America on road to Mich. disaster

My ex-home state of Michigan is far worse off economically than Virginia, which I learned during a recent family reunion there. July’s unemployment rate in “the motor state” stood at 15.6 percent, well above the national average. Virginia’s jobless figure was 6.9 percent. Michigan’s estimated budget deficit for 2010 exceeds $2 billion, while Virginia’s is half that. Gov. Jennifer Granholm has slashed many programs, even released prison inmates, and will need to make deeper cuts.

The two states have one key factor in common, however: divided government. Each has a Democratic governor, and both legislatures are divided, with each party controlling one chamber. That division in authority results in budget gridlock as political parties press their different spending priorities.

In Saginaw, my home town, the situation is dire. Unemployment is running at 20 percent, and 5,000 vacant houses plague this city of 56,000. Arson is reported among the nearly 1,000 abandoned houses. It is a serious problem for Saginaw’s overworked fire and police departments. In nearby Flint, unemployment is reported to be near 30 percent.

Newspapers in Saginaw and Flint recently started issuing papers only three days a week; and in Ann Arbor, home to the University of Michigan, the local paper closed its doors completely, after 140 years of publishing.

What accounts for Michigan’s economic disaster?

An obvious factor is the demise of its auto industry. General Motors, Ford, Chrysler, Packard and American Motors, which got their start in Michigan, turned Detroit, Flint, Saginaw, Pontiac and other cities into boom towns before and after World War II. When I grew up in Saginaw in the 1940s, General Motors was the largest employer and provided high wages to many unskilled workers. Today, the bankruptcy of General Motors and Chrysler highlights how far the industry has fallen.

A major contributing factor, many argue, was the decades-long pressure exerted by Michigan’s auto unions, including frequent strikes, to extract ever greater wage and benefit increases for their members.

The United Auto Workers union was adept in playing off one Michigan automaker against the others, gaining health and retirement benefits for their workers that far exceeded those in many industries.

As a consequence, American companies found it difficult to compete with Euro-pean and Japanese carmakers, whose total labor costs were markedly lower. These smaller and often better-made foreign cars soon cut inroads into the market share of U.S. firms.

Management in the auto industry also shares responsibility. It resisted building smaller cars, and it vigorously opposed Congress’s efforts to require higher gas mileage rates. SUVs were exempt from the new requirements, and this resulted in a surge in sales for these large, gas-consuming vehicles.

Another factor was U.S. government policy, supported by Republicans and Democrats in Congress, that encouraged free trade agreements without sufficient regard for its impact on U.S. manufacturing jobs. Washington’s emphasis on globalization in trade and finance resulted in a major decline in U.S. industrial production, as many companies moved production abroad to lower wage countries.

As a result, America has gone from being the world’s leading manufacturing country 40 years ago to a far smaller one today.

The outlook for Michigan and the United States over the next decade is not favorable in terms of this country’s international relations. America is now so deeply indebted financially to China that it needs Beijing’s cooperation to finance its growing budget deficits. The dollar is losing its place as the international reserve currency, a major factor that contributed to this country’s sustained economic growth.

This recession will affect Barack Obama’s efforts to maintain a large U.S. military presence abroad. It may reduce Congress’s willingness to spend more funds in Iraq, Afghanistan and Pakistan. The current budget squeeze makes it more difficult for Mr. Obama to broker a Middle East peace deal, because Israel and the Palestinians expect to receive large amounts of U.S. aid to implement any agreement they may reach.

What happened in Michigan during this recession suggests that it could happen to the United States if Washington fails to get its financial and economic house in order. Reducing the fast-rising cost of health care is but one challenge Congress faces.

Mort Zukerman, publisher of U.S. News and World Report, argued in a recent commentary in the Financial Times that the reason for ballooning health care costs is simple: “The government pays whatever the cost will be” to use the newest and most expensive medical equipment hospitals now offer. His remedy: “The priorities have to be reversed. Cost containment should come first” (“Cost control, not coverage, is the key to health reform,” Aug. 20).

Unless health care costs, and those of other federal entitlements, are soon brought under tight control, the national debt will continue to mushroom and, I fear, the United States will be in decline as the leading world power.