Harvard Political Review - Role of Government
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Is Government the Key(nes)?
By Colin Motley
From an economic perspective, one might conclude that things in the United States are running smoothly. Unemployment is near record lows, consumer confidence is at record highs, and the Federal Reserve has not seen enough risk of inflation to raise the Federal Funds rate in the last half year.
Viewed through such a lens, the current economic situation in Michigan is all the more surprising. Fallout from heavy losses in the auto industry has driven unemployment up to seven percent in the state, and many displaced workers that have been unable to find local jobs have simply left the state. Meanwhile, the government faces a $290 million budget shortfall, and local residents testify to the poor quality of state services, such as road maintenance. In what many view as a global economy, Michigan has fallen into an isolated, single-state recession.
The battle over how to solve Michigan’s economic crisis is one being fought in the halls of the State Capitol in Lansing, but its resolution will have far-reaching consequences for economic policymakers nationwide. At the heart of the debate over how to bring Michigan out of recession is a question that economists have debated for centuries, and the situation serves as the latest case study towards answering that question: how big a role should government play in economic recovery?
Government as the Solution?
When John Maynard Keynes published his General Theory of Employment, Interest, and Money in 1936, he shifted the paradigm of economic thought in the United States. The solution to the Great Depression, Keynes argued, was an active role for government: as a supplier of jobs, as a buyer of goods, and as an advocate for individual well-being. Since then, advocates for strong government involvement in economic recovery have invoked Keynes as support for their efforts to use government to improve economic conditions.
Governor Jennifer Granholm (D-Mich.) is confident that government programs can help bring about economic recovery in Michigan. In her annual State of the State Address this year, Granholm proposed wide-ranging government initiatives to improve the state’s economy. Her plans included broadening public works to provide jobs for Michigan residents, extending the state-sponsored healthcare program, and an ambitious promise to provide two years of free tuition at a community college to any worker displaced in last year’s job-slashing frenzy by corporate giants Ford, Delphi, and Pfizer. These programs, the Governor hopes, will function just as Keynes’s programs did to pull Michigan out of its own economic slump.
Government as the Problem?
Michigan House Minority Leader Craig DeRoche (R-Mich.) views the situation quite differently. He told the HPR, “The underlying issue is the restructuring of the auto industry, but the reason we’ve been affected so profoundly is a result of the tax and regulatory framework that Michigan established in the days when you could take the success of that industry for granted.” His solution is less government, not more. “Michigan’s success lies not only with the businesses we have in our state now, but also with those from outside our state that we need to attract. Increasing government-financed programs, which inevitably involves tax increases to either businesses or Michigan families, is not the way to attract these business to the state.”
DeRoche and others advocating small-government or private sector solutions to Michigan’s problems echo the sentiment of so-called Classical economists, who believe that the government’s role in the economy should be minimal, restricted primarily to protecting the integrity of financial infrastructure and the money supply. Keynesian policies, they argue, worked for the Great Depression but are not a one-size-fits-all solution to any economic downturn. The problem of attracting private business to a state, for example, does not parallel the problems of the Great Depression. In the eyes of these policymakers, Granholm’s most egregious mistake may have been her opposition to cutting the Single Business Tax, which DeRoche equated to a “tax on private investment that is unique to Michigan.” DeRoche has a problem not with the concept of a tax on business itself, but rather that Michigan’s tax made the state a relatively less appealing place to build a business. Replacement taxes, he argued, could take the form of “a corporate income tax, which is something that accountants and businesses understand and expect and will allow Michigan to compete with other states for much-needed business.”
More than Just a Mitten
The question of whether Keynes’s theorized solutions apply to state- and local-level, 21st century problems is thus under full examination in Michigan, and the early returns bode ill for strict Keynesians. Despite her insistence on public works as a means of recovery, even Governor Granholm has been forced to redefine Keynesian tactics. A large portion of her address was also dedicated to the progress her administration has made in attracting new businesses to Michigan, with an emphasis on the new Google facility opened in Ann Arbor, and even like-minded policymakers have begun to agree that innovation that drives structural economic change often comes from the top down. Therefore, especially at the state and local level, self-promotion has become just as important as self-protection: floundering industries can no longer be saved by government subsidies (such as was the case with Chrysler two decades ago) if it means increasing regulatory constraints on new business opportunities.
However, for Michigan to be an attractive option for new investment, the importance of developing its human capital cannot be overlooked. The rusting ruins of Flint’s GM plant hide the larger problem of a workforce with outdated skills and no means to update them. DeRoche agrees, and points out that “even in this global economy, we’ve lost more jobs to other states than we have to other countries.” The problem is not that lower wages for foreign workers are undercutting Michigan jobs, but rather that there is a dearth of modern job skills in Michigan workers. In a way that the closed, macroeconomic Keynesian model does not consider, the flow of human capital across borders is fluid and difficult to stem. There is no guarantee that even current workers will remain in Michigan if the economic outlook remains bleak into the future.
Education, then, is an area where government involvement may help most in economic recovery. Michigan possesses a substantial network of community colleges, which make it particularly well-equipped for the governor’s education initiative. The question, of course, is whether Michigan can afford such a program with its already-troubled financial condition. Budgetary constraints aside, both sides agree that significant change is needed to ready Michigan schools for the challenge. “Michigan schools are among the top-ten most funded in the nation, but we have the 43rd lowest teacher to pupil ratio – we’re not setting ourselves up to be competitive,” he points out. It is doubtful that he would sign on to Granholm’s guarantee of two free years of education to all displaced workers, but the debate shows that both the Keynesian and Classical sides see a need for some form of government-sponsored change to better prepare students for the state’s changing job market.
While some elements of Keynesian theory may prove outdated for Michigan, the same objective of economic recovery remains. As both sides move to enact reform, those watching Michigan will see how successful their proposals prove to be. Budgetary constraints may force Granholm to abandon some of her programs, and lack of a legislative majority might prevent DeRoche from implementing regulatory reform. Even if Granholm succeeds in advancing her policies, only time will tell whether government action will provide sustainable economic growth or a merely a short-term stimulus. Nevertheless, whether Granholm or DeRoche is hailed as Michigan’s own Keynes, for bringing the state out of its slump, will serve as the latest test in one of history’s greatest economic debates.
Posted on Tuesday, April 10, 2007 at 01:27PM by HPR | 2 Comments
