From The Free Press: Gov. not to blame for economy

Governors are not to blame for economy
July 23, 2006

BY KEVIN J. MURPHY


So on a recent morning I'm flipping through the New York Times and I come across an article entitled "Faltering Economy Obstacle for Granholm." The gist of it was that Republicans, at both the state and national levels, are attempting to pin the blame for Michigan's lackluster economy on Gov. Jennifer Granholm. It reminded me of the late '90s when Republicans, at both the state and national levels, attempted to give credit for Michigan's robust economy of the time to then-Gov. John Engler.

I shrugged it off then as politicians simply trying to take credit for good things that happen on their watch. The article in the Times, however, is no shrugging matter. If Republicans persuade enough Michigan voters that Michigan's economy is foundering because of Granholm, they could swing an election via a patently false claim.

I address this not from any political standpoint but as an economist. The basic economic question is whether a state's governor can significantly influence the economic performance of the state -- and the answer from the economics profession is no.

Government, to the extent that it can influence macroeconomic activity, does so through two channels: monetary policy (i.e., interest rates) and fiscal policy (taxing and spending). States do not engage in monetary policy.

States, of course, do set some of their own fiscal policies, setting tax rates and determining the amount they want to spend on public goods and services. But many states, including Michigan, choose to tie their own hands by requiring a balanced budget.

Now having your fiscal house in balance may sound like a great idea, but it can be problematic from an economic stabilization point of view. During a recession, personal income naturally falls, driving down the state's two main sources of tax revenue -- the income tax and the sales tax. When you force yourself to balance the budget, then the state must cut expenditures at exactly the wrong time. Such cuts only serve to make a bad situation worse.

My basic point, then, is that the state's poor economy cannot be blamed on the governor. She simply does not have the fiscal or monetary policy tools at her disposal either to have caused it to tank in the first place or to yank it out of the doldrums now.

So whom should we blame? For better and for worse, our fortunes in Michigan have been tied to the auto industry for the better part of the last hundred years. Auto sales are extremely sensitive to national economic conditions. If the U.S. economy slides into recession, consumers stop spending on consumer durables like automobiles. The consequence for a state like Michigan can be disastrous.

Given the recovery of the U.S. economy, why haven't we followed suit? I have four possible answers:

First, the national recovery has not been very strong or very sustained. Both the federal budget deficit and the trade deficit are positively huge by historical standards. Some indicators look good, but a lot of other traditional indicators have been pretty flat.

Second, because of fears about inflation, the Federal Reserve has been engaged in a prolonged program of raising interest rates. Higher interest rates are bad news for sales of large goods such as automobiles.

Third, the auto industry is clearly undergoing major structural change. Gas prices have tripled in the last decade. Demand is shifting away from the SUVs and light trucks. The market for vehicles is more competitive than ever before, and this exerts constant downward pressure on market share for the domestic companies. As local automakers scale down, that puts a drag on our prospects for recovery.

A fourth possibility is that those who would blame the governor are simply exaggerating. Consider that Michigan's unemployment rate has averaged 7.4% over the last 45 years. The current 6% rate doesn't seem so bad. Moreover, using the same 45-year window of data, Michigan's unemployment rate has exceeded the national rate by about 25% on average. With the current U.S. rate at 4.6%, we are almost exactly where we have traditionally been relative to the nation.

Finally, comparing the state's employment situation at the same points of Engler's first term to Granholm's first term, one finds Engler had both higher unemployment (6.3%) and 300,000 fewer jobs (4.5 million versus 4.8 million).

I'm not trying to tell anyone whom to vote for come November. I bristle at the thought, however, that the election might be hijacked by a slick campaign of disinformation. Let the election be decided on the basis of which candidate presents the stronger vision concerning issues over which the next governor really does have control.

KEVIN J. MURPHY is a professor of economics at Oakland University and a political independent. Write to him in care of the Free Press Editorial Page, 600 W. Fort St., Detroit 48226 or oped@freepress.com.