The Mackinac Center's David Littman explains the consequences of rent-seeking policies. (rr)
More important for much of the 20th century, Michigan was a model of prosperity, a magnet for human capital -- attracting and retaining a critical mass of world-renowned engineers and entrepreneurs -- and seemed destined to be an economic engine for the nation. But then came the 1970s and the state has been sputtering ever since. Today, a deep fog has settled over a once bright business climate.
The state was always particularly vulnerable to the ups and downs of auto sales. Still, Michigan was a veritable gold mine for wealth-building and wages until the '70s, when automakers began ceding market share to competitors at a pace of just under 1% annually. Rather than being fleet-footed, the "Big Three" ignored challenges, suffered severe UAW strikes and accommodated uncompetitive compensation packages through 2006. This is a well-known decline and fall.
Conditions suggest that it's more than a problem with the auto industry. Most recently the state has also experienced losses of headquarters and jobs in financial and pharmaceutical sectors, e.g., Comerica Bank and Pfizer. Even lumber yards, motels and other low-profile employers are hurting.
Underpinning this downturn are a few economic myths that must be dispelled. Perhaps the most pernicious myth is that Michigan is caught in a cyclical recession. (MS: Even some economists are making this erroneous argument.)
While chief economist of Comerica Bank, I tracked monthly index movements of the state economy over a 50-year period. What I found in the data is disconcerting: Michigan is not in a cyclical decline. Quite the contrary. Vehicle sales in the U.S. have averaged 17 million units over the past five years. Our decline has been a trend, a steady downward slide.
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Another myth: that Michigan's business climate ranks in the middle of the pack among the 50 states. This ignores the fact that Michigan's private sector is contracting compared to the expanding tax bases of every other state.
The economic fog will lift when policies are enacted that make Michigan a good place to do business for newcomers as well as for existing firms. This won't happen if the legislators in Lansing, the state capital -- who advocate heavier tax burdens on the remaining taxpayers to subsidize or attract firms handpicked by government officials -- get their way. These targeted subsidies simply redistribute scarce income. Nor is the governor, Jennifer Granholm, moving in the right direction. Her recent call to impose a 2% tax on most services is a nonstarter. But she's also calling for a new tax on the estates of wealthy residents, giving those with the means an even more urgent reason to leave. Michigan's slide will continue.
Well stated! So are Mr. Littman's proposed solutions?
Two fundamental reforms are essential if the state is to make a comeback. Michigan was a formidable competitor prior to 1967, when the state had no personal income tax. Why not return to these days by abolishing the state's 3.9% personal income tax and replace it with nothing? Even a slow phase-out of the tax will allow the state to vie for business, new jobs and private-sector investment with fast-growing Florida, Texas and the nearly half-dozen other states that do not levy an income tax. If Florida and Texas -- two of the fastest growing states in the union -- can survive without income taxes, Michigan can too.
Second, it's time for Lansing to pass right-to-work legislation, which would allow workers to take a job without also being forced to join a union. There are 22 other states with such laws on the books and those states are often the most competitive for new Toyota, Honda and other auto-manufacturing plants that are creating thousands of new jobs. These are jobs Michigan should compete for.
