Thoughts on Prosperity

February 9, 2007

Dear Governor Granholm,

I listened with great interest to your state of the State address. I was pleased to hear you talk of investment, as indeed, investment is the ONLY variable correlated with economic growth and development over time. I was also pleased to hear you talk of encouraging high-tech, high-innovation business creation, since the type of investment also matters greatly. In short, I believe you have identified the key areas for success.

Yet despite moving in the right direction, I wonder if you really grasp the seriousness of our current situation and the height of the obstacles facing us. Historically, former economic powerhouses that fall from the top rarely, if ever, regain their former position. Two things prevent a recovery. First, the government assumes the entire burden of change. And second, (ironically) the government doesn’t do enough to change entrenched institutions and vested interests that would encourage the private sector to invest.

My experience in the United States as well as Thailand, Singapore, Malaysia, Indonesia, the Philippines, Korea, Taiwan, and Japan is that governments have a key role to play in economic development and growth. This role, however, is not to do everything themselves, but rather to release the entrepreneurial spirits of the private sector to invest productively. Some may lament our current economic vulnerability, but new research suggests that such vulnerability spawns creative responses that may in fact lead to long-term progress. Whether we release and channel appropriately our entrepreneurial spirits depends on policy and institutional choices we make now. I would suggest the following ideas.

Prioritize investment from a broad range of sources and in a broad range of activities. Your investment priorities, primarily in human capital, are too narrow and too state centric and ignore the importance of private-sector participation.

Refocus your economic plan on business creation rather than job creation. Focusing on jobs will lead you to make short-term decisions that may be detrimental to long-term growth. Focusing on jobs does not take into consideration externalities. In many cases the five person high-tech firm will be far better for our economic health in the long term than a 1,500 person transmission plant. I realize the latter is far better politically, but it is increasingly not better economically.

Emphasize and support entrepreneurialism and innovation. I applaud your willingness to "go anywhere and do anything" to bring businesses to Michigan. But the reality is that only a very small number of firms actually move locations, for any reason. The number is less than 6% per year. So, although this effort will be important, it is far more vital that we encourage entrepreneurship and innovation within our communities. We must create the new firms, just like Henry Ford did, that will power our economy into the future. As new firms form and naturally coalesce into industrial agglomerations, other firms will move into the state to join them. Medical equipment, insurance, financial services, pharmaceuticals, transportation R&D, and alternative energies are only a few of the industries that have begun to grow and might thrive in Michigan. The MEDC, universities, economic development agencies, smart zones, etc., should all be focused on generating innovation both in new firms and through expansion of existing firms.

Focusing on entrepreneurship also addresses a problem not touched upon in your address. Although we certainly need to improve the level of education for Michigan students, we are currently losing a large portion of our college educated 20-29 year olds every year. In my senior seminar I teach at James Madison College and MSU, every student for the past 3 years is leaving the state for employment reasons. The answer here is not to create cooler cities (like jobs, cool cities are an outcome, not a cause), but to create companies, and even better, help students create companies. What a great opportunity we have in our university system to not only provide an education, but to help in the application of the education to bettering our communities and society.

Next, quit playing the unfair trade card. While some of the accusations may be true, there is little we can do from a state perspective and, far more importantly, it matters very little for the industries of the new knowledge economy. This is also true for the criticism the political right often makes about labor, regulation, and taxation. All of these variables are far more important in the old economy than in the new and should be de-emphasized.

Now, that said, taxes are a direct incentive for industry. Fewer business taxes mean that more money can be invested. But it doesn’t guarantee that it will be. From my perspective, you should move as many of the taxes as possible to final consumption. Ideas for “service” taxes and “beer and soft drink” taxes for example, are an excellent way to generate income from consumption. Although we need consumption for our economic health, less consumption is not always bad, especially if the surplus is saved and invested. The key is to provide concomitant incentives to invest surplus. I would counsel you to lower business taxes while increasing consumer taxes and simultaneously providing incentives to invest surplus.

Finally, to return to our entrepreneurial roots will require significant reform of existing institutions. I mentioned above that regulation, labor, and taxes should be de-emphasized. But the institutions they have created should be dramatically reformed. Incentives that will help K-12 and university education cooperate with labor and business to improve skills, create knowledge, and then transfer and disseminate that knowledge will add to our competitive advantage.

Governor, I realize that the task ahead of our great state is a daunting one. But greatness never emerges in times of ease. I have been encouraged by the new direction you are taking and I hope you’ll make decisions that are more economically and socially correct than politically correct. But with challenge comes opportunity. As best exemplified by one of my favorite politicians, Harry Truman, now is the time to speak and do the right thing.

Sincerely,

Bryan K. Ritchie

Co-Director
Michigan Center for Innovation and Economic Prosperity
Associate Professor, International Relations
James Madison College 302 Case Hall
Michigan State University
East Lansing, MI 48824
(517) 353-8614
(517) 974-1353
ritchieb@msu.edu
www.msu.edu/~ritchieb

Labels: Economic Crisis Investment Innovation Michigan