a smarter guy for 2022, or, hell, maybe Whitmer will surprise us.

All this Tea-Party rhetoric that you can fix problems without any money... eh. It sounded good in 2010, which is how we stopped the Obama congress. But people can see through that now. Republicans need to start delivering results rather than rhetoric. You want better roads, you need the money to fix them, and that's all there is to it.

Bob
Tue, 11/27/2018 - 3:00pm

A governor can effect any economy thru regulations, taxes, and business environment. Does the governor see them as means to improve jobs and economy or as a piggy bank for social agenda.

***
Tue, 11/27/2018 - 5:55pm

Upcoming GM plant closings in the Detroit area and related cutbacks in the suppliers for those plants does not bode well for Michigan.

Anonymous
Tue, 11/27/2018 - 8:07pm

To all the Trumpsterettes who want to blame Dems/women, GM just announced layoffs of 14,000 and the stock jumps, mostly benefitting the wealthy investor class, who just got a huge tax break anyhow.

The clue phone is ringing. Go answer it.

Jules
Wed, 11/28/2018 - 8:40am

It floors me that republicans refuse to look at who the POTUS is when the economy goes south.

Harry Price
Wed, 11/28/2018 - 10:25am

Yeah, fix the damn roads?. How about we stop spending road repair money on all these turn-abouts that are being constructed all over Michigan. They are confusing, costly, & unnecessary, when stop signs, yield signs, & traffic lights that are already in place work just fine. It's a wasteful way to spend road repair money on this nonsense . We are already being taxed to death for road repairs, $200+ for license plates, high gas tax & wherever else the state can squeeze it out of us. Fix the damn roads right, stop with the turn-abouts already.

Noah Schall
Wed, 11/28/2018 - 3:20pm

To the commenters saying that this article is somehow "leftist" or "making excuses for Whitmer," you need to grow up. I've been a Republican since Gerald Ford ran for office, but there is nothing partisan about this article. They're professionals making good points about Michigan's economy - they live here too. I would've preferred Schuette myself, but you sound like a middle school conspiracy theorist when you make comments like this. Grow up and make a real contribution to the discussion.

I would like to see our legislature take on the auto insurance lobby and bring Michigander's premiums down from the stratosphere. That would add something to all of our wallets. Enough with no fault insurance. Surely the majority in Lansing and Whitmer can agree on that.

Ben W Washburn
Wed, 11/28/2018 - 5:36pm

Without getting into global issues, let me just expound on the "damn roads" issue. This is an issue that should not depend upon what is happening in the larger economy. Although, one of the best times to spend money on infrastructure is exactly when the economy is tanking. That's when the contracting community is desperate for work and is willing to work without earning a profit, just to keep their workforce intact and ready for the next uptick.

Good roads are, however, not just another nice convenience. Look around you when you go for a drive during the workday. More than half of the vehicles around you are being driven by someone working and on the clock. Bad roads, and slow-flowing traffic are a BIG DRAG, on the localized economy and particularly upon smaller businesses.

With bad, potholed roadways, you either pay more to get them fixed, or you pay more at the repair shop, whether you are just one more consumer, or are a business which has a lot of folks out on those roads. Yes, good roads will be bad news for the repair shops, which make up a small part of our total economy. But good roads are great news for the greater part of our local economy.

I say, this should not be a partisan issue. Folks on all sides of the partisan divide ought to be able to own up to the fact that paying more to fix the "damn roads" is a wise investment in our common best interest.

For those who are concerned about kickbacks, I would say: Exercise your Freedom of Info Rights and hold the feet of contract decision-makers to the fire, but don't throw the baby out with the bathwater.

And I would say the same for those who feel that double-weight haulers ought to be bearing a bigger part of the cost. It is better that we all get off of our stymie stands, and get the "damn roads" fixed.

For those who are concerned that Whitmer will do just exactly what the 4 Governors before her have done (Blanchard, Engler, Granholm and Snyder), that is, to make short-term repairs which give temporary relief, but which actually cost more in the long-run, I would say that that is a fair concern. And we ALL need to hold Whitmer accountable for acting in ALL of our common interests, and not just in her ability to get elected for a second term.

For those who look at what other states are charging in gas tax rates, you need to be looking at another important factor:

Half of Michigan's population and roads are in the Detroit metro area, which because of lake effect has many more freeze/thaw cycles than any other part of this whole Great Lakes region. And these weather cycles are what mostly damage roadways. You can't easily compare us with Wisconsin, Ohio or Minnesota. Only a small part of Indiana and Illinois is comparable . And you totally can't compare us with the Great Plains. Our environmental situation is unique, and you had better understand those differences, when it comes to making roads expenditures. New York and Pennsylvania are not comparable because of sharp terrain differences.

Finally, good roads are not financed out of current-year tax revenues. A good road should be expected to last at least 25 years. That means that the government can issue 25-year bonds to improve a road. Government bonds these days are selling for a 3% or less interest rate. Looking at the last 50 years, this is still a bargain rate.

Thus, I say, that NOW is in fact the right time to get the "damned roads" fixed.

Thomas
Thu, 11/29/2018 - 12:47am

Great comment. Thank you

sammelvin
Tue, 12/04/2018 - 1:01pm

Under Gov.Engler Conservative revolution
DETROIT NEWS April 8.2001 Budget>.
Total State budget 1990 ..........$19,5 billion
under Engler.............. 2001.........$ 36.5 billion....... a 60.7% increase
general Fund Budget 1990................$7,7 billion
2001.................$ 9,7 billion
Rainy day fund.......1990........$ 385 million
......................................2001.........$ 1,3 Billoin.........238% increase
ROAD and Bridge budget ...........1990..........$ 328 million.
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,2001.........$ 1,54 BILLION ...369% increases
No Casinos 1990
in 2001 ........ 20..
Governor Salary............1990.....$ 106.690
in 2001........$ 172 000..............................61.2%
and so on lets see..... 2001..........................2012
2012....................................2017???????????????????

sammelvin
Tue, 12/04/2018 - 1:13pm

2004 recession ....Bail-out AIG and Big Banks ..raided out of SS lockbox of $ 1,5 Trilloin from Socail Security Seniors Money..
2004 recession foreclosure Local ReP. congressmen 80 000 ...home.
foreclosure used to take 1 ONE year going though courts/etc in 2004 30 days..$$
$$$ 1,5 Trilloin DUE to SS lockbox 2018 ...2018 is here
all this was menaced ?congress change or making laws!
in 1990 my saving account in Local bank Payed 18% interest!
Now internet 0.025 maybe $ 2.00 if you deposit $ 20.000 in out of state banks
>Wells Fargo .Chase.No intense to account holders But cEO get $ 90 000 bonus etc,