 I'd like to welcome everyone here today to our symposium Michigan, Michigan's Economy 2009 and beyond. My name is, my name is Brian Jacob. I'm the Walter Annenberg Professor of Economics and Education Policy, and the Director of Close-Up, the Center for Local State and Urban Policy. I would like to welcome you here. My job is actually very simple today. I'm going to be introducing our panelists and moderator and then stepping aside and letting them do the talking and doing the work. So today, just starting in alphabetical order here, we have John Austin, who is the Director of the New Economy Initiative and Vice President of the Michigan Board of Education. He has been involved in economic development and policy-related research in Michigan for many, many years. He was the Policy Director of the Cherry Commission, a governor appointed commission that focused on higher education in Michigan. He's co-authored a number of reports and papers, including revitalizing Michigan cities. And he is, as I mentioned, currently leading a very large, well-known initiative on the new economy to try to bring Michigan through its transition from manufacturing to a more diversified economy. We're glad to have him here. Charlie Ballard is a Professor of Economics at Michigan State University and the Director of the MSU State of the State Survey. He has also been working in Michigan Economic Development Policy for many years. In addition to being an excellent public finance economist, more broadly, he has remarkably detailed and in-depth knowledge of the Michigan economy. He's authored a number of books, including Michigan at the Millennium, Michigan's Economic Future, and Real Economics for Real People. We're glad to have him here with us. And then we have Chris Heider, who's the Program Director of the Economic Development Program at the National Governors Association. He directs policy and legislative analysis for the National Governors Association. And we're hoping that his presence here today will help us kind of bring a national perspective to the economic development challenges. And Michigan shed some light on what other states are doing successfully and maybe less successfully. And so we're glad he was able to travel from D.C. to join us here today. Then we have Kim Hill, who is at the end of the table there, Director of the Automotive Communities Program and Associate Director of the Economics and Business Group at the Center for Automotive Research. Mr. Hill is actually an earlier graduate, one of the first graduating classes of the Ford School of Public Policy. He has held many positions before coming to the Center for Automotive Research. At the center, he's actually the lead investigator on their economic impact analyses. And so his work within the Economics and Business Group is working on modeling and economic forecasting related to the auto industry in Michigan's economy. I think, yeah, despite our efforts at transition, the auto industry plays a huge role in Michigan's economy. And so Mr. Hill will hopefully be able to provide some insight on where that industry is and where it will be going. And then finally, we have the University Librarian and Dean of Libraries, the Harold T. Shapiro Collegiate Professor of Public Policy, Paul Courant, who has graciously agreed to moderate the discussion. He will be holding the whip to keep all of our panelists in check, limiting their talks to 10 to 12 minutes, and then taking questions from the audience and moderating the discussion. So without in mind, I think we are all set to begin. The last piece of business I'd like to take care of is to thank some of the people that have worked incredibly hard to put this presentation together. Bonnie Roberts and Tom Avoco from Close Up, Bill Kelly from the Facilities Department here at the Ford School, and then Joe Crane and Laura Lee at the Outreach Office have worked incredibly hard to put together all the preparations for this event. And I'd like to thank them very much here. And with that, I would say we're very, very happy. I believe we said that Mr. Hill would start. All right, thanks very much. Actually, it was X when I was accepted, turned into the School of Public Policy over the summer, and became Ford School sometime after I left, but we won't hold you on that, Brian. So I get to, in my 10 minutes, just tell you all about the auto industry in Michigan. So are you ready? Those of you from Michigan can just ignore the next few things. Just a little bit of background, and I don't have slides on this, because you can imagine what they look like. They start really high up there, and they head down towards the bottom, the bottom right-hand corner. 11 million vehicles are produced in the United States every year for the past decade. 11 million vehicles, 8.7 million were built in 2008. 16 million light vehicle sales in 2007. By the end of 2008, that number dropped to 13 million, and some projections are at the end of this year would be down to about 10 or 11 million. The average for the last decade has been about 16, 17 million sales. So we're dropping off probably 6 million units. I think some people would say, we're lucky this year from the end of last year. GM, Ford, Chrysler are all downsizing. I'm sure you're well aware of that. Others in the country, Honda, Toyota, Nissan, are all losing sales in their idling or reducing shifts at many of their assembly plants. Nissan is just the latest one today announcing what's going on. The auto industry is in bad shape. The economy is in bad shape. Michigan has been hit hard, and many other states are also suffering. I, in my time of living here in Michigan since the mid-60s, I've witnessed five recessions. And since that time, or each time, the feeling is among the state and a lot of people is let's diversify. Let's change our economy. Then, when the economy recovers, lo and behold, Michigan has one of the highest per capita incomes in the nation. And we're fine until the next recession hits. We kind of ride along on the fortunes of the auto industry. Now, my fear when I'm asked to speak about this or get on a panel or talk to folks about diversifying the economy, transitioning the economy, is this is code for let's dump this industry and get into something else, anything else. Something more high-tech and something more, to corner phrase, knowledge-based. And those of us who are close to the industry and study it and work in it would know that that last bit applies to the auto industry. The premise for this panel is that there's been little discussion and no consensus regarding how Michigan should respond to this economic situation, if you will, that we're in. Yeah, also stay on the path of transition toward a knowledge economy. I also have a problem with the word transition. Transition implies that we're moving to something completely different, that we don't have what it is we're transitioning out of into something. I prefer the word transformation. And I'll get into that in a little bit. Transformation is implying we're using what we have. The auto industry in the past has provided good, solid, middle-class quality of life all without the need of a college education. The industry, however, is changing. Even a new assembly line worker, and that's pretty much anachronism right now, a new assembly line worker, is required to have two to four years of college. There's an engine plant just south of here in Dundee that opened building engines and everybody, everybody there had a four-year degree working at that assembly line. The prospects of the jobs, the good-paying jobs, and the opportunity to progress through the industry up to the skies of the limit are, you know, it was a really good situation for a lot of folks. The reason that they want college degrees these days are they've learned their lessons from the Toyotas and Hondos of the world who empower their employees to help out, to improve the product, to improve the process, to work as teams, to feed it back to management and say, this is what we need to be doing better, this is how we continuously improve our product. So they want people with heads on their shoulders and not just muscles and sweat. Therein lies the conundrum. We want to transition to a knowledge-based economy when we already have one. The collective vision of this industry is dirty, grimy, blood, and sweat. Who of you from Michigan, not from Michigan, has that image in your head? Because that is what we hear a lot of. The motto in Michigan, if you're not from here, is if you seek a pleasant peninsula, look about you. To paraphrase, I'd also like to suggest if you seek a knowledge-based economy, do the same. All right, now I get to see if I can work this or not. This slide shows Michigan's share of the U.S. automotive research and development spending that goes on every year. Since 1999, up through the present, the automobile industry has spent annually $15 to $18 billion on researching and developing new products, new processes, things that have made the automobile you drive a marvel of modern science. Michigan's share of that throughout these years is hovered between the mid-60s and the mid-70% of that spending. We've gone from a little over about $10 billion, up to about $13.5 billion, and research and development money gets spent in Michigan every single year, just on the auto industry. Where does it get spent? It gets spent in some of the over 275 research and development automotive-related facilities in the state. And it generates over 50,000 jobs at these facilities. Very high-paying, very high-tech, very knowledge-based jobs. Many of the best workers are also working here. And they make very good salaries. Electrical engineers were in the top 10. Industrial engineers, the top of the states. Mechanical engineers, top in the states. The heart and soul and the intellectual base of the North American automobile industry is right here in Michigan, and it might even add the world. The industry started here and has exported its knowledge ever since. My concern is it will squander the resources we have instead of capitalizing on them, capitalizing these resources that are captured in this region. The U.S. auto industry will survive. It's not like the lumber industry, the steel industry, the textile industry, or many other industries that came before it, which left because these products could be made more cheaply somewhere else and then shipped back here. Automobiles are a very, are a high-value-ad product with opportunities to make profits for the companies that make them, capture all their costs and make profits. Every automobile manufacturer in the world of a legitimate size, this is about a million units, a little bit less than that, worldwide wants to be here in North America because of the opportunities, because of the high price you're able to get for your car. We don't buy nor build $2,000 cars here. Let's see, where was it? The industry will survive, and it will go back to the 10 or 11 million vehicles annually and spending billions of dollars developing them. The only questions, really, are who will make them and where. And that's going to probably be determined during this recession that we're in right now. Turning to the policy front, because I'm sure you want me to, the Congress and administration are pushing for and will continue to push for fuel-efficient vehicles through CAFE, CO2 emission reductions, cap and trade systems, and then there's also that state out west, California, who knows what they have up their sleeve, but the industry will be responding to that. Hopefully the politicians and the folks in DC will do something to bring in the consumer to the demand side of the equation, such as a floor and the price of fuel, but you can catch me on the side and talk about that later. The folks in Washington are at least putting some money behind where their mouths are. With the $25 billion loan package to encourage efficiency upgrades and credits to apply to the purchase of plug-ins and also rumors of billions focused on advanced battery research, which is really sorely needed money brought into this industry at this time. In Michigan, we have the critical mass of highly skilled, motivated labor, the necessary educational infrastructure, and most importantly, the innovation culture that knows what to do with this and to respond to challenges. We can't let this fade away. We must leverage any transformation on the foundation of the auto industry and its assets here in the state. And at that point, I'm looking forward to hearing from my fellow panelists and your questions later. Thank you. Thank you. I'm John Austin. I'm currently the Executive Director of the New Economy Initiative for Southeast Michigan, which is 10 of our states and nations leading philanthropies pooling $100 million and their influence to support the economic transformation that we need to be about. We're governed by a 20-member governing body of community leaders and foundation presidents, including Rick Snyder, who's here, as one of the 20, and Arbor's own. I also want to acknowledge Phil Power of the Center for Michigan and John Bebo, who are here and who are also providing very helpful catalytic pushes to understand our economy and what we do about it in Michigan. What's the website? CenterforMichigan.org? The Center for Michigan.org. To participate in this ongoing work, I would encourage you to be part of the team that Phil's pulling together. And much of what I'll show you today in terms of the context of Michigan in this transformation or this transition from the industrial economy that we invented, really, to finding our place in the global knowledge economy and what we need to do within that comes from work that we've been involved with that started here, really, at Michigan, around the future of the whole industrial Midwest in Great Lakes states that I was involved with with Brookings Institution. And Brittany F. Alter Kane is here. I know who's a senior researcher with Brookings who produced these beautiful data graphics that I benefit from in terms of my ability to talk from them in these kinds of settings. We have unique challenges in Michigan and in the industrial Midwest that are really centered here that are largely legacies of the factory economy that we created and that provided great wealth, as Kim indicated, not least of which is just the physical legacy of the predominant share of the Midwest and Michigan of industrial areas and plants and brown fields. Over 60% of the nation's brown fields are in the Midwest, so the physical relics are in the way. There's probably a river or a lake behind this complex, whatever it is, and that physical residue of the things that made us great is a defining feature. We have the low education attainment levels that Kim alluded to, the lighter states are the least well educated. We did not need a college or post-secondary degree to earn a decent living in our factories and our mines and our mills. Indiana, Ohio, Michigan, in particular, suffered this from this legacy. Since we're so reliant on manufacturing in the factory economy and it is restructuring and under incredible competitive pressures globally, we're seeing massive numbers of dislocations and unemployment which are centered on us. This is a bit dated, but the numbers are the same or worse today. Another defining feature is that our young people who we do educate at scale in the region leave us for more exciting dynamic urban environments. Again, the data's a bit dated, but the trend is the same. The brain drain of young educated people from our Midwest states, with the exception of Chicago and Minneapolis-St. Paul, which are talent magnets, is a defining deficit for us. The young educated people along with immigrants are among the most entrepreneurial and the most willing to take risks and start new things. Our pattern of reliance, of a culture that got used to relying on the big paternal firms and autos and other sectors, the structure of our industry where lots of innovation and intellectual properties locked up in those firms, our lack of venture capital in the region to commercialize new technology, and this talent loss all mean that on balance our metro communities in the Midwest, including Southeast Michigan and Michigan, are among the least entrepreneurial in the country. We need to reanimate the kind of entrepreneurial creation that made us what great, that created all the great industries that matter in the Midwest, but we've lost a bit of that. However, we do have real assets in Michigan that matter in today's global knowledge economy. Starting with, we're still just a huge economic engine in marketplace. These are the GDP output, the dark blue states and provinces, and this Midwest binational region is a center of tremendous economic activity. We're its own country, the provinces of Canada and the Great Lakes states. We'd be the second biggest economy in the world, second only to the U.S. as a whole. Tremendous innovation. The innovation infrastructure, private firms, new technology development, new processes, 80, 90 percent is generated, the private sector 10 to 15 percent in research universities where they work together and where they have the synergies like in this community we're in. That's where you see the incredible new ideas, new technologies, new innovation. Michigan punches above its weight in terms of new intellectual property among states, and that's a consistent pattern in the whole Midwest. A third of our nation's new ideas, new patents come from this oval, this Great Lakes region. We have the world's leading learning infrastructure that was purposely created. The institution we're in, the other public universities, land grant universities, colleges, community colleges is unrivaled on Earth in terms of, and it was a wonderful innovation to provide low-cost, high-quality education for every man and woman, not just the elites, and to do the research and learning with the land grant notion that would fuel commerce industry and a new creation. So this network of the CIC, the Big Ten Plus, and other universities where research universities are at the hub of all the industry sectors that are emerging materials, life and biosciences, IT. They are percolating energy in and around the research university axis. When the Chinese, who are seeking to replicate these great institutions, benchmark themselves and look at the top universities in the world, 20 of the top 100 universities in the world are in the Midwest region, including Michigan, Michigan State, and that's more than any place on Earth. The West Coast has 13 in the top 100. The mid-Atlantic states in New England together have 15. There's no place that has this innovation infrastructure. That makes us a huge center of talent generation. The dark blue states or the states and provinces that produce the talent, the engineers, the scientists, the management talent, the researchers. As Kim noted, almost 5% of all U.S. engineers are produced in Michigan. And so we produced the talent that our countries need to compete. We also benefited immensely by inflows of talent to go to school here, to do their work here, to research here. Immigrants have been a net boon for Michigan. This shows the education levels of immigrants. Our immigrants are much better educated than the folks who grew up here. 37% and higher have a bachelor's degree, but we need to appreciate the power, which is really the power that made Michigan what it is today. When Henry Ford opened the Rouge Complex and 100,000 people showed up for work, they showed up from all over the world. And we as a community benefit by the net inflow of talent that immigrants in refreshing our economy in bringing new entrepreneurial creation in a state which desperately needs all the new firm creation of high-tech startups. A third of our high-tech startups over the last 10 years were created by immigrants, non-native born, much higher than most states in the national average. So it's a huge source of strength for us. Another huge resource for us is this special place we live in. This great lake state, this wonderful peninsula with its waterfronts and its rivers and its forest and its woodland, we're secured by the industrial legacies and pollution that our wealth-generating economy created, but it is a beautiful place. And when place matters, when today's workers and people want to live with access to water and a special quality of life, we have this resource. We do have emerging comparative advantage in key sectors. We're in the top 10 in the nation, in Detroit and around in the creative economy, artists, design, music. What is free is us. And it's a wonderful source of new competitive strength, new industries, new economic activity. We are the cockpit for advanced manufacturing. We have the ability to leverage the incredible research and development engines in next generation energy from the new battery technologies which are going to be built and created by folks here at this university in partnership with the private sector to the new freshwater technology firms and learning that the world needs. It's a growing global enterprise to conserve, protect, and nurture our water. It's the next oil in the words of the President of Dow. We have world-leading health, medical, bio, pharmaceutical, research, learning, teaching, and innovation attributes, including this institution where we are to leverage. We're at the center of the global market and the North American largest marketplace on Earth our relation with Canada. And we tend to forget that even innovations like the internet were nurtured here. University of Michigan with other Big Ten partners created the spine and the internet. And so developing those technologies for the future is part of our opportunity. These are just a few examples of hope ripped from the headlines yesterday. They're being released in Washington a paper about pushing the network of university-hubbed research institutions for repurposing our federal energy strategy, which Tom Walz wrote about on Sunday, which would fuel the complex of research and learning around next-generation energy here. Peter Luke wrote a report that was applauding the opportunity we have to clean up the Great Lakes with the stimulus money and rebuild the water and infrastructure and sewer systems that can help us leverage the special quality place, Paul Koran and other economists did the study that said a $20 billion investment is a huge multi-billion dollar economic engine for our state. And NPR just ran a radio show that Martina Guzman put together that shows look in spite of outflows of people from Detroit, immigrants are still coming and they're revitalizing Mexican town. And they're a source of new urban development and strength which we need to embrace and further. So there is hope. Thank you. Hi everyone, the National Governors Association. And I want to talk a little bit about what Kim said. He mentioned, he was talking about transformation. And so I'd like to drill down a little bit farther on the transformation of workers. We've talked about post-secondary education. We've talked a lot about research universities and briefly about community colleges. But first I'll tell you a little bit about our organization. The National Governors Association was started in 1908 by Theodore Roosevelt right after he'd become president of the United States. He'd of course been governor of New York and really saw, like a communication so to speak, between the states and the federal government. And so the real purpose of the NGA, and it remains so today, is to represent the interest of the governors collectively. So we get into a lot of states' rights issues and every day it's been a real lesson in federalism. I work for a separate but affiliated organization called the NGA Center for Best Practices. And whereas our parents, our parent organization is focused on federal policy, the NGA Center is focused on helping states make better policy. And so we travel a lot. I have a lot of colleagues that focus on many different policy specialties, roads, bridges, prisons, K-12 education. As you can imagine K-12 is our largest because it reflects the interests and funding of governors and states. So it's the largest. My area is post-secondary education. Now if you're not familiar with state government, post-secondary education, and of course I'm generalizing among states, has fallen relatively low on the list of policy priorities for governors. There's a number of reasons for that. Funding, most public post-secondary education systems were created to be separate from the moors of the political system. So they had their appointed regions and such. But the interest, so in the past, the interest has been relatively low, but that's really changed and has changed quite a bit in the past five years. In fact, we've tracked this data for about 50 years. And nowhere before, except for a brief blip in the 60s along the foundation of community colleges, has there been a greater level of interest. Now the interests are a bit different. And so we still hear about access and affordability and these type of things. But the real interests are what I'll call more pragmatic. How do we get more math and science teachers into the classroom? What's this thing called economic development? And what's the role of the universities? And for better or for worse, the real language of this thing called economic development has primarily been focused on, well, the University of Michigan's of the world, it's on tech transfer, on things that are sexy. How do we produce the next Google? How do we really transform our economy to a biotech one? And that's fine and that's important. But it also, as Kim mentioned, it really often neglects the assets that you already have. And I'll talk a little bit more about that. So right now, I've been at NGA about three years. We have a project that we've undertaken that's really trying to understand these linkages between post-secondary education, not just research universities and industry. And so industry defined very broadly. So not just the multinationals. It's small manufacturers. It's track cleaners. But post-secondary education defined broadly. Community colleges, comprehensives, and research universities. So we've learned a few things and it's been pretty interesting. One, despite what you hear, most of the decline in funding has been led by just a few states. So funding has been stable, but there's been an outlier effect by a few states that have drastically cut higher education. Now with that said, most funding has been flat. It hasn't been growing very much. Also from a governor's perspective, because of what I talked about earlier about the fact that there hasn't been a lot of interest, relatively speaking, there's very little capacity at a legislative level or at a governor's office level to understand these very complex issues. What is tenure? How is funding done? How do you do a budget each year? How many states it's done by a formula or it's done incrementally? So that's a challenge. And then more importantly, when it comes to economic development, there's very few ways to coordinate among the institutions. Other than meeting on the football field every Saturday, how often do researchers collaborate? Now they do, but how often do we actually talk about the benefits of that collaboration to a state? And there's a tension there. And it's one that's very difficult to understand. And I think one of the major real challenges, and unfortunately I'm not familiar with the Cherry Commission, I didn't have a chance to read up on that, is a real strategic look at post-secondary education and basically how all the parts fit together. Now the reason this is, many of us know the reasons why this is important. The current economic crisis, changing demographics. I've learned this recently that there's, relatively speaking, there's lower attainment rates with my generation and the succeeding generations than my parent generation. So fewer and fewer people are getting college education. And so that's an issue. And part of that is differing demographics and populations. So the way we provide higher education right now doesn't necessarily fit the way populations are changing. And so it's another important element. But I think one of the main issues is really attainment. So this applied attainment issue, it's not just getting a college degree for a state for a college degree. It's becoming well-skilled in a way that will benefit society, including enabling people to get a job. And this brings up a very sticky statement that I often make called, that's not real popular in universities, it's called productivity and learning. So as a state, we need to give people the best and most immediately useful education in the quickest period of time for the least amount of money possible serving a very different population. Now that's a lot in just a few different sentences. But if we don't start thinking that way, what will happen is sort of what I'll call the golden rule of state legislatures. That which we don't understand, we cut. And so instead of really looking at these things strategically, it becomes a zero-sum game. Let's just cut the state budget because look, University of Michigan has not given us enough nurses. But obviously it's much more complicated than that. So where do we start? If we're really thinking about these different populations, if we're really thinking about the provision of higher education, do we start with the University of Michigan? I argue not. I think we start, we have to start with these very diverse populations with community colleges. Now in many regions, community colleges are pulling double duty. They're serving as one-stop job placement centers, training incumbent workers, granting associate degrees for people that will go on to four-year institutions. Now there's been a lot of efforts among the states to really look at community college systems. So back to that coordination I was talking about earlier, there are many states that have done this. So Kentucky, for example, created about five years ago really as the center of a state-wide strategy to combine both education and workforce development. So it's not seeing these as something, well you go to school and then you go and work. Well actually you need both. You need education but it should be applied to help you go get work. So it's a strong system. It's a cabinet level position which means that governor sees that person almost every day. He's the Cabinet Secretary for Education and Workforce Development. When you get relevant they employ a strategy called career pathways. So pretty much if you take X, Y and Z courses you know within a fairly narrow spectrum what you're going to be doing in a few years. There's other places like Washington that not only think of this in terms of education provisions but also think about older workers in the sense that their needs to actually go to education will be very different. The average community college student is 28 years old. So they probably have a family. They probably have been employed. So the state of Washington is providing things like part time financial aid options. You all that have financial aid you're going full time. Most people that have part time don't have that luxury. Benefits, childcare and so on. But this is not enough and this is where most states really do not have the infrastructure excuse me to support substantial increases and applied attainment. But states are trying and they started trying recently. And so your southern neighbor Ohio has actually been looking at this quite a bit. Now what they're doing in Ohio is quite controversial. In fact what they did was make the chancellor out of actually part of the governor's cabinet. So basically making the regents an honorary position. That's a huge change in American higher education. So basically higher education has become an agency of the state government. Now I'm not here to argue that's a good or bad thing. But what's driving it is like Michigan the economic situation in Ohio heavily related to the automotive industry. What's different about this, and I think I have about one minute left is that at least their strategy, and we'll see how it goes, it sits clear expectations 30 seconds for attainment by institution and then measures them. It also focuses on older populations by combining community college with worker training centers. So using federal money, state money and other sources to do this. It harmonizes basic curriculum but allows differentiation among different institutions based off the needs of the region and the needs of the economy in those regions. And by the way it actually stabilizes funding in this very very bad year the governor just proposes 6% increase. So I think this is a good example, at least something to look at for Michigan and something where Michigan has a very important opportunity and yes the K-12 numbers are quite good in Michigan. You've got great institutions you've got great kids and I think this would be something that really would make an impact not just in the short term but in the long term as well. Thank you. Hi, my name is Charles Ballard I'm a professor in the Department of Economics at Michigan State University. Yes that's right Michigan State not the University of Michigan but before you Wolverine fans boom me off the stage I want to tell you that my grandfather and my mother went to U of M and right now my son is a junior who claims to be majoring in psychology right here at U of M and so my son and much of my money come right in into the Washtenaw County economy. And I root for the Wolverines almost all games. There's only one opponent against which I don't root for the Wolverines. I'm going to make let me go back so here's my title let's have a graduated income tax and eliminate the Michigan business tax. I can echo many of the things that have been said by the three previous speakers I like the word transformation it's clear that since we are now in the ninth consecutive year of job losses in the state of Michigan we peaked in June of 2000 we've lost jobs steadily since we've had cumulative losses are more than 630,000 which is about 14% of the employment that we had back in the year 2000 so that's not a business cycle that's a fundamental structural transformation along with that we now in 2007 which is the most recent year for which we have the data Michigan's per capita income fell 9% below the national average that's the lowest ever been lower even then in 1933 so there's plenty of causes for concern on the other hand the good news is well the speakers have given lots of reason for good news lots of reason to believe that we can make the transformation in a very beneficial way but so many of the things that we're being talked about in terms of changing our attitudes toward education and becoming a more highly skilled state those are things that will happen in a very long period of time so I want to talk about something that we could enact this year and which I believe will have very beneficial effects two pieces graduated income tax eliminate the Michigan business tax now some on the left may say oh graduated income tax that's great but I want to keep the business tax some on the right might say the opposite I'm going to try to make the case that it's a win-win policy discussions about these and other tax policy changes are going on right now so first I'll start with the graduated income tax what are the reasons well over the past generation we've had a phenomenal increase in income inequality and that means that the ability to pay taxes is more concentrated than it used to be frankly if I were to go back to what I was thinking about tax policy in Michigan 15 years ago yeah I was sort of for a graduated income tax but not as much as I am now because year after year the distribution of income has become more unequal second point federal deductibility when I pay a dollar in income tax to the state of Michigan it cost me 72 cents that reveals that I'm in the 28% bracket and for my federal return also many parts not just the income tax the sales tax is even worse many parts of Michigan's revenue service are not very responsive to changes in the economy as the economy grows revenues grow less rapidly therefore we have periodic crises in our public budgeting and finally it's something for which I think there's substantial public support and I'll talk about all of these in turn now this is a data graph that I don't have time to go into all of the details but this is from work that I and my colleague in state Paul Menchick did and we compare at different places in the income distribution like the 5th percentile that's right there the median which is the 50th percentile so the 5th percentile that's below the poverty level median kind of middle class 95th percentile 160, 170 thousand dollars family income we compare in recent years with the same place in the income distribution about 30 years before and what you can see is that in Michigan the bottom half of the income distribution has gone exactly nowhere for a generation but as soon as you get above the median greater and greater growth this is one of many ways that we could say that the distribution of income has become more unequal this is a nationwide trend not just in Michigan but Michigan echoes the nationwide trend in many ways this is another way of saying the same thing which instead of having percentiles on the horizontal axis I've got dollar amounts in 2005 dollars 36 states and the District of Columbia and the federal government and the governments of all of the OECD countries have a graduated income tax Michigan is one of only seven states with a flat rate income tax if you're going to raise a given amount of revenue with a flat rate that means that you're going to raise more from the people at the bottom and relatively less from the people at the top and this I don't know if you can read this but it tells you that we are we have one of the lowest top rates we're 41st among the states in terms of the top rate and we're 40th among the states in terms of the size of the rate that applies to the first dollar of taxable income lots of details in these graphs which we could talk about if we have time but just to give you some sense of where we stand note also with if your dollar of income is fully deductible and the alternative minimum tax at the federal rate at the federal level does create complications for a lot of upper income folks but if you're fully deductible which at least in the last tax year I was and I hope that's still true this year in that I don't have to pay AMT the net effect of the Michigan tax system becomes actually regressive the effective rate including the flat rate at the state level and the federal deductibility becomes you get a situation where the rates are actually going down with income the effective addition to the federal rate caused by Michigan among my many hats I am the director of something called the state of the state survey which is a quarterly public public survey of Michigan adults and one that we did about a year ago asked a question about the graduated tax of course for public opinion polls you can't use words like graduated because four syllable words are too big for polls but we think we asked the question the right way and we found that of those who gave an intelligible answer four out of seven were in favor substantial support and the breakdown is interesting I'd point particularly to the breakdown of the support among income groups not surprisingly folks less than 30,000 of income very solidly in favor but even at the above 70,000 group it's a tie I found favorable I won't tell you exactly how much I make but like a lot of PhD's we've done very well in the economy in the last generation I'm definitely in the above 70,000 group I would pay more under graduated tax so it's not in some sense in my narrowly defined economic self interest but I think it's a better policy all right then how can we make this work in terms of getting it through the public because there have been attempts before to have a graduated income tax and they have run into very staunch opposition from conservative and business groups well the trade that I think would be an excellent grand compromise would be to get rid of the Michigan business tax I don't know how close you followed we had a pretty good business tax called the single business tax when it was first enacted in 1975 it kind of got worse and worse over time then we got rid of it and replaced it with something a whole lot worse which is the Michigan business tax so I ask why do we tax businesses at all after all in econ 201 I tell my students business taxes aren't paid by people business taxes aren't paid by businesses they have to be paid by people either in higher prices for consumer goods either in lower wages for workers or in lower returns for investors the public may have at one time thought that the business tax was a progressive tax I doubt it very much and in fact the public now if you were to ask me what's the long run incidence of the tax I would say that it's probably passed on to workers because of mobile capital but the public seems to think that it's like a sales tax that it's passed on to consumers so if it was ever justified I'm not sure the justification now so if we were to eliminate the MBT and introduce a graduated income tax here was what we would do we would make our overall tax system more progressive which in view of the increased inequality as I think a very good idea we would eliminate a tax that causes some of our biggest headaches in terms of just filling out the forms we would export more of our tax burden to other states for federal deductibility how much of a rate would it take well these give you some sense of it and if you were to replace all of the MBT revenues and if you were to have any meaningful graduation you'd have to have a rate a top rate in Michigan in excess of 7% probably closer to 8% that's getting kind of high the economists do worry about my favorite would be to go into the 6's because we could replace the current income tax revenues and the old SBT revenues with a graduated income tax with rates very similar to those in Kansas and I like to say Kansas because it's not known as a hotbed of left wing radicalism and then we could replace the rest of the MBT revenues from other sources I got a couple of other slides but I'll stop now, thank you very much so now we get to talk to each other this thing on okay good and I guess I'd like to start by letting our panelists talk to each other each of you will get one question to ask any other one of you and then a brief answer and then we'll turn things over to the crowd so John you're the closest to ask somebody a question what Michigan has to work with the train that comes so you want me to talk about everything well since the publication of my book which is titled Michigan's Economic Future which by the way I don't think is an oxymoron it was published about two and a half years ago and that generated a lot people would read it and say hey come and address my group there are 75 talks around the state I've been in Calcassus, Cadillac, Goldwater Cassopolis and other places anyway I I really stress education and skill and so I talk about a lot of the issues that you emphasize but I hasten to add I show how college attainment is so so important that it used to be a generation ago because the rate of return to a college education has soared while the high school educated and the high school dropouts have gone nowhere or fallen off a cliff so I really emphasize training and skill but it would be easy for people to say well yeah and you work for a four year degree-granting institution so it's all you just want to slap at the trough well it's hard for me to refute because of course my own self-interest is for healthy universities but on the other hand the data about the importance of college education are overwhelming but it's also true that I think we're under invested in education in Michigan from preschool to PhD in fact one of the investments that a society can make that may have as high a rate of return social rate of return as any is getting ready for kindergarten if you're behind I mean you know if you think of your life as a marathon and you're not ready for kindergarten it's sort of like the other runners are at the three mile mark and you haven't even started so that's incredibly important then the high school dropout is a catastrophe proposal A equalized somewhat the funding for public school operating expenses but not for public school capital expenses and so our poorer school districts have a physical plan buildings that are not up to code that are not in my view having been in some of these buildings it's offensive in a country this rich that any child would have to go to school in the buildings of the quality of some of the buildings in the state of Michigan of course the more affluent districts have fabulous facilities so along all of those dimensions and then there's also a huge role for the community colleges for the places like Baker college and so on so it's not just four-year universities it's really a culture of lifelong learning and until we can get that culture deeply and great oh one more we've got a school school year that was developed in the 19th century and and it made sense when what you wanted was for your kids to pick the bugs off the potato plants all summer long and hoe the cornrows but I don't know a whole lot of kids that do that anymore so the agricultural basis for our 180 day school year is long gone it's time to move into at least I'd sell for the 20th century you know so I have to say that I've always wanted to have kids who would be wanting to pick bugs off potatoes in the summer but it's never worked out for any of the kids I have I'll say something slightly more substantive in the context of this discussion whatever else you think each of the discussions we've had has indicated not a diminished role for the public sector having a tax structure that nobody can stand and having a tax structure that is really unfriendly to both labor and capital and we've managed to do that is simply not helpful whether you think the money ought to go to longer K through 12 years or for preschool or even for state universities so Kim why don't you ask somebody a question not Charlie not Charles Chris I just wondered if you could discuss what lessons the state of Michigan might take from the governor's association in working together with other states that are in similar situations that are very reliant on the industry I spoke about one of my biggest goals in what I do in my work is to see something like this happen but it's one of the most frustrating things to do I know that through the universities this one I know firsthand is working across state lines and with other organizations to you know to foster really to help transform this economy but at the state level economic development level their answer time for a variety of reasons yeah and by the way I think some would say that the universities were designed based off of a 13th century model so oh even earlier than that should have worn my robes it's a great question and unfortunately in the way that American the way that American governance federalist system has evolved it definitely does not incentivize cross border collaboration especially among states it's even more difficult I mean look at our suburbanization not exorbitant problem that's happening in the core cities so there are very very few cross state collaborations especially with regard to workforce training and other things but they do happen and I think it's actually common industries that allow them to happen or a sector strategies approach that actually work and so I'm familiar with a couple I know in particular it's these urban you know these multi-state multi-county urban areas that have really gotten into the down and dirty details so Kansas City, Missouri and Kansas City, Kansas you know you walk across the street and you're in a different state and so there has been some harmonization of school funding formulas in the Portland Southern Washington state area especially along the lines of training workers in the manufacturing semiconductor industry the states have worked together to put in monies into a common pot based off of number of workers in those regions those things are extremely painful and take time and are political hot potato but they do happen and it's largely it's been community leaders that have been responsible I don't know if that answers your question but it needs to be definitely more of it so I'm going to pick up other questions from the panel as we go along but now I think since everyone in the panel has got at least one second thing to say I'd like to turn it over to questions from the audience yes sir with the exception of Chicago and Minneapolis St. Paul and it suggests kind of a failure of urban policy and I guess one we haven't talked much today about Detroit and there's an issue of can you have a revitalization of the state economy without addressing Detroit but when I look at Detroit as someone coming from hometown of San Francisco it strikes me is trying to figure out what it is about the auto industry that perhaps failed on three accounts did generate high wages but it didn't seem to generate a kind of spin off innovation in a wide range of sectors beyond auto and related it didn't really succeed in generating a kind of rich urban culture that more diversified cities such as Chicago or even Pittsburgh have and maybe even the industry failed to really generate a kind of more progressive and friendly rather than poisoned racial culture in the industry and the city suburbs so is there something about the auto industry particularly in Detroit that failed on those three counts to put it harshly I would say yes let me get at it real quick one feature and everyone's trying to figure out what is it that makes some places attractive to young talent I think the the main driver is young people flock to places that there's a generalized sense that they're going to be professional opportunities so therefore Chicago it's a good question that's what is the business of Chicago well it's everything these days and we still can only answer well in South East Michigan it's auto so we haven't percolated this more diverse economic set of opportunities that is the first driver but you're alluding to major second drivers include people want to be in a diverse multi ethnic racially more integrated urban environment that has density and multinational populations in the urban core in part that's an exciting place to be e.g. San Francisco and New York and now Minneapolis and Chicago so that's a driver but also I would say and the biggest failure of our community with its auto and really paternal big employers and institutions the dominated is we've been spending our time kind of protecting the industry that made us great from change versus embracing change so I think young people and all people these days are moved by also a set of values they want to be part of social change they want to be part of greening the world they want to be part of climate change our reputation which is based on fact in Michigan is we're trying to protect the carbon economy engine that made us great from change that produces an attitude and a culture that is in view of many not embracing the change and leading in greening cleaning climate change social justice social equity but trying to protect what made us great from change which we've been fiercely doing and so it's no surprise that young people flee us for places that are in the vanguard of creating the kind of future that they want to be a part of let me say one thing about Minnesota which is the Minneapolis St. Paul of course is a driving force for any aggregate statistic for Minnesota Minnesota has of all the states in the Great Lakes region Minnesota has the highest educational attainment in terms of the percentage who have a bachelor's degree and or more and not surprisingly they also have higher per capita income than any other state in the Great Lakes region but moreover I showed a slide about the disequalization if you were to show the same graph for Ohio and Illinois it's almost identical except not quite as bad as in Michigan same for Indiana same for Pennsylvania Minnesota is one of the few exceptions nationally and I think what's going on there is that not only do they have a high percentage of their workforce who have a college degree but they also have the highest in our region of who have a high school diploma and I also think that they may have a culture whereby a high school diploma in Minnesota actually means that you have a 12th grade education yeah this has really been addressed towards something like my life as a descendant of immigrants who came around the time the Fort Bruce plan opened to work in industry I was educated as an engineer at Michigan and then I saw the writing on the wall and got a Fort school degree and now I'm a knowledge worker and look at me this is great yeah so education clearly helps the employment numbers that came out on Friday 12% unemployment for people who dropped out of high school 3.8% nationwide for people with a bachelor's degree that doesn't sound very high our economy is serving the educated pretty well even in Michigan we have Auto Alley there's an organization showing how high tech industry is thriving in southeast Michigan university research corridor universities do a lot of great research and a lot of the educated come from other states they educate people they go to Chicago so there's a little bit of spill over there but what do we do about the part of our economy that Mr. Hill talked about that they were brought up in an industry where you didn't need education they basically stepped out of the time machine from the 1950s middle class and now they're here and they're not going to Chicago so I wish I had the answer so I'll ask you what about it it underscores the urgency which we all have been involved with in Michigan to try to raise the education attainment and achievement rates and related agendas that we've been trying to move include some long term and Charles were building blocks of that everybody needs to get to and through post secondary period and so that's part out of that we now have high school exit standards which were new to basically require everyone to learn relevant things before they can leave high school we put money to pay for post secondary not enough but we asked our community colleges and our universities to work together to ensure better completion of folks who are enrolled we put money into diversify the economy that percolates out of higher ed so this is an agenda that's a long term essential element from Michigan I think in the Minneapolis analog is relevant we in Michigan along with our sister states or the heavy industrial heartlands we just got more of the folks coming from the south black and white I grew up in West Virginia I never heard as many West Virginia accents as when I lived outside Flint because the jobs were here the no skill demanding factory jobs at scale Minneapolis St. Paul did not have nearly that number of opportunities and it didn't get the massive influx of relatively uneducated white and black folks from the south and Appalachia to come here and those folks redefined us the culture in Michigan and are left with this legacy that we have of lots and lots of now adults and a culture where the young people who grew up in this household never expected and hoped that they wouldn't need to have the kind of post-secondary rigorous education that is required as Kim said to work in a high tech manufacturing facility you need a post-secondary set of technical skills today so we just have that challenge more than most places it's one of the legacies of our factory economy scale and so we've got to do everything anything we can to help up the achievement levels for all our people and create the conditions that make our place attractive and universities are a poor in which we attract people who want to come here and be part of a new round of creation versus leave us and I think college is not a monolithic entity and I mean the population you're talking about are not the people that their parents send to college for four years they have a great time and they graduate and get a job I mean the people that you're talking about are people who have been working for 30 years they're 48 years old with three kids and they don't know what they're going to do and that's the problem is that it's fairly easy to get people to go to a community college and take classes I mean they're fairly accessible there's not huge admission requirements and most people I don't know Michigan's numbers but I know in a lot of places people actually have high school education and people actually have a little bit of college but it's actually you know it's been so long you know why do I need calculus why do I need to do these things and so you might even get a peep person with an associates but where do they go now they're not going to fit into a freshman English class at the University of Michigan I mean why should they do that but and so it really brings up this issue of of you know college is not college is not college it's it's it's applied attainment in the sense of how can we get that person the skills they need to get the job that they need to help our economy and so there's been a lot of debate along the lines of the applied baccalaureate right so so it's it's an HVAC you know if you're in air conditioning technician by the way the average in New England I don't know what it is nationwide starting salary with one year of a degree is $72,000 that's pretty darn good that's more than I made when I was 22 years old out of community college but the idea that you know of really looking at our education system not necessarily as a as a right of passage to certain certain classes that's that you know people can have that if they can afford that and they're young enough to do it but the real challenge I think the challenge for Michigan and other states like is really everybody else what do we do with with those good people Peter you only get to talk for more than a minute okay I have a lot of scars and efforts to get a graduate and income tax and I think the biggest problem we found in the old days was easily encapsulated as a Joe the plumber problem if I had if my boss's business for sale and if it were making $250,000 and if I could possibly afford to buy it I'd buy it and I'd be rich and your higher taxes would hurt me and that's a very common attitude among people who would benefit from any tax reduction in a graduate income tax. I wish you could talk a little bit about the politics of it how you might combine the two ideas to get business on the side on the side of it and also what are these Kansas rates that you talked about and would they provide enough gain at the lower income levels to try to create a real constituency for that kind of issue tax? Let's see, first of all in terms of the politics of it I think Joe the plumber may have some reluctance all I can say is public education and remind Joe the plumber that your chances of having of being in the top group are probably small but a lot of the opposition I think has come from folks who have 100 times as much income as Joe the plumber who know that with their current income they would pay more and that's a fact and I don't think my guess is that some folks at the top of the income scale wouldn't change their minds no matter what I say but part of it has come from opposition from business groups. Now I don't know if we could get the Michigan Chamber to go along I think there are but I think a lot of the businesses, especially smaller and medium sized businesses who have been clobbered by the MBT would be happy to go for elimination of the MBT even if it meant a graduated income tax. Let's see, Kansas bottom rate is 3. something and top rate is 6.35 of and they I have one thing that's nice if you are professor of economics at a Lansing area institution you have PhD students who now work for state government so I have a friend who's run a lot of these things for me and it's you know I think we should be clear that there's no way that pushing toward graduation in a state income tax will reverse the huge tidal wave of inequality that we've seen over the last generation but it can chisel at the edges of it and the Kansas tax raises, their income tax raises about $1,700 per person more than ours does so that would be sufficient roughly to not only replace the existing income tax revenues that we have but not the full MBT but the old single business tax revenues within as close an approximation era as we economists can usually get and back I appreciated all the assets that the state has and I think you're right on that I guess the question I have is it seems to me that the current economic downturn that we're in and any kind of stimulus that comes our way there's we're going down and it's going to take several years even with people attaining higher education to you know realize the goals that you're talking about so it seems to me that for the next two to three to four years Michigan is just going to continue to lose population as well as all the support services that make it up we're going to get more diversified because that's because the auto industry is going to shrink continue to shrink at least the manufacturing part does anybody have anything more optimistic to look at over the next four years come on come on you guys okay good we're constantly looking for the optimistic side of it the you know like I said the there's no avoiding the industry in this state so one always has to address that and say how's that going to impact a lot of other things the industry creates a vast number of jobs just by being here it turns out probably four or five more jobs in the Michigan economy just for every one worker in the auto sector so if the auto climate nationally is bad if it's bad globally you know the sales numbers which generate the revenues which generate the jobs which generate the spin off jobs are tough the stimulus one would hope that the stimulus the reason they talk about let's make things let's do something with the money so don't just invest it somewhere and it gets hold up is to get people working to get money moving through that economy it seems like with the with the financial sector meltdown unfortunately the federal government is the only game in town to churn money through the through the economy and the companies that are in the auto industry are heavily reliant on short term loans to finance new product to research and develop things to put money out in front before the revenue stream picks up so you know frankly we are looking at something very positive out of the stimulus package that would aim itself toward the industry to keep these companies working on product development so that as the economy recovers hopefully in a year that product then starts coming through product then starts getting built the worst thing we can see in the auto industry is they severely cut back on product development the thinking part of it that's very optimistic let me make just a comment on this so I've lived through I'm not quite sure how many recessions in Michigan quite a few years and every time this is the question that comes up things look bad for the auto industry for the next couple of years what are you going to do about that we sort of struggle and hope for various things that would stimulate demand so we get back up to 16 million units again and every time the long run solutions are actually not that different from each other improve K through 12 have a tax structure that's more flexible try to create a more entrepreneurial market in the state strengthen the universities I'll even leave the universities out it's too self-serving and the ability to have a stable enough structure so that we can actually look at the long term is going to make the next short term better so that's very conditional optimism but at least some notion there Brian I'm just wondering whether you have someone who's not particularly familiar with the auto industry any specific suggestions as to I think we've talked about how things have looked very bad from one perspective from another perspective but if you could advise either the auto industry itself or policy makers what specific suggestions do you think you could give them to make this transformation and are there changes in the practices of the industry itself that you think are necessary other than stimulating demand and if you're buying more cars what can we give? One has to take a leap of faith that the economy will recover and consumers will continue to start buying things again and GDP goes up and the like as far as the automakers and the states that are host to in a lot of the communities we talk to them a lot about positioning yourself for the economic recovery the companies we've heard it that the demand is there hopefully it's not going to tail off the demand for more fuel efficient vehicles is there something that the companies in this state have dragged their feet on for many years and I think frankly that's part of the problem perception problem is why don't young people get jobs and come into the industry is because it's an industry that said for so long we can't do that we can't meet those fuel efficiency requirements we can't get them any miles per gallon we can't do it however we're the most advanced industry on the planet there's a disconnect there so I do firmly think that consumers and I would suggest probably most people in this room are not fooled by two dollars a gallon gas anymore that four dollars is probably more likely when a global expansion comes on and fuel is needed to drive the many engines of industry in many sectors that the demand for that oil is going to be heavy and so again I said in my presentation I said it's not a matter of this industry surviving in this country it will it's a matter of who in this country that's building cars is going to survive and where they're going to be and I think that without me saying names you can envision the companies that are a little more progressive and a little further along the curve this is a good time right now for those companies that aren't far along the curve to get on the curve and get there very quickly because they have the abilities to do it and I think that that is what you have to do you have to make this industry sexy you have to what John was talking about the green economy that's going to keep young people here if they're working for companies they think it's helping solve the environmental degradation of the global these fabulous products then I think you've got to do that I think that a lot of what these folks at the table are saying are we do have to enhance the foundation that we have and one thing somebody said way earlier and I didn't get a chance to respond to it I think one of the problems in this region here southeast Michigan and the Detroit area and the racially divided culture I don't know if that person is still there is that we don't have a mass transit system I go in a lot of places and I love hopping on the subway hopping on light rail and we don't have one in Detroit and it's kept the people that are doing well away from the people that aren't doing so well and the places where they can get to and I think most young people these days want to show up in a place where there's mass transit and the ability to get around and I think those are some more investments that could be made here Can I just add to that that's the kind of thing we should be spending the stimulus money on to make ourselves more attractive but also in addition to any way to accelerate the auto folks to be leaders not laggers in next generation transport technology electric hybrid the auto industry does have tremendous set of competencies and there's a lot that we all can do to help aid the huge amount of talent that's spilling out of autos become entrepreneurs and take their intellectual property and put it to work in new industries as well as a lot of the auto supply base can migrate to new product lines make medical devices instead of auto parts make energy components instead of auto parts helping them find those new product lines when they're not used to it because they've been just happily looking in one dimension is an offensive that the state's under and there's a lot of real urgent possibility and opportunity all of us after we leave our universities or place of work or wherever we go back home to a city town village or school district and I've spent my career in public finance in Michigan, governmental finance and I see the governmental finance model broken the state has reneged on its promises to fund the lower units of government that touch us most closely on a day to day basis does anyone have any comment on public policy and what we need to do to make the places where we actually live and work more sustainable and vibrant a little leadership mistake would be nice I think that proposal A did more good than harm but I don't believe that it was chiseled into stone tablets and brought down from Mount Sinai and I think we may want to revisit it make it easier for local governments to change the property tax structure if they believe that it's good for them I've heard talk about a local sales tax option I don't know if that's a good idea but there's talk about it it might might be worth looking at it and then also the cap on taxable value was written just like you said housing prices would never go down now we've got this phenomenon housing prices have plummeted but then if they ever start coming up again they'll be capped and I've seen some really dire scenarios for many state and local governments and stretching out even to 2017 2018 because of this I think we need to revisit a bunch of those things but I fundamentally think that the biggest issue is what you said the state government has dropped the ball the state government in its hurry to fix its own finances has just pushed down to the local governments many of which are far more vulnerable than the state government not too many governors get re-elected based off of their restructuring public finance platform one of the problems is with higher education it's the same thing we have funding mechanisms that were built in the 1930s and 40s so we fund enrollment not outcomes I have to say our local government structure was created centuries ago and probably is actually we need more regional cooperation so as students of public policy we can be thrilled that there's so many avenues for productive work to be done thank our panel thank you all very much for coming