1 / 25

Michigan’s Economy in Crisis

Michigan’s Economy in Crisis. Prepared for: Michigan Mortgage Lenders Annual Leadership Conference August 3, 2009 Patrick L. Anderson Principal & CEO. O v e r v i e w. Who We Are Current Economic Crisis Federal Government Intervention: Helping or Hurting? Expectations for 2009

aden
Download Presentation

Michigan’s Economy in Crisis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Michigan’s Economy in Crisis • Prepared for: • Michigan Mortgage Lenders Annual Leadership Conference • August 3, 2009 • Patrick L. Anderson • Principal & CEO

  2. O v e r v i e w • Who We Are • Current Economic Crisis • Federal Government Intervention: Helping or Hurting? • Expectations for 2009 • Policies to Help Michigan’s Economy

  3. W h o W e A r e • Anderson Economic Group is an economic consulting firm, specializing in economics, financial valuation, market analysis, and public policy with offices in East Lansing and Chicago. • We advise some of the country’s leading businesses, governments, and institutions. • Our work is based on our core values: • • Professionalism • • Integrity • • Expertise

  4. W h o W e A r e • Patrick L. Anderson • • Founded Anderson Economic Group in 1996. • • Helped repeal the SBT (2006); create a PPT credit (2007); reform tax reversion laws (1999); change sales tax law (1996); and implement proposal A (1994). • • Author of Business Economics & Finance (CRC Press, 2004) and Executive Editor of the annually-published State Economic Handbook. • • Most recent article, “The Value of Private Businesses in the United States,” was published in the April 2009 issue of Business Economics.

  5. W h o W e A r e • Recent AEG Projects in Michigan • • Assess the technology industry in Automation Alley. • • Estimate the economic impact of Michigan’s University Research Corridor. • • Assist MSU in winning federal funding for the FRIB. • • Assess the effectiveness of tax incentives. • • Outline business tax reform options for Detroit Renaissance.

  6. The Current Economic Crisis

  7. C u r r e n t E c o n o m i c C r i s i s • U.S. in a Severe Recession • • Economy began shrinking in December 2007. • • 1.9 million jobs lost in last 4 months of 2008 and negative GDP growth in Q3 and Q4. • • Unemployment rate was 10% in June 2009. • • “Financial Crisis” declared by elected officials in late September 2008; first “bailout” bill voted down by Congress on Tuesday, Sept. 30. Second “bailout” bill passed on Friday, October 3.

  8. C u r r e n t E c o n o m i c C r i s i s • Michigan in a Recession Since 2001 • Jobs lost every year since 2001 • • 372,300 private sector jobs lost between 2001 and 2008. • • 339,200 private sector jobs lost between June 2008 and June 2009. • Unemployment rate was 15% in June 2009 • • Highest monthly rate since March 1984. • Michigan’s recession not caused by “Wall Street,” but by real economic conditions such as contractions in earnings, decreased demand in key industries, and poor business climate. Source: Bureau of Labor Statistics

  9. C u r r e n t E c o n o m i c C r i s i s Unemployment Rate Trend Mid 2000’s: MI two points higher than nation. Mid 1990’s: MI gets better than the US

  10. C u r r e n t E c o n o m i c C r i s i s The State of Michigan’s Budget • State revenue for FY 2009 is expected to fall from the previous year, for both the GF and SAF. • The Senate Fiscal Agency estimated in May 2009 a $884.5 million General Fund budget deficit for FY 2009. • Normally the current economic condition would trigger a transfer from the BSF, however it is almost empty. • Still not clear how state will end its fiscal year (Sept 30th) within the Constitutional requirement for a balanced budget. Source: State of Michigan Census Revenue Estimates, revised May 2009.

  11. C u r r e n t E c o n o m i c C r i s i s Michigan: No Strategy • We have no coherent economic development strategy. “Film credit this week, battery credit next week” does not instill confidence. •Our tax policies are confusing. Since 2006: SBT repeal; new MBT; “Excise Tax”; repeal Excise Tax and add “Surcharge.” • Structural deficit, but no structural reforms. No sustainable spending priorities. • Reform ideas now coming from outside the executive branch…and outside government entirely.

  12. Federal Government Intervention: Helping or Hurting?

  13. G o v e r n m e n t I n t e r v e n t i o n Financial Sector Bailouts • The “Troubled Asset Relief Program” totals $700 billion in government funds; $160.2 billion remained uncommitted as of Spring. • The Federal Reserve has also guaranteed more than $1 trillion to buy “toxic” assets and purchase government bonds. • Management of financial firms is largely unchanged. Government essentially forced some banks to accept money. • Lending and relief programs are rife with moral hazard. Source: U.S. News and World Report, “Auto Bailout,” February 26, 2009; TheWall Street Journal, “Goldman Seeks New Stock Sale,” April 10, 2009; AEG Analysis.

  14. G o v e r n m e n t I n t e r v e n t i o n 2009 Stimulus Plan • Total expenditures equal $789B ($507B in spending programs and $282B in tax cuts and AMT exemptions). Most spending dedicated to infrastructure, energy, and technology. • Some funding will go to Michigan, but, thus far has largely been used to fill budget gaps and fund programs that the state can’t sustain. • Very little in actual tax cuts; more spending helps in the short term but leads to higher taxes (or inflation) later. • Most of “stimulus” money not spent yet…

  15. G o v e r n m e n t I n t e r v e n t i o n Automotive Industry • U.S. Government ousted GM CEO in March and put Chrysler on a 30-day watch; bankruptcy followed quickly for both firms. • These actions have had devastating effects on consumer confidence. • “Old GM” will be liquidated; “New GM” is a smaller collection of assets primarily funded by the federal government. • U.S. sales still at 10 million unit annual rate; lowest post-war rate ever.

  16. Expectations for 2009

  17. E x p e c t a t i o n s f o r 2 0 0 9 • Weak economy through 2009. • • Unemployment will continue to climb even if GDP growth turns positive. • Automotive sales trend will continue. • • Consumers are likely to avoid bankruptcy-tainted firms. • No avoidance of deep employment reductions in Michigan auto industry. • • White collar and blue collar. • • Closure of more auto related facilities.

  18. E x p e c t a t i o n s f o r 2 0 0 9 • A “bailout” of the automotive industry would have been less expensive than pushing GM and Chrysler into bankruptcy. Our fall 2008 analysis found: • A realistic scenario involving two of the Detroit 3 going into bankruptcy would cost taxpayers more than four times the cost of a federal bridge loan. • Direct taxpayer costs of bankruptcy were estimated to be about $66 billion; excluding many additional costs (e.g. DIP financing).

  19. E x p e c t a t i o n s f o r 2 0 0 9 • No improvement in housing market.• Michigan did not have much of a “bubble,” but suffered the worst economic contraction. • Private employers, and many of their employees, may face higher taxes and possible inflation in the future due to stimulus spending and bailout. • In the short-term, some employees will pay higher federal taxes, while others will pay lower federal taxes. • Moral hazard created by many bailout policies will afflict financial sector for decades.

  20. Policies to Help Michigan’s Economy

  21. P o l i c i e s t o H e l p M i c h i g a n • Tax Reform for Businesses • Tax burdens are the only major business factor that we control completely. • Michigan ranks 22nd in the nation for our business tax burden (about 27th after implementation of the MBT), based on FY2006 data. • Perception of Michigan is worse: some surveys rank Michigan 48th out of 50. • “Average” is not good enough to compete with comparable states, like Ohio.

  22. P o l i c i e s t o H e l p M i c h i g a n • Enact Structural Budget Reforms • Improve economic and budget projections; complete budgets in 2-year cycles. • Address serious structural imbalances. • Recognize Importance of Higher Education • University Research Corridor alone contributed $13.3M in net economic impact in FY 2007.

  23. P o l i c i e s t o H e l p M i c h i g a n • Encourage High-Tech and Life Sciences Industries • Over 311,000 high-tech jobs with an average wage of $70,000 in Automation Alley in SE Michigan. • Adopt a Plan to Win • Hoping for “green jobs” and relying on stimulus money is not a coherent strategy. • We need a coherent plan for Michigan that builds on actual strengths and addresses worst problems.

  24. C o n c l u s i o n • Federal government intervention: hurting and helping • • Moral hazard, and auto bankruptcy legacy, will be with us for some time. • • Enormous taxpayer cost of stimulus may force significant tax increases. • Economy, especially employment, not likely to turn around in 2009. • Michigan needs to adopt a strategy to win.

  25. East Lansing | Chicago www.AndersonEconomicGroup.com

More Related