For years we ended our presentations with a slide that said Michigan must get younger and better educated or we will get poorer. Where younger meant a place where Michigan was retaining those who grew up here and attracting mobile young talent from any place on the planet. And better educated primarily meant increasing the proportion of adults––particularly young adults––who had a four-year degree or more.

We didn’t get younger or better educated and we did get poorer. Falling from 99 percent of the nation in per capita income in 2000 to 89 percent in 2020. Falling from 18th to 33rd. If Michigan had just stayed at 99 percent per capita income in Michigan in 2020 would have been higher by $5,656 in 2020.

Maybe more concerning is this from a 2020 Automotive News article: Rivian CEO RJ Scaringe “believes California is a cool place to be and Detroit has an old technology image,” a former Rivian executive told Automotive News. “He thinks California represents tomorrow and Detroit is all about yesterday.” Where Detroit means the region and the automotive industry, not just the city.

Another way of saying this is California is young, Michigan is old. Where yes old means the average age of its residents, but also our communities and our economy. Michigan is over concentrated in neighborhoods of drivable suburbanism and under concentrated in neighborhoods of walkable urbanism. The state’s economy is over concentrated in declining sectors and under concentrated in the growing, high-wage knowledge-based sectors.

Michigan’s fundamental economic problem is that we do not have enough young adults––new entrants into the labor market––to replace retiring Boomers. And that the young adults we do have, too few are high-skilled, particularly too few have a four-year degree.

Using the Rivian CEO’s framing that California represents tomorrow here is what the ratio of 20-29 year olds compared to 55-64 year olds looks like in the U.S., Michigan and California: US: +4.3 percent, California: +15.9 percent; MI: -2.0 percent

If Michigan had the same ratio as the U.S. there would be 85,000 more 20-29 year olds in Michigan today. If we had the same ratio as California there would be 243,000 more 20-29 year olds in Michigan today.

In terms of young adults with a four-year degree or more in 2019 37.1 percent of the nation’s 25-44 year olds had a B.A. or more; California was at 38.2 percent, Michigan at 34.4 percent. Michigan ranked 31st. (Massachusetts is the leader at 52.9 percent. Minnesota is the Great Lakes best at 43.5 percent.)

What is particularly worrisome is Michigan is doing worse on both measures in 2020 compared to 2010 at the end of the so-called lost decade. In 2010 Michigan’s 20-29 to 55-64 ratio was 100 percent vs 98 percent in 2020. In terms of 25-44 with a four-year degree or more Michigan trailed the nation in 2010 by 2.2 percentage points compared to 2.7 percentage points in 2019.

If the state doesn’t change these realities the state’s economy cannot grow much. Not having enough young adults is the path to slow growth. Not having enough young talent is the path to low prosperity.

Over two decades of research has taught us one fundamental lesson: Talent = economic growth. Then New York City Mayor Michael Bloomberg got it right when he wrote in a Financial Times column:

Many newly successful cities on the global stage – such as Shenzhen and Dubai – have sought to make themselves attractive to businesses based on price and infrastructure subsidies. Those competitive advantages can work in the short term, but they tend to be transitory. For cities to have sustained success, they must compete for the grand prize: intellectual capital and talent. I have long believed that talent attracts capital far more effectively and consistently than capital attracts talent.

Creating a place where people want to live and work becomes even more important as Michigan goes through at least a decade and a half where the number of older workers leaving the labor market will exceed younger workers entering the labor market. Regions without the quality of place that mobile talent is looking for will be at a substantial disadvantage.

To create those places––to get younger and better educated––will require five fundamental shifts in Michigan’s approach to economic policy:

• Shift from an emphasis on being a low-cost state to a state that develops, retains and attracts human capital as its core strategy for economic success.
• Shift from intolerance to welcoming all people from any place on the planet
• Shift from an economic strategy based on low taxes to one that recognizes taxes must be balanced with the need for public investments in education from birth through college and in creating places where people want to live and work.
• Shift from state limitations that prevent cities and regions from controlling their own destinies to giving them the flexibility to develop, finance and implement their own quality of place strategies.
• Shift from accepting a crumbling 20th century infrastructure to providing a world-class 21st century infrastructure.

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Governor Walker and the Wisconsin state legislature have pursued a highly conservative agenda centered on cutting taxes, shrinking government, and weakening unions. In contrast, Minnesota under Governor Dayton has enacted a slate of progressive priorities: raising the minimum wage, strengthening safety net programs and labor standards, and boosting public investments in infrastructure and education, financed through higher taxes (largely on the wealthy).

We have compared––as has the national media––the economic experience of California and Kansas who also have taken very different paths since the election of  2010. Closer to home, Minnesota and Wisconsin offer a similar real life experiment in how state economic policies effect residents’ economic well being.

In employment, household income and wages Minnesotans have done better than Wisconsinites. From December 2010 to December 2017 EPI calculates that Minnesota experienced an 11.0 percent growth in total nonfarm employment, compared with 7.9 percent growth in Wisconsin. Median household income in Minnesota grew by 7.2 percent from 2010 to 2016. In Wisconsin, it grew by 5.1 percent. In an economy where real wage growth has been elusive, Minnesota has also outperformed Wisconsin. With real median hourly wages from 2010-2017 rising from $19.62 to $20.09 in Minnesota compared to $18.35 to $18.40 in Wisconsin.

EPI summarizes the wage data this way:

From 2010 to 2017, the median wage in Minnesota cumulatively rose 2.4 percent over and above inflation—meaning that middle-wage workers in Minnesota have had a measurable improvement in their living standards. Minnesota’s median wage growth was also stronger than the 1.6 percent the U.S. experienced as a whole over the same period. In contrast, from 2010 to 2017, the median wage in Wisconsin rose only 0.3 percent after inflation. In other words, middle-wage workers in Wisconsin are treading water, barely hanging on to the same buying power they had in 2010.

Of course, state policy is not the only factor that determines economic well being. It probably is a relatively small factor. But that is not what we are told over and over again by business and political elites. Who have been pushing for decades the story that the places with the best economies are those that are following the Wisconsin and Kansas playbooks of low taxes, shrinking state government and weaker unions.

What Minnesota and California demonstrate since the 2010 elections, at the very least, is that raising taxes,mainly on the wealthy; using the funds to make public investments in education and infrastructure and generally viewing active government as a way to improve economic well being does not lead to the predicted economic decline. In the case of Minnesota and California it has been a playbook that contributed to greater prosperity.

Michigan Future has  published two case studies on the Minnesota policy playbook over the last four decades. One on state policy entitled State Policies Matter. The other on the policies of metro Minneapolis entitled Regional Collaboration Matters. Both worth checking out. What stands out in each is the decision at both the state and regional level––on a bi-partisan basis––to make education attainment the centerpiece of economic policy. Not low taxes. That has mainly meant high standards and a high level of public investments in education from birth through college. It has also meant public investments in creating places where talent wants to live and work.

Minnesota, not Wisconsin nor Kansas, is where Michigan should be looking for a state policy playbook that leads to rising household incomes for all.

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Despite the overwhelming evidence that cutting taxes doesn’t grow state economies, it seems like the Michigan legislature is hellbent on replicating the failed Kansas playbook. This time by eliminating the state income tax. Not smart!

Let’s quickly review what has happened in Kansas. This comes from a Bloomberg column by Barry Ritholtz, founder of Ritholtz Wealth Management. He writes:

In May 2012, he (Brownback) signed the bill into law. It initially lowered the top personal tax rate to 4.9 percent (it’s now 4.6 percent) from 6.45 percent, but most importantly, it eliminated income tax on profits for owners of limited liability companies, subchapter S corporations and sole proprietorships.

Give Brownback credit for passing the exact legislation he had promised.

The results, however, haven’t been very encouraging. Indeed, since the tax cuts were passed, almost nothing has gone as promised in Kansas. Revenue plunged and the state resorted to pulling money out of its rainy-day fund to plug the holes. A number of critical services, including for road maintenance and schools, were cut. The business climate has been poor, and the economy has lagged behind neighboring states as well as the rest of the country.

… The math is simple: Tax cuts tend to reduce revenue, in Kansas’ case much more than expected. To change people’s behavior requires more substantial incentives than changing things by a few percentage points. The reduced revenue led to spending cuts that lowered quality of life. In response, rising numbers of people and companies have left the state.

Ritzholtz details the economic underperformance of Kansas since the tax cuts:

• Kansas’ gross state product fell behind the six-state region and the nation for the third straight year. (Kansas’ gross state product grew at a faster rate when compared to the region and the nation in three of the five years before Brownback took office in 2011).
• Private industry wages in Kansas grew at a slower pace last year than they did in the region and the U.S. — as they did during the past five years.
• The number of private business establishments in Kansas trailed both the region and the nation for the last year, again continuing a five-year trend

Why did the experiment fail? As Ritzholtz explains: “Alas, reality trumps theory. As we have seen almost every time this thesis has been put into practice, it fails. The tax cuts don’t magically kick the economy into higher gear and the government ends up short of money. Remember former President George W. Bush and his tax cuts? Same deal. … The bottom line: The results from the economic laboratory known as Kansas are in. Supply side theory — and Kansans — lost.” (Emphasis added.)

At the same time that Kansas was slashing taxes, California and Minnesota were raising theirs. In both cases, mainly higher income taxes on households with the highest incomes. What the tax cutters repeatedly tell us is the worse thing you can do to a state economy. Think again!

California arguably has had the best recovery of any state since the end of the Great Recession. The Washington Post reported:

California’s economy grew by 4.1 percent in 2015, according to new numbers from the Bureau of Economic Analysis, tying it with Oregon for the fastest state growth of the year. That was up from 3.1 percent growth for the Golden State in 2014, which was near the top of the national pack.

The Kansas economy, on the other hand, grew 0.2 percent in 2015. That’s down from 1.2 percent in 2014, and below neighboring states such as Nebraska (2.1 percent) and Missouri (1.2 percent). Kansas ended the year with two consecutive quarters of negative growth — a shrinking economy. By a common definition of the term, the state entered 2016 in recession.

And then there is Minnesota. It, as we detailed in our State Policies Matter report, has, by far, the strongest economy and the highest taxes in the Great Lakes. The lowest unemployment rate, the highest proportion of adults working, the highest per capita income and lowest poverty rate.

Michigan policymakers should have learned by now that cutting taxes is not effective in growing state economies from our own experience as well. We have been trying this playbook since the late 1990s. The result: Michigan for the first time ever is a low prosperity state with a strong Detroit Three. The last time the Detroit Three was thriving in 2000 Michigan had a per capita income at the national average. Today, having gone from a high tax state to a low tax state (see this Citizens Research Council report), Michigan is eleven percent below the national average. And there are roughly 400,000 fewer jobs in Michigan today than in 2000.

So no the states with the lowest taxes don’t have the best economies. And definitely states without income taxes are not the most prosperous.

What correlates far better with high state prosperity is talent. The states with the highest education attainment.

As we have written frequently (see this 2010 post, this from 2014, and this from 2016) what matters is what you get from higher taxes. Yes there are benefits you get from taxes. The places with the strongest economies are those that combine high quality education systems and high quality of place that retains and attracts mobile talent. (And are also welcoming to all.) Both education and placemaking require public investments. These kind of public investments, paid for by our taxes, is the state policy playbook most likely to return Michigan to high prosperity, not more of the failed Michigan and Kansas tax cut after tax cut recipe.

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Their own report shows how untrue that is. They only provide data for ten states that they designate as comparison states for Michigan. The ten (in the order they list them) are: North Carolina, Massachusetts, California, Texas, Illinois, Alabama, Tennessee, Georgia, Indiana and Ohio.

Of the comparison states the one with the lowest business cost score is North Carolina, 14% below the national average. The two comparison states with the highest business cost scores – far higher than Michigan – are California and Massachusetts (18% and 17% above the national average). If they are right that Michigan’s moderately high business costs are the chief cause of Michigan’s economic decline, then Massachusetts and California should be in ever worse shape and North Carolina should have one of the nation’s best economies.

The exact opposite is the case! Their two highest business costs states are the only comparison states in the top ten nationally in per capita income and North Carolina is thirty fifth. The differences: per capita income in Massachusetts $16,000 higher than North Carolina, California $8,000 higher.

So what about per capita income growth rates? (Some – including Business Leaders for Michigan – argue that Michigan should benchmark itself against high growth states.) From 2001-2008 Massachusetts ranks 24th, California 33rd and North Carolina 44th.

How about the metric that most of the public uses to measure economic success – the unemployment rate? In February 2010 Massachusetts 9.5%, North Carolina 11.2%, California 12.5%.

Lets look at all ten comparison states. North Carolina is one of seven below the national average in their business cost scores. Of the seven all are below the national average in per capita income. Six – Texas at 26th being the exception – are in the bottom twenty.  The tenth state is Illinois whose business cost score is at the national average. It is 14th in per capita income.

The three comparison states with the highest business costs scores are the three states with the highest incomes – by far.  So much for low business costs being the key to Michigan’s economic revitalization!

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Judis agrees that California – no matter how dysfunctional its state government – is going to be a technology-based growth engine. But he argues that economy is likely to leave out lots of folks. This, I believe is America’s challenge, not just California’s.

Judis observes that California’s economy has no middle. Either you are part of the high wage technology (we would argue more broadly knowledge-based) economy or you are in a low wage economy. Those in the low wage economy are predominantly those with low education attainment and disproportionately African American and Hispanics.

Our educated guess is that about forty percent of the jobs, when our economy gets going again, will be lower skill/low wages. We believe that, in addition to the thirty percent or so that Judis believes are in high wage occupations, there is another thirty percent or so that will be in middle skill/middle wage occupations. What to do for the forty percent is an issue the whole country is going to have to deal with. Other than an expanded safety net, the answer is not obvious.

Secondly, Judis argues that California – more than most states – has moved from being a state that invests heavily in education, to a laggard. Sound familiar? And in doing so has significantly reduced the chance of many Californians – particularly those growing up in households without college educated parents – from getting the skills needed to be part of the sixty percent in high or middle wage jobs. He makes a strong case for a return to investing in education (pre k-16) as a priority.

He argues that this disinvestment is the result of the anti-tax movement in California and the general shift to the right by the Republican Party. I think he places too much emphasis on funding as the answer to better preparing talent for a flat world economy. Transforming teaching and learning is really important too. But we agree that restoring public investments in teaching and learning as a priority  is an essential ingredient on the path to prosperity.

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I keep coming back to the central conclusion of our New Agenda work that culture trumps policy. (For details read our New Agenda for New Michigan report.) This is culture as attitudes and beliefs, not arts and culture.

We surprised ourselves in developing our New Agenda by concluding that what most distinugishes those places across the country that are doing best in a flattening world is their culture. That if you got the policy right and the culture wrong, you would not be successful.

The places with the most prosperous economies highly value lifelong learning, an entrepreneurial spirit and being welcoming to all. This is what matters most along with an acceptance – rather than resistance to – globalization and technology.

The importance of valuing learning is obvious. Education attainment is what is driving success for individuals and communities. And because the world is constantly changing learning needs to be for a lifetime.

We use entrepreneurial spirit in its broadest sense, the opposite of entitlement. It means a community with a DNA that values risk taking and taking responsibility for your own career whether you start a business or not. It sure means giving up on the notion that you are owed a job with good wages and benefits as long as you do your job, whether your employer is successful or not.

Talent increasingly can live anywhere they want on the planet. Its no longer can we compete for mobile talent with Chicago and California. Its now those places plus China, Africa, Europe, you name it. And one thing is clear, if people don’t feel welcome, they will not come. The places doing best are those that are open to having folks come and live in their communities from anyplace on the planet.

These cultural values far better characterize California than either Michigan or Indiana. And are a more powerful driver of economic growth than getting state and local spending and taxing right. Changing culture is hard, but its something we need to put at the top of our priority list. Its that important!

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Lets look at a state that many in Michigan think get policy right: Indiana. For decades we have been lectured on the need for Michigan to be more like Indiana. The most recent example is a Detroit News editorial comparing Indiana’s ability to reach agreement on a downsized budget to Michigan’s continuing gridlock.

In the Great Lakes, Indiana is the poster child for both the small government ideologues (low taxes, less government spending, weak regulations) and the good government moralizers (less partisanship, balanced budgets). According to them that should lead to a strong economy today and tomorrow.

Think again! Indiana in 2008 is fortieth in per capita income – the eleventh poorest state in the country. The only Great Lakes state poorer than Michigan. Since 2000 – while Indiana has been held out as model for Michigan – its fallen from thirty second to fortieth. Who wants to be like them?

Contrast that to California – which we are told is doing state policy the worst. Its ninth in per capita income, down from eight in 2000. Clearly small government and a less partisan politics that produces balanced budgets is a lot less important to economic success than many believe.

So what does explain California’s prosperity and good future economic prospects and Indiana’s relative poverty? Participation in the knowledge-based economy: where job growth has been the fastest for two decades and where most of the good-paying jobs are. (For a description see our Second Annual Progress Report.) Sixty one per cent of California’s wages and salaries come from knowledge-based economy employers compared to forty five percent in Indiana and fifty eight percent for the country.

The places where the knowledge-based economy is the strongest are those with the highest proportion of adults with a four-year degree. Because its the most valuable asset to knowledge-based employers. As we have written repeatedly its the factor that best predicts prosperity. California is fourteenth in college attainment, Indiana is forty first.

On all these factors (income, concentration in the knowledge-based economy and college attainment) Indiana is the worst in the Great Lakes. One lesson we need to learn is that you can’t get California’s economy by adopting Indiana’s policies. Small government, less partisanship and balanced budgets are not the path to prosperity.

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The article argues that California is and will be in the future a leader in economic growth. With lots of data to back up their assertion. Contrast that to the conventional wisdom that, because of arguably the most dysfunction state government in the country combined with what is thought to be business unfriendly polices, California’s economy is in for long term decline.

Have the folks at Time lost their mind? If you listen to the small government ideologues they have. They argue that the places that will be the economic winners in the future have low taxes, small government and weak unions. Then there are the good government moralizers who argue business won’t invest in places with hyper partisanship and where states and local governments can’t even balance their budgets.

Turns out the stuff on the priority agenda of the small government ideologues and good government moralizers doesn’t matter much to economic success. As Time argues what matters is that California is:

the greenest and most diverse state, the most globalized in general and most Asia-oriented in particular at a time when the world is heading in all those directions. It’s also an unparalleled engine of innovation, the mecca of high tech, biotech and now clean tech.

The central important defining characteristic of California that emerges in the article is their future orientation. No matter how screwed up their politics, its a state which, at its core, is at about creating the future, not protecting the past. What matters most is the talent and entrepreneurialism of the people of California. To the degree that policy matters what matters most is their embracing more than resisting globalization and technology. More free trade oriented, more open to immigrants, at the leading edge of green policies, stem cells and now transportation alternatives to the car.

Its these characteristics that Michigan most needs to replicate. The lesson we need to learn is that aligning with, rather than resisting, a flattening world is what matters most to future economic success.

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