Michigan: The France of North America

It’s no secret that Michigan’s economy is suffering, and the state has consistently appeared at or near the bottom of job growth relative to other states. But judging from the agreement on tax reform and "economic development" recently reached (and later unraveled) in Lansing, you would think legislators were still failing to grasp the gravity of Michigan’s precarious economic position.

On Nov. 4, Gov. Jennifer Granholm and key state legislators announced a plan to cut business taxes and securitize tobacco revenue to spur economic "diversification." The tax relief for 2006 amounted to about 0.1015 percent of total state spending — hardly enough to ignite a commercial revolution. Michigan needs bold reforms, not a "collection of half-measures," as Detroit Free Press columnist Dawson Bell described the plan.

According to published reports about the $1 billion securitization agreement, $400 million would have been appropriated in fiscal 2006 for state directed economic development purposes. The idea of securitization (selling a portion of annual revenue received by the state as part of its 1998 legal settlement with tobacco companies) was floated this year in response to Gov. Granholm’s desire to sell $2 billion in debt for the state to invest in cutting-edge technology research. The Republican plan is smaller and doesn’t use debt as a financing mechanism, but does contain a proposal similar to the governor’s to invest in cutting-edge technology.

Of the initial $400 million expenditure, the Nov. 4 agreement would spend $10 million on the state agricultural development fund, an entity that appears to have little to do with cutting-edge research or commercialization. The same is true for $26 million set aside for the Forest Finance Authority, which appears to have more to do with protecting a vulnerable Republican house seat than it does with economic development.

Other non-tech related expenditures slated to receive funds in fiscal 2006 include $15 million for tourism advertising, which is run out of the state’s primary "jobs" department, the Michigan Economic Development Corporation. The MEDC would receive another $36 million for administrative costs, as well as business development and marketing efforts. (Some of these funds might be used to oversee new tech investments/programs.) The agreement also provided an additional $75 million a year for economic development purposes to the "Strategic Fund," which is basically the MEDC’s legal mechanism for receiving funds. These appropriations were scheduled to start in 2008 and run for eight years.

In short, the Nov. 4 agreement appears to be a boon for the MEDC, an agency that has repeatedly failed in its mission to improve job and economic growth in the state, according to Mackinac Center research. So, it’s probably best that the deal fell apart.

But real problems remain. Michigan is becoming the economic France of North America — and as one Forbes magazine writer once observed, in France "even the chefs are leaving." Despite state government’s efforts to centrally plan Michigan’s economy by targeting tax breaks and other favors to for-profit firms and industries, the state has slid to the bottom of many important metrics for measuring overall economic well-being.

Consider the following:

First, Michigan has one of the worst employment records among the 50 states. It was effectively the only state in the country to lose jobs in 2004. From September 2004 through September 2005, Michigan was only one of three states to lose jobs — and the other two were devastated by Hurricane Katrina.

Second, Michigan’s Gross State Product, which represents the value of goods and services produced in a state, has tanked. Michigan’s rate of per-capita GSP growth ranked 50th among the states from 2003 to 2004. Between 1994 and 2004, Michigan dropped seven spots in per-capita GSP, from 21 to 28.

Proponents of state programs argued that Michigan did without a state economic development agency during Gov. John Engler’s first term and that it hurt the state. But Michigan enjoyed a rise in its GSP rank among the states long before Engler’s later economic development programs began, and tended to peak with the economy as a whole before crashing. The MEDC and state lawmakers simply do not have the power to swamp larger economic forces by targeting small economic favors to particular industries or corporations.

Lastly, the state’s per capita income growth ranked 48th between 1994 and 2004 and, even worse, has been below average for the past five years — the first time this has happened since the Great Depression.

All of this bad economic news occurred on the watch of the state’s "jobs" departments. The MEDC, and its predecessor agency, had plenty of time to make Michigan an economic powerhouse. It failed to do so and, as a result, should be dismantled, rather than boosted with hundreds of millions more dollars. If these institutions were effective, Michigan should at least be able to retain its rank against competing states.

These are monumental problems that demand bold solutions. What would those look like? How about eliminating the Single Business Tax; replacing the revenue with dollar-for-dollar spending cuts. Or pass a Right-to-Work statute that allows Michigan to compete with states where employment is growing, not shrinking. Bold steps like these would send a signal that Michigan is ready, once again, to be an economic powerhouse, not the France of North America.

Michael D. LaFaive is director of fiscal policy for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.