Sunday, January 13, 2008

Michigan's Weak Economy

I've been in Michigan a lot longer than George Will. In fact, I'm not sure that he's ever been to Michigan. But for some reason he felt obligated to discuss Michigan in his latest column:
Tuesday's Republican primary is in one of the nation's worst-governed states. Under a Democratic governor, Michigan has been taxed into a one-state recession. Native son Mitt Romney, the Republican candidate who best understands how wealth is created, might revive his campaign by asking: Whom do you want to be president in 2010 when the Bush tax cuts, which McCain opposed, expire?
I'm no defender of Jennifer Granholm, but her administration did not occur in a vacuum. She inherited a disaster left by John Engler, both in the form of a massive budget deficit and an ill-considered tax policy that was made part of the state constitution. Between that and the fact that during most of her tenure the Republicans have controlled both chambers of the State House, it's a child's game to put the blame on the governor or her party. In this particular game, as played by the likes of Will, when roles are reversed (a Republican governor and a Democratic House) all failures are still assigned to the Democrats as "they control the budget." I would personally argue that Michigan's economy has been badly managed for decades, by governors and legislators on both sides of the aisle.

If Michigan has been "taxed into a one-state recession", it is not because of the amount of taxes. The Tax Foundation recently ranked Michigan's "State Business Tax Climate" twenty-seventh out of the fifty states. Given Will's love of Mitt Romney, it is perhaps worth noting that Massachusetts ranked thirty-sixth. So maybe there's more to the picture than taxes. Maybe there's a lot more.

That's not to say that nothing about Michigan's tax policy hurts its future. Consider, for example, the fact that so much revenue is poured into corrections. In the 80's and 90's, legislatures had lots of fun being "tough on crime" - but all that toughness carries a huge price tag. The fact that if you move to Michigan, you'll pay a lot more in property taxes than your neighbor who has lived in the same house for a few years. Say what you want about businesses moving to California (49/50 for tax climate) anyway - Michigan is not California. Paring back public services and funding of state universities to avoid a tax increase? I'm not convinced that many people look at the quality of education available in the state, and the quality of education likely to be available in the future, then say, "I would rather have bad schools than slightly higher (or progressive) state income taxes." I am convinced that many people look at the quality of schools in a lot of the areas where they might locate their businesses, and worry that employees won't want to move there with their families. Oh yes - and the nearest big city is Detroit. (Chicago has the Magnificent Mile, but move to Michigan and you get Eight Mile....)

As for Mitt Romney being the candidate who "best understands how wealth is created"... well, yes. Romney was born into a wealthy, powerful family, so he would have a pretty good idea of how effective that can be at generating wealth and power. (Will provides some of the history, but I'm looking forward to having Bill Kristol fill in the details in his next column on "well-born" Americans.)

Let's close with an explanation of Michigan's budget woes that is somewhat more... competent than George Will's.
Michigan's seemingly perennial budget shortfall, now approaching a five-year run, is rooted in two fundamental issues: a cyclical economic downturn made worse by an endemic, structural deficit. ... Simply put, as its own economic recovery lags behind the rest of the nation, Michigan finds itself faced with the challenge of funding programs with costs that rise faster than available revenues, even in economic boom times. ...

The state's record 1.43 million Medicaid recipients are seeing cuts in services that could grow worse - and, ultimately, more costly to individual patients - if proposed cuts in federal funding are approved by Congress. Michigan's cities and townships have 1,100 fewer police patrolling streets since the terrorist attacks of Sept. 11, 2001, and communities are struggling to provide services like fire protection and road and infrastructure maintenance. And as other programs such as corrections swell, more tax dollars are diverted away from higher education, leading to steep increases in tuition and other fees that many say are putting college educations farther out of reach at a time when a changing economy most demands the degrees.

A perfect fiscal storm.

In Michigan's case, steady increases in corrections, Medicaid and K-12 expenditures and what Clay calls an antiquated revenue structure created for a yesteryear economy are leaving the state in a persistent hole....

In balancing annual budgets, Granholm and state lawmakers so far have combined more than $3 billion in cuts, the transfer of nearly $6.5 billion in one-time resources - including draining the state's $1.36 billion rainy day fund - over four years and selective tax increases and shifts to balance annual budgets.
The article also discusses the consequences of the state's failure to invest in education and infrastructure. Almost three years later, things look... no better, probably worse.

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