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.