Wooing the Wolverines

With Michigan voters having already weighed in on the next Republican presidential nominee, it's worthwhile to address the pandering engaged in to attract those votes. Sadly, short-term political gain trumped sound thinking when it came to summoning votes in the Wolverine State.

Campaigning near a GM plant in Ypsilanti, the former governor of Massachusetts, 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 deemphasize 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.

With market capitalizations of roughly $13 billion each, private markets presently attach a higher value to nascent social networking site Facebook than they do to 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 despite its dip in numbers.

Mr. Romney adds, "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 reengineering of companies at Bain Capital, capitalist economies cannot be stationary.

So long as Michigan clings to yesterday's industries, its economy will continue to lag behind other states in America seeking to modernize into sectors that attract heavy investment, and with investment, higher-paying jobs. True job and wage growth materializes when innovative ideas are matched with capital. A real 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 that statement can be made due to the elite status of the University of Michigan.

What he failed to speak about is for whom Michigan's universities produce productive workers? Indeed, are top students from the University of 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? It seems fair to say that Michigan makes some of the best and brightest and companies from around the country and world then take them, thanks to an economy that is not very welcoming.

Though it began as a joke at Mr. Romney's expense on NBC's "The Tonight Show," Mike Huckabee, another Republican presidential candidate, 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 Mr. 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 carmakers 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 from the Republican 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.

Mr. Tamny is editor of RealClearMarkets, and a senior economist with H.C. Wainwright Economics. He can be reached at jtamny@realclearmarkets.com.