An Interview With Mackinac Center Senior Economist David L. Littmann (12:49)

The Economic Impact of the Auto Crisis on Michigan

Hoekstra: "What impact do you think the Big Three’s financial woes are going to have on Michigan?

Littmann: "Oh, it’s already happened. Essentially the layoffs and the proposed layoffs suggest that revenues for the state will continue to plummet, as will the contributions of the employees to the local communities and the tax revenues to the local communities. The automakers and suppliers were such a big part — I’m going to say between 26 [percent] and 30 percent — of the tax base of Michigan. And today that’s eroding to something on the order of perhaps 10 [percent] to 12 percent."

Hoekstra: "Wow. And the Big Three’s share of the auto market certainly will be impacted."

Littmann: "Well it already has been. Again, we’re looking at the aftermath, and yet there’s more to come. Whereas some 30 years ago it took nearly 78 percent of the market. I just looked at the figures and they’re in the 30 percent [area], all together. So between the transplants and the foreign automakers, [the Big Three] have gone from 78 [percent] — nearly 80 percent — to [where] they’re rapidly approaching 20 percent.

Hoekstra: "All of that sounds very grim."

Littmann: "Well, it is grim. It’s grim because of the legacy costs that people seem to be reluctant to talk about. But if you can’t face the problem, you surely aren’t going to solve it with bankruptcy or taxpayer money. That’s just a one-way street to oblivion. Now I’m very happy that Ford Motor has opted out of that. I think GM still has a chance to make things work very well for itself. If you look at their China sales, they’re up. They can make profits there. They can avoid some of the pitfalls and the legacy costs that afflicted them here."

Hoekstra: "So what do you think about Chrysler going into bankruptcy?"

Littmann: "Chrysler’s a dead letter. Fiat is the blind leading the blind. They can’t make money except — again — if the taxpayer [through the] agent of government is to give to them at the point of a gun. I do not think it’s an ethical solution, and I do think the automakers here that aren’t legacy-cost burdened and those — for example, the Japanese — who are in the right-to-work states can run circles around them if and when the economy picks up. I think what most people are not facing is the reality of the fact that even when we were selling for four years a record 17 million units of autos and trucks in this country, the automakers here in Detroit were losing share hand over fist and never made money. Now, instead of 17 million units, we’re looking at something like [on] the order, at best, [of] 9 [million] to 10 million units a year. They cannot make money. Even the Japanese, who have the top-rated productivity and cost control, can’t make much money at those levels of sales.

Hoekstra: "So where does that leave Michigan?"

Littmann: "It leaves Michigan in a continuing hole. What is absolutely astounding to me as an economist who studied the Michigan economy for over 40 years, is to see the governor’s council of economic advisors and budget directors explaining that: ‘Oh, next year’s going to be a better year. You don’t have to worry about the budget. It’ll come back. We’re just in a borrowing situation right now.’ They have to explain rationally to the voter and to the taxpayer why they think somehow heaven will change Michigan’s fortunes if bad policies persist."

Hoekstra: "So, ‘Things need to change from the bottom up, on a structural level,’ is the nuts-and-bolts of what you’re saying."

Littmann: "What we need is a competitive economy with a labor force that’s competitive — a right-to-work state, among other things — so that there’s competition to give us the kick in the Bahamas that we need. But to just be answering to special-interest groups, labor in particular, is to make the state so uncompetitive that as it stands now, the surveys show that half of the prospective new startups and expansions in business by businessmen — half of those people — won’t even look at Michigan because it’s not a right-to-work state. So if we can’t really focus on what’s ailing us, we’ll never do anything but continue down in a poverty way compared to the other states. That’s what we’ve done; that’s what we’ll do."

Hoekstra: "So if things remain status quo, if the economic landscape of Michigan stays as it is right now, how long do you think it would take for us to … turn things around? Can we ever turn things around?"

Littmann: "No. Nature doesn’t work that way. There are too many people both in this country (other states) and other lands that want to get where Michigan was 45 [years], 50 years ago. If we are complacent, careless, reckless as we have been, of course, who cares about Michigan? We lose financial clout, as you’ve suggested; we’ve lost economic clout; but mostly we’ll continue to lose political clout.

"So, what turns it around? When people say, ‘I’ve had enough.’ Give … back the competitive market system that we used to have in capital, management and labor."

Hoekstra: "For the state — the policymakers, the decision makers — who may be watching this video right now, what message would you have for them?"

Littmann: "The single most important element in reform — long-lasting, durable economic and financial reform — for this state, so that we can become a magnet for attraction of business and jobs, is to make it a right-to-work [state]. A free-to-choose labor state. Without that, there’s no reason to be in Michigan. Absolutely no comparative advantages.

"We have essentially removed the comparative advantage we used to have in our water. Water is such a scarce and lovely resource to have [in] home appreciations, wealth, income: It was a magnet. With an uncompetitive workforce and a deteriorating infrastructure, we’ve essentially offset those wonderful comparative advantages. "

Hoekstra: "I want to go very quickly back to the automakers and the bankruptcy. When the news of Chrysler’s ‘surgical bankruptcy’ came about, you had some pretty harsh words for how that is all playing out."

Littmann: "Well, one should, because … bond holders are the ones who have lent the money. They’re usually first in line to receive whatever credits are available in the company through bankruptcy. Instead, you had a heavy-handed, intimidating administration and a Congress coming in to say, ‘No, you stand at the back of the line.’ Well, what kind of incentive [is that] — because that’s all economics is, is incentive — to anybody else who wants to really buy [or] become an active, productive player in the auto market in Michigan? It just won’t, won’t happen.

Hoekstra: "So turning off those types of investors in the future?"

Littmann: "We won’t have the venture capital. We won’t have the human capital. We’re chasing away our human capital — the most essential resource, economically, that exists on the face of the earth — at the rate of [31,000] to 40,000 a year. Well, once you’ve lost that critical mass, that cream of the crop, you’ve essentially exported whatever renaissance Michigan might have."

Hoekstra: "You also mentioned that especially with the Chrysler situation — because that’s the most recent automaker situation where we have some definitive action happening anyway — you said, ‘There’s no exit strategy.’

Littmann: "There’s no exit strategy in the sense that government — that means the taxpayer, with a gun to his head — will be forced to subsidize a losing entity. And we’ve seen this pattern before. It’s a socialist-type economy. It’s not one that can grow. It simply depletes the resources of the existing people who are trying to make things work. A far better exit strategy would be [that] you go through a Chapter 11 [bankruptcy protection]. You let the judges, the non-political forces, enter [and] restructure it. And so hopefully, domestically you have an industry that is viable. That’s why I say in order to be hopeful about the state of Michigan and the auto industry, you look at Ford now. And you look at GM and hope quickly they can get their restructuring into Chapter 11 protection, which will allow them to still make money overseas and still have management here."

Hoekstra: "And finally, … going into the direction of Chapter 11 bankruptcy protection is sort of a drumbeat that you and many others began, boy, at least last fall. I mean, I know you were talking about it."

Littmann: "That’s correct."

Hoekstra: "Why isn’t anybody listening to you?"

Littmann: "Well, because politics seems to usurp good economics. And that can happen for a little while. But people have to remember that politics is a zero-sum game. Somebody wins, somebody loses. That’s not the way an economic system, a market system, is. And [in] a market system, the whole idea is to grow the pie through rational, competitive use of resources bringing down the cost structure, [which] favors the consumer wallet. And you don’t hold a gun to people’s heads to tell them what kind of car to buy — ‘a green car with this kind of battery that goes at most 40 to 100 miles, and costs $7,500 more per period than a normal car.’ When politicians do that for their favorite interest group — labor unions, Sierra Club, whatever — the consumer loses. And that’s the way this country became great: … not listening to special interests, but to the consumer. The consumer should resume being king."

Hoekstra: "And you correctly predicted last fall that unemployment in Michigan early this year would reach 12 percent. You were right on that, and you know, here’s hoping some folks will listen to you."

Littmann: "No, they won’t. They won’t. People have to feel the pain on their bodies before it gets to their mind that change, radical reform, has to occur. By the way, my current prediction, because we’ve traced this issue, [is] that unemployment in Michigan will be approaching somewhere between 17 [percent] and 20 percent by the end of this year. You can hold me to that."

Hoekstra: "… Anything else [that] you want to share with us, that you wanted to touch on, that we didn’t yet?"

Littmann: "No. I’m writing for a local magazine and for the Mackinac Center [about] what the reforms should be to have us in a durable, long-range recovery that will … again put Michigan as a premier economic state and a pre-eminent attraction of labor and capital. Foremost among those is the right to work. And as hard uphill as that is for some labor unions and political groups to swallow, that is the fact. And as the logo in Michigan says, If you don’t believe it, ‘look around you’ and see what other states have done that have succeeded better than Michigan. We should leapfrog those [states’] incentives and make Michigan the place it used to be: a competitive, market-oriented — not a socialist — type of state."


"By the way, my current prediction, because we’ve traced this issue, [is] that unemployment in Michigan will be approaching somewhere between 17 [percent] and 20 percent by the end of this year. You can hold me to that."