By Michael Hicks and Kevin Kuhlman
This recession has been difficult throughout the Midwest. The nation’s two leading manufacturing states, Indiana and Michigan, have and still continue to feel the pain of this recession. Yet Michigan, which is less dependent on manufacturing, has had a much deeper and longer downturn than Indiana. This is a great puzzle. We have recently authored a study that attempts to frame the issues more clearly "The Puzzle of Indiana's Economy Through the Great Recession," for the Sagamore Institute.
In the wake of this recession the livelihoods and dreams of many in the Midwest have been impacted by high levels of joblessness and persistent unemployment. Unemployment peaked in Indiana at 10.8 percent, but rose to 14.9 percent in Michigan. Any economic model would predict either state would have had unemployment rates in the 13 to 15 percent range. Our study tries to explain this difference in outcomes between the two states. It is a riddle that has a few answers.
First, it is pretty clear that the unemployment rate differences cannot be wholly explained by the structure of manufacturing. Indiana is more manufacturing intensive than Michigan, and the sharp drops in auto sales such as those seen in 2008 and 2009 are not correlated with increased volatility in Michigan’s unemployment rate. Of course, the auto industry matters. Indiana saw just one Big Three plant closing during the recession, while Michigan lost seven GM plants over the same time period. Indiana is also home to Honda, Toyota and Subaru plants. In 2010, Indiana was site of large announced investment by GM. Granted, the life cycle of a particular plant will effect closing and opening dates, so plant closings can be affected by such things as a discontinued product line or aging equipment. In the end, plant closings are heavily influenced by underlying economic factors, both local and national.
Unsurprisingly for anyone who has lived through the past five years in Indiana or Michigan, tax policy plays a role. At the beginning of the recession, Indiana was debating property tax reform. The legislation passed before the deepest economic declines, beginning a three-year tax cut in the state.
The same time frame saw Michigan pass a new business tax (Michigan Business Tax) and then slap on a surcharge before the new MBT had a chance to become law. This action did not improve Michigan’s reputation for poor fiscal management.
At the same time, the foreclosure rate in Michigan was about five times that of Indiana. Average weekly wages in Indiana rose by $3.51 from 2007 to 2009, but dropped by $22.93 in Michigan.
The American Recovery and Reinvestment Act apparently didn’t help. While Michigan received a significantly higher share of the so-called stimulus money, it took some $559,457 to create a job in Michigan compared to$489,274 in Indiana (according to White House estimates). Of course these estimates suggest a frighteningly ineffective stimulus, but if it required some $70,000 extra to create a job in Michigan than Indiana when the unemployment rate in Michigan was almost 40 percent higher, deeper problems plague Michigan.
Most worrisome is our finding on debt between the two states. Indiana’s bond debt is about one-third that of Michigan on a per capita basis. This raises the specter of much higher future taxes and is a big signal to business that without better political leadership in Michigan, taxes will necessarily rise.
Ultimately, the prosperity of Michigan and Indiana matter to residents in both states. The two states are connected through more than geography and the differing effects of this difficult and persistent recession potentially offer an important lesson on a variety of economic and public policy matters.
Michael Hicks, an adjunct scholar with the Mackinac Center for Public Policy, is the director of the Center for Business and Economic Research and an associate professor at Ball State University. Kevin Kuhlman is an adjunct research associate at the Center for Business and Economic Research. He holds a B.S. in engineering from Purdue and an MBA from Ball State University.