The Pain of Economic Change
by Tom aka Rusty Rustbelt
The Pain of Economic Change
Michigan is the only state in the union showing a net negative population trend in the recent census report, and is an interesting case study of the pain of economic change.
For several decades after WWII, Michigan enjoyed above average prosperity on the backs of the Big 3 auto makers and the employment model of the United Auto Workers, with lateral benefits and trickle down to construction, tourism, retail, services and health care. Both the private sector economy and local/state government systems were built on the broad foundation of prosperity.
Tax and regulatory systems were not hospitable to non-manufacturing businesses and non-union businesses, but with enough money in the system all of this was tolerable (money can ease many hurts).
During the 70s, 80s and 90s the Big 3 and the UAW threw away about 40% of the US market share and spawned a wave of state “lemon laws,” due to consistently poor design, poor quality and poor service.
Globalization scourged Michigan with the offshoring of thousands of light and medium manufacturing jobs (your Electrolux sweeper is now made in Mexico).
Still, the Big 3 and Michigan were able to recover from every recession, until 2000-2001. By then the Big 3 was enfeebled and the transplants had tremendous momentum in many market segments. Optimism springs eternal, and every tiny sign of improvement was a reason to pine for the “good old days.” Governor Jennifer Granholm (D) (2002-2010) had terrible timing, and compounded the problems with lots of rhetoric about change but very little effort to make any substantive change, waiting for nirvana to return (I have some empathy on the timing problem, but not the inaction).
The 2008 “great recession” was a near death blow for GM and Chrysler, and only the federal government could save the two companies.
Now the pain is real and pervasive; the government sector will be shifting to a new reality and the private sector continues to deteriorate. Any “recovery” make take a generation. There will be much screaming as a new governor (Rick Snyder, R) attempts to introduce Michigan to the new reality.
Michigan is actually ahead of some states (say New Jersey) that totally denied reality until 2008, but that is small comfort. Whatever happens to the national economy though, the benefits are unlikely to roll onto the rustbelt states.
The pain is palpable.
You hit in on the head with this:
“Tax and regulatory systems were not hospitable to non-manufacturing businesses and non-union businesses, but with enough money in the system all of this was tolerable (money can ease many hurts).
During the 70s, 80s and 90s the Big 3 and the UAW threw away about 40% of the US market share and spawned a wave of state “lemon laws,” due to consistently poor design, poor quality and poor service.”
A combination of incompetant, corrupt anti-business government, poor & arrogant management, and underperforming and corrupt unions killed the golden goose. Even then it took a generation as the devastated economies of Europe and Asia finally came fully back on line.
You can add Ohio to the list of states that committed seppukku with the same anti-business climate. Ohio grew a whopping 180,000 in ten (10) years. Thats less than 6 months growth down here in Texas (who will pick up 2 congressional seats shortly – thank you blue states!).
Ohio, Michigan the rust belt in did themselves in. When Mississippi beats you out for new factories, you know your doing something totally wrong. But it took until 2008 to finally, maybe beat the message into the politicians heads. And this will take decades to fix.
The self-inflicted pain will be palpable.
Call me when the best & brightest think Detroit/Michigan is the place to be again…
Islam will change
I agree that the Big 3 had become bloated, but the bankruptcies of GM and Chrysler finally fixed that problem. But your other claims are incomplete. Germany has high labor costs, but their companies are doing much better because Germany has an active policy designed to encourage manufacturing, which is the basis for America’s middle class. Here, we have naive “free marketers” who allow other countries to devalue out entire industries, Japan first, now China and South Korea. No offense to the red states, but this country can’t make it as long as the oil and insurance industries are allowed to wage war on the productive segments of the economy (and just to correct the prior post, most of Texas’ new population is coming from Mexico, not the blue states).
And what of Texas’s $25 billion budget deficit?
Last I checked we were getting lots of folks coming from California. Texas also does a fairly good job of melting immagrants into the Texas life style. If you look at the gainers vs losers of congressional seats its basically a blue state to red state transfer (in general). People are leaving Michigan and Ohio in droves – they are coming to Texas and other Red states (again in general). Texas is growing while anti-business pro union states are stagnant at best.
But untill the rust belt gets its anti-business act together it will losse out to sun-belt states when it comes to new factories being built. I’ll say it again. If you can’t out compete Mississippi for new factories you basically suck and have a very bad climate for new business.
Ohio and Michigan can take a great first step by making themselves right-to-work states.
And GM sells 30% of it cars to the US Government. I wouldn’t consider it fixed. As for bloat – how many jobs got eliminated?
Islam will change
Another graduate of the Glenn Beck school of economics for the clinically insane. If your argument is centered around wages and other costs of employment; then it would make sense to high-light the booming Somalian economy, the low tax rates with no labor unions would certainly even make Texas look noncompetitive. So why is nobody talking about Somalia? Perhaps your relationship between organized labor and economic growth is spurious at best and perhaps ideologically driven?
A Polish Labor Union ended the Soviet domination of Poland. Imagine what it can do for this generation of pro-business screw-ups!
Blind defense of any ideology can be detrimental. Accountability should really be the GOLD Standard…
The labor union used to protect unfair labor practices but had become unaccountable for it’s actions. The big three threw away it’s competitive edge when the union workers become unresponsive to the needs of the consumer. If a worker does not produce a well made, quality, affordable product, whose going to buy them? Both the managment and the labor unions utterly failed. Both had same equal responsibility.
It’s really about how you exercise the economic too! Keynes ask for responsible stimulus at times of economic weakness and savings during times of prosperity. We are doing stimulus without the responsibility of saving…
We are really not that competitive… The rescued GM is spending it’s money overseas… This Government Moters… But it’s not investing in the US… I think Labor Unions really needs to do a little soul searching, is it there to represent the welfare of it’s worker and good responsible work ethics versus promotion of selfish, unproductive, hurtful labor practices that eventually leads to everyones demise.
Robbie,
Read what I wrote. The Unions were just one part of the mess that the rust belt cuased itself. I also mentioned the corrupt city, local, and state governments and arrogant & blind management. Get a grip. We are seeing the effects of the government, management, and union policies of the last 40 years have caused in the rust belt. I argue from facts. They are real, real simple. No one has opened up a major factory in Michigan or Ohio in over 30 years. They have been opening them up throughout the south, including Texas. Growth for both of those states has been stagnant for the last decade. Texas grew more than both states TOGETHER did in 10 years in the last 6 months. The rest of the sun belt also. In general right-to-work states are outperforming and out-growing big-union states (with the exception of the growth in government unions – something everyone should worry about). All the financial basket case states are Blue states – lead by California and Illinois.
Unions had their place, and still do, but their actions toward the big three was just another large nail in the coffin. They helped kill the golden goose.
This is a reality based blog. Try some on for size.
Call me when the best & brightest start moving to Detroit or Cleveland or Buffalo. 50 years ago they did. Now the ones born their flee at the earliest opputunity.
Islam will change
MG should be here posting links to structural issues.
There are a few more factors rolling around the “demise” of the mid west, than organized labor:
Oil shocks in the ealry 1970’s, made automobiles designed for places who had no subsidized oil appealing which took the US auto tycoons 10 -15 years tp get to. Oil shocks encouraged “flight” to hot places like Arizona, Dallas and Atlanta, who soon will ration bathing, stealing water from Mexico and farming.
Reindustrialization of the bombed out Axis economies, as well as industrialization of the Pacific Rim and a few other places.
Perpetual war, and DEBT from tax cuts to borrow instead of tax the wealthy:
Channelled by Orwell:
“Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed DEBTS and TAXES … known instruments for bringing the many under the domination of the few.… No nation could preserve its freedom in the midst of continual warfare.”
James Madison, Political Observations, 1795
Did I mention wages? Quality was the problem.
The Germans never produced the likes of the Pontiac Aztec or the Ford Escort.
Buffpilot, the Texas economy is based on resource extractment i.e. the oil industry. There is nothing inherently advanced about it. In fact, the selling of resources is usually the main economic engine of third world countries. Billions of dollars are being spent in Michigan to upgrade existing factories. No new factories are being built because none are needed – the industry is saturated with production capacity as it is. The result of Texas being swamped with Mexico’s best and brightest remains to be seen, but being tied with California as the biggest financial basket case in the country won’t help the situation.
ilsm:
“Perpetual war, and DEBT from tax cuts to borrow instead of tax the wealthy”
I think the questions should be why do we have a very very selective tax the wealth system? Where some of the most productive “wealthy” people gets to be taxed at maximum tax rate but some don’t? Is there something structually wrong with our lobbyist controlled politicians in Congress and in the Executive Branch?
Do we really want to go back to a few big government sanctioned enterprises and individuals who paid very little taxes versus supporting the small businessess. Should our tax system address this structural difference between the little “wealth” guys and girls versus “rich” individuals/ “big corporations” Is this part of the reasons why Michigan/Illinois/rust belt region went under?
Explain to me how can some of the highest taxed states have some of the worst fiscal responsibility? I.E. California? Or Illinois? Don’t make this into right versus left analysis because some of the most liberal state managed to have lower taxes but have better fiscal health!
The budget deficit number is up for debate. I’ve seen it as low as 17 billion and as high as 28 billion depending on what policitical side you’re on. I guess we know your side Dan. And let’s remember that the deficit number is a two year deficit since the Texas legislature only meets once every two years. So when they pass a budget it’s a two year budget. Also Texas has a “rainy day” fund of approximately 10 billion. With oil and gas prices rising over the last 60 days the predictions of a 25 billion dollar deficit may be wildly overblown.
Is this something from The Onion?
Pax,
What I found odd about that quote is the source, it was not Jefferson, who said much the same things.
“Where some of the most productive “wealthy” people gets to be taxed at maximum tax rate but some don’t?”
I do not think this statement is correct, may be there are some black swans paying top rate otherwise the top rate is too low, and avoided by most.
And please tell me how productive a Hedge Fund manager, a seller of oddities might be.
California is exposing the results of neocon activism, in a place where they do not print money (ala Bernanke).
rustbelt says The Germans never produced the likes of the Pontiac Aztec or the Ford Escort.
The Ford Escort was built in Saarlouis, Germany.
ilsm:
Hedge Fund manager getting taxed at long term capital gains rate. Google getting preferential tax deferrment paying effective tax rate of 2.5%
As for the statement “I do not think this statement is correct, may be there are some black swans paying top rate otherwise the top rate is too low, and avoided by most. “
Have you heard of W-2, 1099, K-1 partnership firms. Those are your typical high earners whom might be paying the top rate. I.E. Doctors, Engineers, Pilots-Professionals whom earn their pay hour by hour. So how should we tax them? What is a reasonable top tax rate for them? Compare then to funny money in Wall Street-how should we tax them?
Besides, top 1% of the wage earners are paying like over 40% of our national tax collection? Can you really say they aren’t paying their taxes? Isn’t very very dangerous to put all your national hope, dream, support on just 1% of the population? What happens if half of those 1% drops out of the tax system? What do you think happened in Illinois, California? Majority of the “1%” pays their taxes to make this happen, if only a few pays them, then the middle class will take a big hit!
What needs to happen is a real reform of the progressive system, and start treating all people in their prospective tax bracket the same. There are too many exceptional rules in our tax system that favors the multinational corporations, wall street traders(especiall private equity fund managers). Those are the fat cows that needs to start paying their share. Not the people that already pays the top rate? Why do you propose to punish those already paid the top rate but allows for exemption for other?
The US automobile industry didn’t take the challenges of foreign competition seriously. VW fired a shot across their bow, and the Japanese followed up in force. Still, Detroit’s approach was sensible from a corporate point of view. Rather than innovate and improve the product and production methods, they looked for ways to cut wages. This is good for the lower wage producers, at least for a while, so right now everyone is moving to Texas, but Mexico awaits, then China, then Vietnam and probably then Zambia or Kenya. If the commies running China believed in free trade, it is likely that Shanghai will be a ghost town with rice paddies in the office park parking lots in less than 100 years.
Remember, the industrial revolution was a result of high wages in 18th century England. If the Brits could have cut wages somehow, we still wouldn’t have steam power or railroads, let alone everything else that followed. Corporations don’t innovate for the hell of it. They innovate to survive.
Personally, I expect Texans to squeal blue murder when lower wage countries start taking their jobs.
That’s a big part of being red state, being able to dish it out, but being unable to take it.
Interesting:
* The National Association of State Budget Officers found that during this decade Michigan shrunk spending and cut a greater percentage from government than any other state in the country.
* Michigan was named one of the best-managed states in the country in 2006 and 2008 by Governing Magazine and the Pew Center on the States.
* Since 2004, according to the Center for Digital Government, Michigan has been either first or second among all states for using technology to streamline government and serve citizens.
* The Tax Foundation found that Michigan’s business climate rose from 27th in 2003 to 17th today.
* Site Selection magazine, which annually ranks the business attraction efforts of all states, found that over the past two years, Michigan is one of the top three states for attracting new business expansions.
* And the nonpartisan Senate Fiscal Agency reported that Michigan’s business and individual tax burden dropped more than any other state’s in this decade.
Three terms of Engler really screwed things up. Add that to a Bush led and Wall Street manipulated caused recession coupled with little job creation certainly put Michigan in the shitter. But then Rusty, you fail to acknowledge such issues. You choose instead to localize them. The issue we face today were not the result of Labor or people. After all, who faced the end result. Labor wasn’t rescued, the companies were.
Your problem, Buff, is the same one you’ve always had – your willful refusal to actually commit to a falsifiable prediction. Because your “facts” about the local government antibusiness, or corrupt, or incompetent, or the unions “underperforming” aren’t really susceptable to quantification, I suppose that had to necessarilly follow.
What you have, in short, is not even a hypothesis; it’s no more and no less than a narrative.
Sorry, but I just jad to make that observation after your whopper about being “reality-based”.
Your problem, Buff, is the same one you’ve always had – your willful refusal to actually commit to a falsifiable prediction. Because your “facts” about the local government antibusiness, or corrupt, or incompetent, or the unions “underperforming” aren’t really susceptable to quantification, I suppose that had to necessarilly follow.
What you have, in short, is not even a hypothesis; it’s no more and no less than a narrative.
Sorry, but I just jad to make that observation after your whopper about being “reality-based”.
No one has opened up a major factory in Michigan or Ohio in over 30 years. They have been opening them up throughout the south, including Texas.
I spent the last couple of years in Detroit. During that time Michigan was hoping to attract a Volkswagen factory. Michigan lost, to either Alabama or Tennesees, I forget which. However, BOTH of those other states essentially built a complete site for VW, and probably tossed in other publicly funded goodies besides. I guess Rustbelt politicians should give away **more** to multinationals, eh?
“No one has opened up a major factory in Michigan or Ohio in over 30 years. They have been opening them up throughout the south, including Texas. ”
I spent the last couple of years in Detroit. During that time Michigan was hoping to attract a Volkswagen factory. Michigan lost, to either Alabama or Tennesees, I forget which. However, BOTH of those other states essentially built a complete site for VW, and probably tossed in other publicly funded goodies besides.
So I guess Rustbelt politicians should give away **more** to multinationals, eh? All in the name of “free enterprise”, natch.
“* Michigan was named one of the best-managed states in the country in 2006 and 2008 by Governing Magazine and the Pew Center on the States. “
Well the solution to America’s problems becomes clear. We just need to import more Canadian born folk like Jennifer Granholm and turn Statehouses over to people who don’t believe that ‘Government is the Problem’. Couldn’t hurt.
What side is that??
Seems to me that to argue that the only causes of the decline of manufacturing were governments, union and management ignores the effect that free trade agreements and the arrival of Toyota, Honda, and the other Japanese and German manufacturers, and not only of cars, had to do with it all. The federal government engineered free trade agreements and let’s face it, the goal was to transfer manufacturing to other low-wage nations so that products could be manufactured more cheaply and profits thus maximized. It has worked for business; displaced labor was an afterthought or a non-thought.
It is interesting to observer that 100 years ago the Republicans were strong protectionists. I believe that over the long term the protectionist policies followed after the civil war had a large part in the development of the US. It allowed a steel industry to develop, and put the british one to shame. Now during this period the south was made to suffer, so that the industries of the north could do well. Its interesting that as the political base of the two parties switched (south going from Solid democrat to Solid Republican) that the point of view on trade switched with it, the reps becoming free traders as the old dems were etc.
The side that told you 25 billion.
Ford Escort was designed in Detroit Michigan .
Run:
So if all of that is true (and I think Governing magazine is mostly comedy) why is Michigan sliding downhill at an astounding rate?
If you do not believe me, leaf through the archives of any of the large Michigan newspapers, or better yet, listen to the final interviews with Jennifer Granholm herself.
You will never hear anything good about Engler from me. H played a big game of kick the can down the road.
And the lousy service for the Ford Excort came completely from Detroit, I know from painful expereince.
So Michigan is an exonomic paradise?
A friend of mine was the lead engineer on the new Jeep plant (North) and is it buzzing along.
The old Stickney and Berdan complexes have been mostly razed, as it hailed back to pre WWII.
“* Michigan was named one of the best-managed states in the country in 2006 and 2008 by Governing Magazine and the Pew Center on the States.”
I cant find any Michigan reporter, editorialist, newspaper (left or right), tv political reporter or anyone else in the know who agrees with this assessment.
The Detroit Free Press (an excellent paper) has a serious left tilt editorially (they are friends and let me write for them a couple of times) and they are pleading for lots of change as quickly as possible in both the private sector and the government.
Wait a minute — “Union workers became unresponsive to the needs of the consumer???” I don’t think it was the union worker — the union workers just built the stupid things – it was management that designed them and marketed them. Always blame the worker, why? They don’t control anything.
Unable to take it? I guess you’ve missed out on the stereotype of a Texan for the last 80 years.
Big three management should be getting equal blame with the Unions. They all thought they were invulnerable, and cooperated to take every penny while investing as little as possible. Unfortunately, management and the unions never cooperated on production and product, limiting themselves to agreeing to percentages of the take. Management fought it as much as any shop steward. Even after GM management paid Toyota to build a factory and teach them their system, they failed to adapt. Then they all received an @ss whooping for their hubris.
Strip that much money out of they economy, there is no state or region that could adapt quickly. No regulation or policy changes would have prevented the damage when the overwhelmingly dominant industry decides to shoot itself in the head.
And the Ford Escort built in Germany was not the same piece of trash sold here. The Germans didn’t get an engine that needed a value job every 40K miles. They also didn’t get a suspension designed to wallow like a ’64 Galaxy.
Big 3 vehicles were famous for a while for random acts of assembly line sabotage, including the favorite – trash and lose bolts in the drivers side door (requiring the dealer to tear apart the entire door to clean out the mess).
Damn right. The unionized workers just assemble products designed by management. Management thought American’s wanted boats and that they built the best cars in the world. When both of those stopped being true, managment went into denial. Go see GM’s deadliest sins at the truthaboutcars.com
I grew up with and have lived with UAW members for much of my life, and until recently they had the following advice on buying a car.
1. look at the exact assembly date
2. never buy a car built on Monday (lots of hangovers, high absenteeism resulting is lots of line substitutes)
3. never buy a car built on Friday (many hangovers, high absenteeism resulting in lots of line substitutes, higher than average sabotage as anger built over the week, everybody is in a rush to start the weekend).
Quality has improved over the past decade or so, as told by UAW members, and I believe that.
that’s urban myth, save! I just doubt that it’s true. The cars built by the Big 3 started the loss in market share because of planned obsolescence, e.g., which was the brainchild of John DeLorean, as I understand it. The Japanese started offering fuel efficient cars with lifespans counted in decades and hundreds of thousands of miles and the public went for it. Workers had jack all to do with it.
” No one has opened up a major factory in Michigan or Ohio in over 30 years”
Wanna bet?
Buff,
If this winter goes as usual here in freezerland I am moving to San Anton!!
Lots of commissaries, lots of military treatment facilities and no income tax.
And as long as I can afford the 4×4 I can get around.
Happy New Year
I rode in an Edsel, too young to drive it, named for one of Henry’s boys.
Distinctive, even then!!
One of the (extremely little excuses) minor arguments leading to secessions 150 years ago was protection of northern industry which raised cost of English finished goods which in effect lowered the margin on cotton and other agriculture [labored on by slaves and] sold to the English.
Protectionism cuts the margin on slave labor.
I had exceding good use of a ’81 Chevy, ’85 Pontiac, and a ’93 Pontiac I lost in a divorce……….
Maybe I was lucky for about 15 years.
Not so happy with ventures to Chrysler and Ford in those years.
Since divorce I have gone Japanese…..
This is what I am pointing out… The culture of “Blame” the worker and management blame each other. The worker is definitely responsible for the product!!!
The Japanese worker in the 70s 80s have a zero defect policy. A worker will stop the production if they perceive there is a problem with the car that they are making!
A worker that doesn’t care about their product is just as bad as the management, engineers that cannot design a car properly!
This is the reason for the downfall of the big three automakers…
Blame the management, Blame the workers i.e. Unions
You’re right about the Ford Galaxy – that was the first car of one of my high school friends, shopped and bought with the assistance of his mechanic dad. I too have a mechanic dad, and my first car was a 67 Impala. Sigh. They sure don’t make ’em like that any more, the eponymous car as big as whale that seats about 20 – and tops out at well over 100 mph.
Anyway, yeah, about the rise of the MBA mentality: very true. This was the confluence of a couple of bad trends. First, even in the 50’s, the Big Three were well-established companies. The capable men of vision who were responsible for their rise and the products they put out had long since been displaced by men with other skillsets; instead of engineering expertise these men had the uncanny ability to advance themselves within the organization despite their mediocre track records and frequently at the expense of those who were much more able. Of course, once at the helm they followed through with their singular lack of aptitude in producing anything of worth. They thought that since they had advanced through promotion and flash, the sort of thing that dazzled their superiors and blinded them to the actual reality, why, the same techniques would surely work on the buying public. Well, yeah, they did. For a while. And then came the crash, same as it ever was.
The second disasterous strain of thinking was that management by virtue of it’s position was always smarter, more knowlegable, and more capable overall than those they bossed. Remember that this was the 1950’s, so they would have been born sometime in 191_. These protomanagers would have picked up this attitude from their dads when perhaps it was a little more forgiveable. That changed, of course, and the mechanical engineers under their purview were demonstably much smarter, more knowledgable, and overall more capable. Can’t have that.
Hence the rise of the myth of the MBA. Really, nothing more than a bit of face-saving, and self-destructive face-saving at that.
Those union guys? While they may have had a part in Detroit’s problems (arguable), even if true, they’re number four or five on the list of contributory factors.
Right. Yet another myth for cheap labor conservatives – the notion that Mercantilism is bad economic policy. Despite the numerous counterexamples.
Japan spent 6.4% of its government outlays for war, Germany 3.3% and the US 19.7% in 2009. Been that way since losing WW II forced them to disarm.
Incursion of Japanese and Germans cars, electronics etc took place about the time the engineers that built during WW II retired, when the war machine and beating the Russuans had driven technical prices too high, real US spending on war peaked, etc……..
The Japanese used a lot of automation and implemented statistical process control (SPC).
The Toyota model (machine) is good but it is nothing new.
That they came in when the US was being plundered by war profiteers and was going global financed by the sellers was fortuitous for Toyota.
Back in my callow youth I did some dealership accounting and I do believe the sabotage stories are true.
As far as product, GM finally built a car that (maybe) can compete with the Toyota Corolla and Honda Civic in 2010, yes 2010 for God’s sake.
The UAW is not blameless but the primary responsibility always rests with management.
rustbelt says the Ford Escort was designed in Detroit.
The first Ford Escort model was designed in the U.K. and the next generation was a Ford U.K. and Ford of Germany design. All five generations of the Ford Escort were initially designed in Europe and the American version was a derivative of the European design.
The Escort was the first of Ford’s world car designs. The American version was only one of the models that was eventually developed and it was an inferior version of the well known Escort model.
Run:
In an accident of timing Mrs. Rustbelt went to the Michigan DMV to get a new plate sticker for the car she registers in Michigan.
I read your post to her when she came home.
I have to clean this up a little, but her essential comment was:
“Michigan is at least 20 years behind Ohio, and charges higher fees. How can that be?”
The Ford Escort built in America was a poor derivative of the original Escort design first created in the U.K. and then redesigned by Ford of Germany and UK. There were five generations of Escorts produced in Europe and later in South America.
Pain is inevitable but we all have to go through that no matter what. Just have to be positive about it and hope that the changes would bring good results.