When the allies finally stopped the Germans in North Africa in November 1942, it was welcome news after three years of almost unbroken defeats. British Prime Minister Winston Churchill put it in perspective, saying, "Now, this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

Turning to Michigan, and our own economic wars, I'd like to take the liberty to modify Churchill to observe that 2008 might turn out to be the "beginning of the beginning" of Michigan’s slow march back from disaster. The issues are both economic and political.

What's been going on hasn't been, as some claim, a "recession in one state." Instead it is the consequence of the wrenching transformation of our dominant industry, automobiles.

The not-as-big-as-they-used-to-be Big Three have been in transition, moving from an inefficient and costly system in which management and labor protected each other from their own failings to a smaller but far more efficient and globally competitive industry.

According to Sean McAlinden, the numbers genius at the Ann-Arbor based Center for Automotive Research, Michigan auto employment in Michigan dropped has undergone a staggering decline.

He forecasts added small declines in auto jobs for the next few years. But this time, it won't be due to Michigan’s economic woes. Instead, these job losses will come for the right reasons -- as a result of rapidly increasing productivity and cost reductions made possible by the new contracts with the United Auto Workers union.

Joan Crary, the economics whiz who heads the economic forecaster at the University of Michigan, estimates that the state lost 76,000 jobs during 2007, with another drop of 51,000 projected next year. But, she adds, "The rate of job loss becomes progressively smaller as we make our way through 2008, and by the spring of 2009, job growth pokes above zero."

She predicts a net job gain of 14,000 jobs in 2009, mostly in service industries such as health care and education.

These projections, of course, assume no national recession brought on by the subprime mortgage crunch, which has put Southeastern Michigan near the top of the nation for home foreclosures in recent months. "If we get a recession, we're very vulnerable because we don't have any resources to take up the shock," says Tom Clay. the respected and now-retired research director for the Citizens Research Council of Michigan.

Even without a recession, Clay says the state budget for the fiscal year that will end on September 30, 2008, will face a $500 million deficit, split roughly equally between the general fund and the school aid fund.

Clay expects deteriorating home values to end consumers' recent habit of converting gains in home equity to TV sets and new gizmos. As a result, he thinks "sales tax income to the state might suffer, say a $200 million drop."

His two biggest worries at the state level: Cash flow and political deadlock. "We had some trouble paying our bills on time last year," said Clay, who helped oversee state budgets for three decades, "and there’s nothing about the new Michigan Business Tax and the new surcharge to that tax that make me believe there will be any material increase in cash flow."

Michigan cannot under its constitution borrow any more than it has, so a cash shortage means delayed bill payments, which in turn means the state will put off paying school districts and universities and local governments what they are expecting.

What this means to me is that the chronic structural budget deficits that we've seen for the last several years are certainly not going to go away because of what the legislature did with taxes this fall. Gov. Jennifer Granholm, perhaps reflecting both fatigue and realism, said the other day that she wasn't about to go for any more tax increases. And you don't find many lawmakers in disagreement.

So that leaves structural changes in the organization and workings of state and local government, together with legacy costs of state employee pensions and health care. There are very large cost savings involved here, but they are very unpopular, especially with state employee unions. The governor and legislature had a great chance to bundle them into a tax plan while they were working in crisis mode to save the state from going into default.
But they blew that opportunity. On the political front, however, what gives me some sense of hope is that legislators I talk with are beginning to get fed up with looking like a bunch of ineffective nincompoops. Most of them are good people who wanted to go to Lansing to do the right thing. But they found themselves being chivvied by their respective party leaders to do a bunch of things that looked a lot more like scoring political points than governing a state.
"It doesn’t have to be like this!" said one legislator in exasperation. And if this feeling ever begins to spread through the ranks during the coming year, we just might have some real political change, and change for the better, in Lansing.

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Editor’s Note: Former newspaper publisher and University of Michigan Regent Phil Power is a longtime observer of Michigan politics and economics. He is also the founder and president of The Center for Michigan, a centrist think-and-do tank. The opinions expressed here are Power's own and do not represent the official views of The Center. Power welcomes your comments at ppower@thecenterformichigan.net.