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November 22, 2005

Driving Indiana’s and Michigan’s Economic Performance

The Midwest economy is lagging the U.S., but some states are doing better than others. These differences may help us understand the reasons for the region’s lagging economy.

Last week in Indiana, I presented some evidence that the entire region is growing more slowly than the nation. Payroll job growth in our Seventh Federal Reserve District is up only 0.6% for September from one year earlier, versus 1.6% in the nation. In some respects, this performance is not surprising since, nationally, manufacturing jobs are still declining (down 1% year over year through September), and the Midwest’s economy is steeped in manufacturing. In addition, the region’s economy is bogged down by the structural change taking place in the automotive industry. Foreign nameplates continue to gain market share from the domestic automakers (previous blog). Since the foreign nameplate companies and their parts suppliers tend to locate in the South, jobs and income are seeping away from the Midwest.

In this regard, comparing the performance between Indiana and Michigan is telling. Though both states rank among the top 3 nationally in manufacturing concentration, the unemployment rate in Michigan stands at 6.1% in Michigan (Oct.) versus 5.4% in Indiana. Year over year, manufacturing payroll job growth is virtually flat in Indiana, but down over 3% in Michigan.



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The economies of both states are automotive intensive, but Michigan to an even greater degree. Indiana’s automotive share dominates manufacturing inside the state, at 16%. But Michigan’s automotive sector accounts for 35% of its manufacturing employment. A weakening automotive sector, then, would be felt more sharply in Michigan.

On top this, the auto sector’s performance in Michigan has been worse. From 2001 to date, automotive jobs have fallen 24% in Michigan, compared to 8% in Indiana.

Indiana’s automotive performance is buffered by having a larger share of foreign auto parts and auto assembly plants than Michigan. According to senior economist Thomas Klier, 29% of automotive parts plants in Indiana are foreign owned, as are 2 of its 3 auto assembly plants.

Auto parts makers tend to locate close to their customers. In Indiana, the foreign-owned parts plants are more likely to supply parts to those automakers who are gaining market share—the foreign nameplates.

Michigan’s automakers are only 17% foreign owned; its only foreign owned assembly plant is the Mazda plant, versus its 15 domestic auto assembly plants.

If the current shifts in market share among automakers continue, it will be imperative for Michigan’s economy to attract investments from the successful auto suppliers and auto assembly companies.

Other performance differences between Indiana and Michigan are intriguing, though one cannot draw any hard conclusions. The chart below illustrates the population growth of the largest metropolitan areas in each state—Indianapolis and the Detroit MSA. Indianapolis’ population growth has exceeded the surrounding areas, and far exceeded that of the Detroit metro area.


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In searching for explanations, manufacturing concentration again comes to mind. As recently as 1969, only 26% of Indianapolis’ overall employment was manufacturing, versus Detroit’s 35%. Generally speaking, “factory towns” have had the roughest road in restructuring. As manufacturing employment shrinks, such cities must re-employ larger shares of their work force in new industries and activities. Otherwise, workers move from the area and create a different set of challenges to the town governments. That is, how to efficiently use and maintain their current roads and buildings for a less populous (and sometimes less wealthy) population.

Governance structures may also explain some of the challenges. Central city Detroit has been buffeted by job, population, and income flight, with concentrated poverty left in the wake. Detroit city leaders have been unable or unwilling to climb above the city’s fiscal problems to re-build its economy. To what extent has this failure come about because the central city was isolated from the rest of the metropolitan area (and state), and left to solve profound problems with its own (meager) resources?

Indianapolis and other cities have taken some modest steps in consolidating local governance to a closer fit with their metropolitan-wide economies. In the late 1960s, Indianapolis moved toward a “Unigov” structure. As Rick Mattoon discusses (working paper), the city’s boundary was expanded from 82 square miles to 402 square miles, with a legislative body responsible for governing the city. Though there remain many independent governments, taxing authorities, and school districts within the city, the consolidated city has six administrative departments below the mayor’s office.

Other Midwest cities with elements of regional governance include Minneapolis–St. Paul, which has a metropolitan sharing of property tax base. Columbus, Ohio, has not consolidated, yet its central city government has been aggressive in annexing land outward toward its interstate beltway. Both metropolitan economies have outgrown the broader Midwest.


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Posted by Testa at 1:00 PM | Comments (1)

November 7, 2005

Can Higher Education Revive the Great Lakes Economy?

In the Midwest and elsewhere, state government financial support for higher education has been eroding. Public colleges and universities are increasingly being left to their own resources; this raises a number of issues for them and for the Midwest economy.

In a major conference held here this week, Chicago Fed President Michael H. Moskow summed up one dilemma. “….universities today are increasingly forced to rely on their own resources to make budgets balance. But this can restrict access, because schools must often dip into endowments and resort to aggressive tuition hikes to close the gap. If the school is concerned with maintaining academic quality, large tuition increases are often the best option, but in doing so access for (lower income) students may be limited. If on the other hand, the university limits tuition increases, it is often forced to economize and offer reduced services, which can jeopardize quality through large classes and the use of part-time faculty.” (link to speech)

However, if state universities had a free hand in shaping the tuition schedule and financial aid, higher tuition need not be borne by lower income families.

Many state universities charge tuition rates well below the cost of education provision. Meanwhile, the returns of the degree to the students are significant in terms of higher wages and salaries throughout their working life. And especially at state flagship universities, which are highly selective, a large share of students come from high-income families.

Mike McPherson, President of the Spencer Foundation, presented evidence on familial background of the available talent pool of highly selective schools, drawing from a recent book by William Bowen et al. Of children born in 1988 in families where neither parent attended college, only 0.9% went on to score 1200 or higher on the Scholastic Aptitude Test (the common admissions test for highly selective schools). This compares with 6.6% of children in families where at least one parent had attended college, and 14.6% from families in the top quartile of U.S. family income.

The point here is that many more families at state flagship colleges and universities could and would pay more for their education. Of course, unlike private colleges and universities, state flagships are often constrained in raising tuition because they must petition their state governing boards to do so, and such requests often fail to garner political support.

Perhaps that is why many representatives at the conference from public flagship schools instead pushed for a renewal of the “social compact” between public education and the public, in which public financial support would be restored and enhanced. To accomplish this, schools need to do a better job of explaining the many benefits that accrue to the general public from subsidizing the education of the few. For example, economists Kevin Murphy and Robert Topel have documented the societal benefits from public medical research in terms of reductions in mortality and morbidity. These benefits have been enormous in relation to public expenditures—and probably should be promoted (link).

But what benefits of this type would be specific to a particular state or region? For a (Midwest) region that has been lagging in growth and development, a benefit of economic renewal would certainly get some attention. James Duderstadt, former president of the University of Michigan, proposed that the region’s major research universities collaborate to increase their impact on regional economic activity. ((link to Millenium Report).

The possibilities are surely worth pursuing but, in my opinion, the specific linkages between such a collaboration and regional revival must be well-articulated and demonstrated.

One argument offered is that the U.S. economy is continuing to shift toward knowledge and knowledge workers. Since the Midwest is lagging in its transition from agriculture and manufacturing to high-level services, perhaps we should subsidize education more to produce more talent locally? However, at least for the highest levels of educational attainment, there is already a net outflow of young adults from the Midwest region. (link to Yolanda K. Kodrzycki at Boston Fed). What are the public benefits of producing more?

Young adults with somewhat lower educational attainment do tend to remain in the region. So, if further educational subsidies are to be entertained, community colleges and regional institutions might be a better target. We should probably not subsidize the higher end further unless we simultaneously create the job and new-firm opportunities to retain these students after graduation.

Can we create such opportunities? Although there was little conference discussion about university spin-outs of new firms and other technology commercialization, there have been some promising movements in that direction. A Midwest Research University Network (MRUN) was established in 2002 as an alliance of university business development professionals to facilitate technology development and commercialization. Eighteen MRUN member institutions exchange information about financing, placement of management talent, and opportunities for collaboration. (see link to current Testa Fedletter )

More promising still, North Dakota apparently offers a fine model to marry regional economic revival with public university excellence (link to conference presentation). Leaders there of all stripes held a summit roundtable in 1998 to reflect on the state’s struggling economy and its detached university system.

The North Dakota Roundtable began by asking business, community, and government leaders what they would like a university system to do for the state. The answer was: to promote expansion and diversification of the state’s economy, enhance quality of life for its citizens, become academically competitive nationally and internationally, and be accessible and responsive to all citizens of the state, both individual and corporate.

One year later, enabling legislation assigned responsibilities for these outcomes to all of the involved stakeholder groups. No initial funding was provided for the university system. Rather, the university was given significant latitude to fashion and conduct its programs.

The results? From 1999 to 2004, annual research expenditures climbed from $44.6 million to $102 million. Graduate and professional enrollment climbed 20%. Doctoral programs offered climbed from 15 to 40; doctoral students from 150 to 500. A new 55-acre research park is now nearly full; new investors there include three Fortune 500 companies and several Silicon Valley companies. Internship programs with these companies are believed to be partly responsible for a significant climb in the percentage of graduates who remain in the state.


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Posted by Testa at 7:26 PM | Comments (0)