Revolutionary Cure

Michigan’s economy is terribly ill. A few examples:

Unemployment remains well above 8 percent, among the highest in the nation.
Wages in 2007 fell for the third year in a row, dropping to 27th among the states. Michigan ranked 16th as recently at 2000.
The poverty rate is now 16th worst among the states. According to The Detroit News, Detroit is the "poorest big city in the country."
In 2007, also according to The Detroit News, "Michigan was the only state that saw both a rise in poverty and decline in income."
People are fleeing the state. According to data provided by United Van Lines, Michigan had the highest outbound migration rate of any state in 2007. Michigan could also lose one additional Congressional seat after the 2010 census, further reducing its influence in Washington D.C. The U.S. Census Department predicts that Michigan will fall from the 8th largest state today to 11th largest by 2030.
Michigan's state and local government bodies have a combined unfunded retiree health care burden of $23 billion, which is roughly equal to half of the state's annual budget.

Identifying the symptoms is the easy part. The hard part is determining what to do next.

The status quo in Lansing says that at this point Michigan has three choices: 1) raise taxes to balance the budget; 2) increase state debt; or 3) stimulate economic growth through targeted tax breaks to specific companies to entice them to move to or expand within the state. All have been tried and found wanting.

The evidence is clear that tax increases suppress economic growth by encouraging people to modify their behavior in response to the new taxes, leading to lower tax revenue. As proof, after last year's tax increase in Michigan, 2008 state tax revenue is projected to fall $350 to $550 million short.

Further, the state is already heavily in debt, and with the low U.S. dollar and the overall credit crunch, additional borrowing will be at unfavorable interest rates and further harm the state's credit rating.

Finally, targeted tax breaks have been tried for the last 10 years via the Michigan Economic Growth Authority and Michigan Economic Development Corp. According to an exhaustive analysis of MEGA by Mackinac Center scholars, it "has effectively had no impact on job creation or per-capita personal income in the state." Keep in mind that targeted tax breaks and incentives must be paid for by the existing taxpaying base.

Ultimately, the state must change its image as a high-cost, overly regulated place with a difficult labor climate, all while keeping spending within the limits of its actual tax revenue. What options are available to us? Quite a few actually, but all are controversial and will be strongly opposed by various factions

First and foremost, Michigan must become a right-to-work state. Several right-to-work states already have higher disposable incomes than Michigan, with others poised to overtake the Great Lakes State soon. Passing a right-to-work law has an added benefit: it can be enacted without any additional government spending.

Second, the government can also make Michigan more competitive by reducing burdensome regulations, such as the proposed water use restrictions in what is perhaps the wettest state in the union. From our experience in the private sector, Michigan's regulatory climate is much tougher than our neighboring states, chasing away many potential businesses. This must change if Michigan is to be successful. This option too will not require any added government spending and will in fact reduce costs due to reduced outlays for regulatory enforcement

Lastly, the government must make Michigan a more attractive place to do business by reducing taxes. Because the state must run a balanced budget, any tax cuts must be funded immediately by spending cuts or selling state assets. The Mackinac Center has developed a list of realistic spending cuts totaling more than $1.5 billion per year, such as eliminating prevailing wage rates and transferring state police road patrols to local law enforcement. Revenue can also be generated by selling assets, such as the MacMullan Conference Center in Roscommon and the Porcupine Mountains Downhill Ski Area in Silver City. (Yes, the state owns a conference center and ski resort!) Local municipalities can sell their publicly owned golf courses, most of which are subsidized by taxpayers and also cut into the profits at neighboring privately owned, taxpaying golf courses.

The desired result is to make Michigan a state that is attractive to business. The state will not "bounce back like it always has" this time. Attracting new business requires fundamental change to promote economic growth.

Michigan's economy is ill. These proposed changes are strong medicine. None will be popular, but we are aware of no other course for the state to take. Milton Friedman said that a crisis is the point where the politically impossible becomes the politically inevitable. At this moment in time, the changes discussed above are politically impossible to enact. But Michigan's crisis point is coming. Soon. The Legislature must take its medicine.

#####

Philip Seamon of Birmingham is an engineer and Scott Taylor of Brandon Township is a salesman and U.S. Navy veteran. The Mackinac Center for Public Policy is a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the authors and the Center are properly cited.