Lights Out?

In the early 1980s, when the entire nation was suffering under the strains of a severe recession, job providers and other people were leaving Michigan in droves. The outflow was so great that the going joke at the time was that the last one to leave the Great Lake State should remember to turn out the lights. Data released today from the nation’s largest household mover suggests that if Michigan doesn’t make significant changes to its economic opportunity landscape soon, someone may have to reach for the switch. The company graciously allowed the Mackinac Center an early look at its data set.

United Van Lines operates in all 50 states. Since 1977 it has collected and published data on its client moves in the continental United States. For example, UVL reports that in 2006, 64 percent of all North Carolina-related UVL movement was inbound, making the Tar Heel state the number one destination for UVL clients in America.

By contrast Michigan was the number one departure state, tied with North Dakota. Sixty six percent of all UVL moves were outbound. This is an eye-popping 2.1 percentage points higher than just one year ago — representing the continuation of an upward trend. United Van Lines has not seen this type of outbound traffic from Michigan since 1981, when 66.9 percent of Michigan moves involved a departure from the state.

Mackinac Center for Public Policy adjunct scholar Michael Hicks performed a statistical analysis of United Van Lines data last year and found that it was highly correlated with U.S. Census data. In other words, UVL moves represent overall American migration patterns. Indeed, a Census report released in December showed Michigan was just one of four states to suffer an absolute decline in population (about 5,000 people according to published reports). The other three states include New York, Rhode Island and Louisiana, which has not yet recovered from Hurricane Katrina.

What makes these departures all the more troubling is that they have occurred during a time of robust national growth. In 1981 the entire nation was in a recession and Michigan had a double-digit unemployment rate. Comerica Bank reported last week that the state’s economy hasn’t been this soft since 2001. Moreover, the national economy may be showing signs of slowing. Even a mild national recession could be a catalyst for greater emigration rates from the state because Michigan has typically suffered more than other states during national recessions.

These facts have vital public policy implications. People are the building blocks of economic growth and development. As people leave a nation, state or region they take employment and entrepreneurial talent and their consumption or investment dollars with them. Something must be done to stanch the outward flow of Michigan residents and attract new ones.

Where have Michigan expatriates taken their personal and financial capital? The federal government collects data tracking the movement of U.S. citizens through Internal Revenue Service tax filings.

In calendar year 2004, the number one destination state for Michigan residents was Florida, which gathered 14 percent (more than 19,300 people) of all Michigan emigrants nationwide. This is twice rate of the next nearest destination state, which surprised the authors given the great distance between the Wolverine and Sunshine states. Key factors in moves to Florida probably included weather, local amenities (greater recreational opportunities) and better economic opportunities. In addition, Florida has no personal income tax, is a right-to-work state and is ranked third in federally estimated, inflation-adjusted state Gross Domestic Product growth in 2005. By contrast, Michigan was ranked 48. The growth estimates were published by the Bureau of Economic Analysis in October.

The next two states to receive the most Michigan expatriates are Ohio and Illinois, and such choices are relatively easy to explain. Both Ohio and Illinois have pockets of economic growth and are adjacent to Michigan. Migration researchers use what is known as a "gravity model" to explain this type of economic migration because both the size and proximity of desirable locations influence migration choices.

People don’t just survey a nation for the fastest growing region and then move there. Other considerations, such as distance from family, influence such decisions. The implication is that close regions that are large and growing are going to absorb the state’s residents at a faster rate than more distant areas. As an aside, UVL also ranks Ohio and Illinois as high outbound states. They have relatively high economic growth rates (Ohio barely so) than Michigan, which may help explain why our residents are moving to those locations.

What should policymakers do to stem this tide? First, they must avoid raising the price of living, working and investing in Michigan, all of which exacerbate existing problems.

The drumbeat for higher taxes has already begun in some circles as predictions of a $500 million shortfall in the current fiscal year were announced last December.

Taxation matters. In his 2006 analysis, economist Scott Moody of the Maine Heritage Policy Center looked at the taxation levels of all 50 states between 1994 and 2004 and analyzed how the 10 states with the highest and lowest tax levels, respectively, performed relative to three metrics: personal income, employment and population growth. Moody found that the 10 states with the lowest tax burdens had personal income growth almost 32 percent higher than the states that taxed the most — employment growth was 79 percent higher and population growth was a staggering 172 percent higher than high-tax states. This is not the only study to show a possible link between migration and taxes.

Moreover, Michigan taxes itself in ways that are not explicitly taxation. The Great Lake State has no right-to-work law, which is akin to having an effective labor market tax. A right-to-work statute says that a worker need not financially support a union as a condition of employment. A 1996 study by University of Minnesota professor and Federal Reserve consultant Thomas Holmes found that, from 1947 to 1996, states with right-to-work statutes saw manufacturing employment expand 150 percent while non-right-to-work manufacturing employment was "virtually the same today as it was in 1947…" In other words, Michigan must not only compete against low-tax states, but ones with friendlier labor climates too. This is just one example of how Michigan burdens its economy and chases away opportunity and people.

Some pundits and politicians have proffered their own ideas for righting Michigan’s listing economic ship. One of the most common ideas batted about is spending more tax dollars on higher education to stimulate economic development. This is a bad policy choice.

Anecdotal and empirical evidence show that the opposite is true. Consider one case study. Economist Richard Vedder, executive director of the Center for College Affordability and Productivity, a Washington, D.C.-based research institute, looked at higher education spending in Illinois, Michigan and Ohio and subsequent economic growth for his book, "Going Broke by Degree: Why College Costs Too Much."

Of these states in fiscal 1980, Michigan spent more as a percentage of personal income on state universities — as much as one-third more than Illinois. In the following 20 years Michigan substantially increased its funding. By 2000, according to Vedder, the state of Michigan was sixth in the nation for higher education spending as a percentage of personal income — nearly double the rate of Illinois. Yet it was Illinois that economically outperformed Michigan as measured by changes in per-capita personal income. Indeed, the income advantage Illinois initially held over Michigan actually doubled during that time period, according to Vedder. This is not the only such example.

Vedder points out that North Dakota (which is tied for the number one UVL outbound state with Michigan at 66 percent) and South Dakota are two of the most similar states in America. They each have similar climates, are agricultural, sparsely populated and similar in size.

Yet they are not similar in what they spend on higher education: North Dakota has spent more per-capita than South Dakota since at least 1977. Over the next two decades, North Dakota hiked its spending while South Dakota reduced its proportion of expenditures that went to higher education until North Dakota was dedicating about twice the proportion of its income on higher education than South Dakota.

Yet South Dakota has had faster per-capita income growth and less out-migration. In fact, United Van Lines has ranked South Dakota as a 2006 "high-inbound" state with 55.9 percent of its traffic moving into the state. It would not strain the bounds of credulity to suggest that North Dakota taxpayers have long been subsidizing the education of South Dakota’s newest residents.

In coming weeks and months there is going to be a lot of talk about raising taxes to cover shortfalls in government spending. Michigan should not do more damage than its current policies have already done by reaching deeper into the pockets of job providers and other taxpayers. The state must balance its books by trimming its budget, not forcing taxpayers to trim theirs.

Over the past decade the Mackinac Center for Public Policy has made hundreds of recommendations for trimming the state’s bloated budget. Some ideas have been adopted, others ignored. If Michigan wants to stop, and hopefully reverse, its outbound-migration, it must turn away from higher taxes, higher spending and the economic gimmickry of government "development" programs.

The Great Lake State was once a magnet for opportunity seekers. It could be again, if only it would stop giving people a reason to leave — or never arrive. Doing otherwise foretells a night the lights go out in Michigan.

Michael LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Michael Hicks is an adjunct scholar with the Center, an assistant professor of economics at the Air Force Institute of Technology in Ohio and a research professor at the Center for Business and Economic Research at Marshall University. Permission to reprint in whole or in part is hereby granted, provided that the authors and the Center are properly cited.