Michigan's Single State Recession

The U.S. economy remains in better shape than bearish partisans contend. Broad economic indicators like real GDP, payroll employment, and industrial production are expanding, while the U.S. economy itself is nearing its sixth year of expansion. Yet the same bullish claim cannot be made about Michigan, which continues to lose jobs.

It’s rare for a state with an economy as large as Michigan’s to record job losses in the midst of a national expansion. A lot of ink is spilled in Detroit each month reporting short-term job losses. But some key long-term trends have been overlooked.

How bad is Michigan’s labor market? Michigan is the only state to record a contraction in nonfarm payroll employment for five consecutive years. The state’s labor market is headed for its sixth straight annual decline in 2006. This unprecedented contraction is centered in the private manufacturing sector, which peaked in July 1999. Total Michigan nonfarm employment peaked in June 2000. Employment in some of Michigan’s metropolitan statistical areas peaked earlier — including Flint, which peaked in 1997.

Say again? You mean Michigan’s job losses didn’t start under President Bush?

Trained economists are debating the various factors that have contributed to Michigan’s single-state recession. These include fiscal, regulatory, trade, and monetary policy. By contrast, too many Michigan politicians have resorted to the logical fallacy of poisoning the well in an election year.

Fortunately, a few officials are focusing on sound economics. Thanks to the efforts of Oakland County executive L. Brooks Patterson and state Rep. Leon Drolet (R), and despite Democratic Gov. Jennifer Granholm’s opposition, Michigan’s anti-competitive single-business tax has been repealed. That’s good news since employment isn’t the only troubling economic indicator in Michigan. Income growth also has been weak when compared to historical norms.

The BEA’s per capita income series dates to 1929. Between 1929 and 1980, Michigan PCPI was 100 percent or more of the U.S. total for all but two years (1932, 1933). It peaked at 122 percent of the U.S. total during WWII. Since 1980, Michigan PCPI has been several percentage points above or below the U.S. rate — until 2005, when it fell to 94.8 percent of the U.S. total. The only time Michigan recorded a weaker number was in 1933, when income was 93 percent of the U.S. total.

Michigan’s rank in the national income sweepstakes also has fallen. From a peak of eighth in the U.S. in 1944, Michigan has dropped to twenty-fourth in the nation as of 2005, its second-worst performance. (In 1982, a recession year, Michigan was twenty-fifth in PCPI.)

Before his untimely passing in August, Stephen Dresch advanced a neo-Hayekian critique of the Michigan government’s many failed attempts to pick economic winners with tax dollars. According to Dawson Bell of the Detroit Free Press, Dresch helped set in motion investigations of university economic-development activity “which led to public outcry, criminal convictions and the departure of high-level officials” at Michigan Technological University. Dresch was later elected to the state legislature as a Republican in a heavily-Democratic Upper Peninsula district.

It was Hayek who argued that governments lack the knowledge to successfully engage in central planning. And Dresch, a Yale Ph.D, was treated in a boorish manner in Lansing for defending this moral high ground. But there is cause for longer-term optimism. Dresch’s critics lost this year’s policy battle over the single-business tax, while more positive change seems inevitable in the wake of Michigan’s severe employment and income declines.

Those serious about solving Michigan’s economic problems should reflect on Dresch’s critiques and let private venture capitalists and entrepreneurs, not politically connected funds and authorities, allocate capital.

One lesson to be learned from Michigan’s single-state recession is that economics trumps politics. Another is that markets don’t wait for politicians.

— Greg Kaza is executive director of the Arkansas Policy Foundation, an economic research group founded in 1995 in Little Rock.

My wife and I moved to Atlanta because she has a fellowship at Emory. I had to find a new job when we moved down. I had two job offers in the first week. What are the chances of that happening in Michigan?

I believe that 25 years, Michigan will be as poor of a state as Mississippi or Alabama was 30 years ago. I believe it is inevitable that Ford and GM go bankrupt. Both can hardly make a profit when the economy is going well. Imagine Ford and GM's losses when the nation has another recession.

One benefit in the long run for me is that when I retire in 30 years or so, maybe I'll be able to buy a nice lake front place in the Traverse City area for a decent price. I don't believe there will be nearly as many wealthy people who can afford lake houses in Michigan by then.

Single Business Tax is Dragging Down Michigan's Economy

by Chris Atkins and Jonathan Williams

(The following article originally appeared in the March 25, 2006 edition of the Lansing State Journal.)

Michigan's economy is a mess, and most lawmakers agree the Single Business Tax is a big reason why. Yet Gov. Jennifer Granholm is filibustering every effort to repeal the notorious tax, and her threatened veto of a new bill would again stall progress on the state's business tax climate.

The Michigan House of Representatives and Senate have passed a bill that would kill the SBT and give lawmakers a year to come up with replacement taxes. But Granholm insists on immediate replacement revenues.

She and her allies have floated numerous rationales for their SBT addiction: That Michigan doesn't have high business taxes, that Michigan cannot afford tax reform, and that reform would shift the burden of taxation from businesses to individuals. None of them bear close scrutiny.

On the issue of how bad Michigan's taxes really are, former Treasury official Robert Kleine has repeatedly defended the SBT, citing Michigan's ranking in the middle of the pack on taxes, not at the bottom like New Jersey or New York.

This claim to mediocrity is accurate: Michigan's combined state-local tax burden is 22nd highest, and its business tax climate ranks 26th.

But what makes Michigan fall below half the states when its personal income tax gets rave reviews? Answer: the SBT, which levies the nation's highest effective tax rate on corporate income (over 15 percent), and extracts the 7th highest per capita corporate tax revenue. Thus, while Michigan overall has an average business tax climate, the SBT is a millstone around the state's neck.

Next objection - Michigan cannot afford tax reform. Not long ago Granholm vetoed a bill that would have cut the SBT rate for small businesses, saying the state general fund couldn't afford a $30 million reduction. That's only a penny a day for each state resident, yet she found it unaffordable!

Of course, everyone knows Michigan already is losing a lot more than $30 million a year from mass layoffs and major bankruptcies. A more business-friendly tax code could help cure the disease instead of using higher public spending to apply Band-Aids.

One final, mistaken argument that members of both parties are using - SBT repeal would "shift the tax burden" from businesses to individuals.

No one should kid themselves about who ultimately pays the price of business taxes like the SBT: the people of Michigan. The first to pay are employees of Michigan businesses - people who make lower wages or perhaps even lose their jobs.

Next are those who have investments in Michigan businesses. Finally, consumers pay more at the cash register for goods made by Michigan companies. In other words, the old saying is true: corporations don't actually pay taxes - people do.

Hopefully lawmakers can see through the smokescreens, scrap the SBT and come up with a solid replacement tax. Gov. Granholm should put away her veto threat and work constructively for the next 21 months to make that happen.

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