Profs, students study Michigan’s economic future in research seminar

The link provides access to an article in MSU's News Bulletin about the "Michigan Futures in the Global Economy" undergraduate applied public policy research seminar that Professor Bryan Ritchie and I are running this semester. More information about the seminar can be found at the seminar's web site.

Michigan must nurture innovators and ideas

A shortened version of the following appeared in the Lansing State Journal on Sunday, March 18, 2007 (see the link for the short version).

Comerica’s decision to move its headquarters from Detroit to Dallas is one more piece of bad news for the state. But what does it mean? Are we to surmise that the tax environment remains too onerous for business, despite the elimination of the Single Business Tax at the end of 2007? Although Texas ranks 6th, and Michigan 27th, on the Tax Foundation’s State Business Tax Climate Index for 2007, Comerica’s CEO Ralph Babb, Jr. did not cite taxes as a major reason for the move. And he’s probably right, at least about the fact that taxes did not prompt the company to leave Michigan. Research we have been conducting in the Michigan Center for Innovation & Economic Prosperity suggests that the tax environment is not the key deterrent to business activity in Michigan by state residents; there are enough other obstacles to overcome! But our research does suggest that companies considering moves to Michigan do consider the tax environment an obstacle. One could say the following about Comerica’s decision: the company left Michigan for business reasons, but Texas’ low tax environment made it an attractive location relative to the company’s other choices. Comerica’s other major markets are Arizona (ranked one spot behind Michigan at 28th), California (ranked 45th), and Florida (ranked 5th). Texas may have won because it provided a low tax environment close to the majority of the company’s customer base.

But saying that taxes didn’t matter to Comerica’s decision to leave Michigan doesn’t let the state off the hook! Comerica is a financial services company, and thrives when it operates in an environment where people are starting up new businesses and existing companies are growing. Comerica can find funds anywhere (notice, it will keep its branch facilities open in Michigan), but its company operations need to be near its commercial and investment customers. And they, in turn, need to be in a location conducive to business startup and expansion. Michigan’s bureaucratic and regulatory structure right now is not designed promote entrepreneurial activity. And that needs to change.

The state’s economic focus continues to be jobs, jobs, jobs. I understand the motivation behind that focus, but it needs to shift. We need to focus on creating an environment conducive to innovation and to encouraging companies to serve customers around the world. The focus on jobs comes from the old notion that capitalism is about the accumulation of capital and the employment of labor. We assumed for decades that economic growth in Michigan was built on wedding the capital of companies like GM and Ford to our labor. Instant prosperity. Except that it wasn’t their capital and our labor that were the real keys to that prosperity. It was their innovation and the world’s demand. Innovation is about people having new ideas about how to use things. Increased demand is also about people having new ideas about how to use things. In short, the economy is not first and foremost about capital and labor: it is about people, ideas, and things. Thomas Edison, Henry Ford, Ransom Olds, and the Kellogg brothers understood that. We somehow forgot it along the way, settling instead for jobs, any jobs.

How do we move as a state from a conception of economic development built upon the old economy to one that helps people find new ideas and new ways to use things? We need to streamline the process of business startup and expansion: reducing the confusion of paperwork and office-jumping would help; a real one-stop shop would be even better. We need to stop trying to pick “winners” (companies that will provide lots of jobs in Michigan) and provide an incentive structure that encourage Michigan entrepreneurs to devote their activity to serving customers around the globe. We need to facilitate the interaction of entrepreneurs and innovators in our universities with entrepreneurs and innovators in the private sector. Perhaps most of all, we need not only to upgrade our children’s education, but connect them more often to activities of private sector businesses and non-profit organizations so that they can become people who have new ideas about how to use things.

The End of Ingenuity Is Not Nigh

The following is a response to an editorial in the New York Times by Thomas Homer-Dixon on November 28, 2006. Homer-Dixon's editorial was entitled "The End of Ingenuity."

T. Robert Malthus was onto something, but it wasn’t what Mr. Homer-Dixon thinks it was.

In his recent editorial Thomas Homer-Dixon argued that Paul Ehrlich and the limits to growth crowd are proving Malthus right: we will run out of resources in the long run, despite Julian Simon’s appeal to the human capacity to innovate. Innovation, Homer-Dixon argues, is not infinite, or at least, it is uncertain enough that we should not depend upon market-driven changes to deal with global climate change. While his editorial leaves the policy conclusions vague, the clear implication is that governments will need to both increase regulatory oversight of market outcomes and provide incentives for business and academia to innovate faster.

The problem with Mr. Homer-Dixon’s argument is that he misses a subtle aspect of the problem of innovation that Malthus actually understood. When we talk about Malthus, we usually speak only of his “population principle”: the source of the so-called Malthusian trap where the growth of population necessarily outruns the earth’s capacity to sustain the human population’s consumption. But if we go beyond the population principle in Malthus, we find he argues that the civilizing institutions that humans create—especially property rights and free markets—provide incentive structures that both restrain population growth and ensure a steady stream of innovations. In other words, the human response to natural constraints is to organize: we use our reason and foresight to create institutions that enable us to continue innovating and also contain population growth.

To be fair, Mr. Homer-Dixon is right that the prospect of innovation is uncertain. But the main reason it is uncertain emerges from Malthus’ insight: while the capacity that allows humans to restrain population growth and continually innovate is always there, the institutional framework in which we find ourselves may provide an unworthy guide to prudential action. It is not the human capacity to innovate that is somehow fundamentally inadequate or flawed. Instead, the problems lie in the nature of the incentive structures in which human innovators find themselves. When those institutions create significant uncertainties or perverse incentives, innovation tends to dry up.

Malthus followed Adam Smith in believing that the substitution of market coordination of human actions for state coercion would allow the human capacity to innovate and to restrain population growth to function best. Mr. Homer-Dixon thinks otherwise. He fears that failures in prudential action signal the failure of markets, and calls for the substitution of state coercion (perhaps in the form of a carrot rather than a stick) for the uncertainties of market organization. I believe time has shown Malthus, Smith and Simon right. Our future prosperity depends upon ensuring that global climate change does not become another means by which the coercive power of the state is expanded in ways that limit even further our capacity to respond positively to the uncertainties of life through innovation.