Michigan Freakonomics

At first glance, Steven Levitt doesn't seem like a rabble rouser prone to upsetting powerful interest groups. In fact, this charmingly mild-mannered economics professor could pass for Bill Gates' younger brother. But when he opens his mouth, people tend to seethe or applaud. Either way, they pay attention.

Levitt has a reputation for examining the kinds of hot-button issues that make traditional economists wince. His best-selling book "Freakonomics" (co-written with journalist Stephen J. Dubner) linked the legalization of abortion to a drop in crime in the 1990s, compared drug gangs to McDonald franchises and explained why teachers would cheat for their students. To say he ruffles feathers would be an understatement. During a lecture last week at Wayne State University, Levitt even dared to call for an end to teacher tenure --which drew a tepid applause.

"I don't set out to upset people but I do try to say what I find and often times that makes people unhappy," Levitt says. 

Despite his maverick status, Levitt is seen as a rising star in his field. A Harvard graduate who earned his Ph.D. at MIT, he was awarded the prestigious John Bates Clark Medal -- given to the country’s best economist under 40-- by the American Economic Association. Currently he is a full professor at the esteemed University of Chicago Economics Department and consults with one of Detroit's Big Three (although he wouldn't say which).

Wayne State University President Irvin D. Reid, who has a background in economics, says he has "never come across anyone quite like Steven Levitt's Freakonomics."

Levitt spoke with a small group of reporters including metromode after his lecture at Wayne State.

We're all very concerned about Detroit and Michigan's economies. Are there new ways we should be asking questions about the urban economy or older, northern industrial economies? 

The problems of the rustbelt are just some incredibly difficult problems. I wish I had some magic bullet to offer but it's just tough. In terms of the economy it all comes down to, essentially, workforce productivity. Can you make things people want cheaper than other people can make them? Either you're going to be productive and get paid high wages or you're not going to be productive and be paid very low wages. Chinese workers are not very productive and they get paid very low wages. That's why Chinese products are so cheap. In the U.S., workers are productive but if you are not doing jobs that require high skills you're not going to get paid high wages. I don't know. I wish I had answers for this incredibly difficult situation. In the long run, the only way out of it is through education. An institution like Wayne State is critical to educating a workforce to make things better and do things better than people can elsewhere. 

In terms of incentives for economic development, all states and cities give companies tax breaks to relocate. Do you think those incentives accomplish anything or are they subsidizing stuff that would have happened anyway?

I think those kinds of tax breaks are not subsidizing things that would have happened anyway. A big corporation trying to decide where to put its headquarters has an enormous range of choices. Now one thing we know from economics is that when one party has all of the power they tend to get all of the resources. The company can move anywhere. You have seven different cities competing for their business. What you expect to happen is that the price that the city pays in terms of tax breaks to get the business should more or less balance out to the value of having the business there in the first place. I haven't done research on this myself, but the limited time I spent looking at studies is that is exactly what happens. When you lure a corporate headquarters to your city, the city ends up paying just about what it's worth to get them. My belief is there probably isn't a whole lot of true benefit for a city from luring a corporate headquarters there.

When we talk about Michigan's economy you hear a lot of terms like one-state recession. There are a lot of problems being presented as problems unique to Michigan. As if it's one separate from the other 49 states. How true do you feel this is? What other indicators are there out there that might say that is or isn't the case?

The problems Michigan faces are certainly the same problems that are facing all of the Midwest and parts of the Northeast. It's not unique. Michigan's problems are perhaps highlighted by the fact that a large share of the economy is struggling because of the automobile industry. There could be some truth to that. If the American automobile industry disappeared, which it won't, that would be a dark day for Michigan. The only parallel I have seen to that is essentially steel. But if you look at it, Pittsburgh is a pretty good city these days. Pittsburgh has really reinvented itself pretty effectively. But there are other areas. I just visited Youngstown, Ohio, and it is having more trouble reinventing itself. When faced with change, and obviously there is going to be more change coming, the nature of the economy is there will be change. If you look at the 100 biggest companies by market capitalization back in the 1920s, very few of them even exist anymore. There obviously will be changes going on but change doesn't have to be bad. Change handled well can be good. In large part it comes down to having people in government who can think about economics intelligently. Many of the most important questions on the horizon are economic questions and navigating your way through economic change. That's not what politicians are typically good at or elected for and yet I think that is something that is incredibly important. 

North Carolina formed the Research Triangle Park, which emphasizes massive investment and cooperation between the state's three major research universities: Duke, North Carolina State and North Carolina. Michigan is looking at doing something similar with its three major research universities: Michigan, Michigan State and Wayne State. Can Michigan duplicate their success?

I'll be honest, I don't have much faith in general in government making great choices. If you go back to the 1980s there was something called METI (Ministry of Economy, Trade & Industry) in Japan, which was in charge of industrial policy. All of the economists were writing books on how Japan was going to take over the world and how the United States needed an industrial policy. You don't hear much about that anymore. Japan has been in recession for a decade.

I think the people who should make the choices are the people likely to generate the profits from those choices. While I do think it can be valuable, it's hard for a government to know what to invest in. It seems that North Carolina's Triangle Park has been extremely successful. I think if you can pull it off, that's great. But in all honesty I would guess the history books are littered with examples of where government set out on ambitious plans with the best intentions and all that was left in the end was wreckage. 

With the economy in Metro Detroit the way it is right now, many people put a lot of emphasis on the unemployment rate as an indicator of how well the economy is doing. Should we be focusing so exclusively on that or are there other statistics we should be looking at to know when the economy is picking back up again?

The unemployment rate is a pretty good metric, but it leaves out two things. It leaves out the people who have completely dropped out of the labor force. That is a very important factor. When you become so discouraged that you're not even looking for a job anymore you're no longer counted as unemployed. So that can be deceptive. The other thing is the equality of jobs. There's a big difference between being employed at minimum wage and being employed at $25 an hour. So I wouldn't exclusively rely on an unemployment rate but as a single metric it's a pretty reasonable one. 

In the last few years there has been a lot of emphasis on Richard Florida's book on the Rise of the Creative Class and bringing them here to help rejuvenate the cities. What do you think of that philosophy?
 
It's an optimistic view of the world, but I'm not sure its right. I don't really know but I think it's a question of causality. What attracts the creative class to a place are the same sorts of features that likely make that place successful in the first place. Let me put it this way. If Detroit passed a new policy that gave huge subsidies to artists instead of corporations I doubt you would get a renaissance. I really think that a desirable class of people move into a place because of correlation, not causality. The same set of factors that make a place attractive to those people makes it attractive to businesses and other people.

Kalamazoo has a program that offers free college tuition to graduates of Kalamazoo Public Schools. What type of impact do you think that program will have in that area?

That is a good program. I like it because it's something the business people are willing to put money behind, put resources into and it certainly benefits the kids. The primary thing I worry about in those types of programs is that people just don't value stuff they get for free. It's an ironic thing. There has been research done by one of my colleagues where in Africa they are giving away chlorinated supplements that makes the water safe to drink. What they have found is that if you give the supplements away the people won't use it. If you make them pay for the supplements and you go back a few months later and test their water, it's a lot cleaner. It's ironic that making college free might reduce the value people put on it. I love the idea of the program, but I might just tweak it so the students have to pay some valuable amount of their tuition instead of making it absolutely free.