TCS Daily

Unwise and Unproductive Pandering from the GOP

By John E. Tamny - January 15, 2008 12:00 AM

With voters in Michigan set to weigh in on the next Republican presidential nominee, it's not surprising to learn that the pandering for votes has picked up. Sadly, short-term political gain has trumped sound thinking when it comes to attracting votes in the Wolverine State.

Campaigning near a GM plant in Ypsilanti, former Massachusetts government Mitt Romney said solving Michigan's economic difficulties would serve as a template that "we can apply across the nation." Unfortunately, his solutions involve restoring Michigan's auto industry.

The problem there is that Michigan's economic malaise is arguably attributable to vain attempts past and present to save an industry that markets no longer attach a high value to. As painful as it might be in the near-term to de-emphasize the auto industry, doing so would serve the long-term interests of Michigan's workers.

Simply put, wages are a function of investment capital, and as evidenced by the values placed on the Big Two carmakers in Michigan, investment is not flowing their way. Due to persistent annual losses inked by GM and Ford, neither has a price/earnings (P/E) ratio to speak of these days, and with market capitalizations of roughly $13 billion each, private markets presently attach a higher value to nascent social networking site Facebook than they do Michigan's automobile behemoths. And in shedding Chrysler, Daimler AG essentially paid Cerberus Capital to remove the ailing unit from its books.

It could be argued that if both Ford and GM were run better that Michigan's problems wouldn't be so dire, but even Toyota, the present and presumed future giant in the automobile sector can only claim a P/E ratio of 10. Conversely, Amazon and Google respectively enjoy P/Es of 73 and 47, while even retail coffee giant Starbucks can claim a P/E of 19.

Romney adds that, "It's inexcusable to me to see these jobs going away again and again and again." Nice sound bite, but as he no doubt knows from his successful re-engineering of companies at Bain Capital, capitalist economies cannot be stationary. And so long as Michigan clings to yesterday's industries, its economy will continue to lag the regions and states in the U.S. seeking to modernize into sectors that attract heavy investment, and with investment, higher-paying jobs. Wishing for jobs is just that, whereas true job and wage growth materializes when innovative ideas are matched with capital. A true economic solution for Michigan would involve moving beyond an industrial sector that investors deserted long ago.

John McCain argues that, "Michigan can lead the nation and the world again. We've got the technology here. We've got the academic base." No doubt due to the elite universities that Michigan can still claim, some of what McCain says is true.

What he failed to speak to is for whom Michigan's universities produce productive workers. Indeed, are top students from Michigan and Michigan State actually sticking around after college, or do they account for part of the exodus of top Michiganders to better economic climes? Owing to the top-ranked nature of Michigan's schools, it seems fair to presume that Michigan "makes" as it were, and companies from around the country and world "take" its best and brightest thanks to an economy that by all accounts is not very welcoming.

Though it began as a joke at Mitt Romney's expense on NBC's The Tonight Show, Mike Huckabee is airing ads in Michigan in which he says, "I believe most Americans want their next president to remind them of the guy they work with, not the guy who laid them off." Good political theater once again, but if economic honesty counted for something in the world of retail politics, voters would quickly pick up on the absurdity of Huckabee's claim.

In truth, Michigan's economic malaise to a high degree results from the historical inability of its car manufacturers to shed workers that no longer provide value to its operations. Union pressure has made this process difficult, and the "loud sucking sound" has been capital fleeing a state unwilling to accept economic reality. Painful as layoffs are, had Michigan's auot companies addressed redundancies long ago they would be better off today, not to mention how honest appraisal of workforces would have enabled redundant workers to seek more productive employment elsewhere.

So while it's understandable that politics is about attracting votes, no one should mistake the recent pandering witnessed from the GOP candidates for sound economic advice. If Michiganders are realistic, they'll see that the state's economic problems don't result from poor management, or a weak yen, or bad luck, but instead from a calcified political/economic culture that clings to outdated industries.

Stock markets have for some time been communicating to Michigan that investors have very little interest in the automobile sector. The sooner Michigan voters accept this truth and diversify, the sooner will capital return alongside smart entrepreneurs from inside and outside the state eager to participate in Michigan's economic renaissance.

John Tamny is editor of RealClearMarkets, and a senior economist with H.C. Wainwright Economics. He can be reached at


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