Lessons for Ontario from Michigan’s economic revival

Notwithstanding a recent uptick in economic growth, Ontario has been mired in a long-term economic slump that has lasted more than a decade.

In fact, inflation-adjusted economic growth per person averaged an anemic 0.4 per cent annually between 2003 and 2014.

Some contend that the decline of Ontario and its manufacturing-based economy is an inevitable outcome of global economic restructuring, with the movement of manufacturing away from rich countries to poorer ones.

The evidence, however, does not support such claims. A glance across our border at the manufacturing sector of neighbouring Michigan shows that economic decline is not an inevitable outcome for manufacturing jurisdictions in affluent countries.

Two key metrics illustrate the divergent trajectories of Ontario and Michigan in the years since the great recession. A natural starting point is to look at real (inflation-adjusted) economic growth.

Throughout much of the 2000s, Michigan’s economy was in abysmal shape and Ontario’s economy was regularly outgrowing Michigan’s on a year-to-year basis.

Yet after the great recession that all changed. From 2011 to 2014, average annual economic growth in Michigan was actually higher than in Ontario, despite slower population growth. In fact, inflation-adjusted economic growth per person in Michigan averaged 1.7 per cent annually between 2011 and 2014—that’s about double Ontario’s real per-person growth rate of 0.9 per cent.

One key reason for these different growth trajectories has been a much stronger recovery in the manufacturing sector in Michigan. Consider that in Michigan, employment in manufacturing actually grew at an average annual rate of 6.1 per cent from 2011-2014, while in Ontario manufacturing employment declined at an average annual rate of 0.5 per cent.

Clearly, the manufacturing sectors, and indeed the broader economy, in the two jurisdictions went in opposite directions during this period.

It’s noteworthy that Michigan’s remarkable economic turnaround happened at the same time as its state government was implementing a series of economic reforms. These reforms included:

• Right-to-work legislation (signed in 2012 and taking effect in March 2013). “Right-to-work” legislation means that workers in the state cannot be compelled financially support a union as a condition of employment.
• The replacement of the complex and onerous Michigan Business Tax (MBT) with a simpler and lighter flat corporate income tax of 6 per cent.
• Prudent fiscal management. The state government introduced sharp budget cuts in 2012, and allowed only modest growth in state spending since then.

This final dimension of the reform package, which was dismissed as reckless by critics, produced a string of balanced budgets and helped rebuild Michigan’s “budget stabilization fund.” This contrasts sharply with Ontario, where the province has failed to adequately restrain spending and has seen a rapid run-up in government debt.

Despite Ontario’s recent uptick in growth, Ontarians continue to suffer from previous years of sluggish economic performance and the burden of servicing the province’s mountain of debt.

Finally, Ontario’s economic decline relative to the rest of Canada and several peer jurisdictions over the past decade was not inevitable. Policy choices matter, and have important effects on different jurisdictions’ economic performance. Given Michigan’s strong economic performance in recent years, policymakers in Ontario would be well-advised to learn lessons from the Wolverine state.