Capitol Gains

The Snyder administration and the Michigan Legislature have made great strides to improve Michigan’s business climate, but there’s more work to be done.


Published:

Special Report: 2012 Michigan Economic Forecast

 At first glance, Michigan seems to be returning to a normal recovery mode. Households and businesses have been saving inordinate amounts of money over the past two years — which is a good sign, since saving is the precursor to renewed growth. As households rebuild their finances, they are able to spend money on cars and durable goods, and businesses use the added cash flow to restock inventories, expand into new markets, and invest in more productive equipment.  

Another sign of an economic recovery in Michigan is the record-low cost of borrowing. Affordable mortgage and installment-loan rates usually presage housing and auto-financing booms. Late summer upticks in home prices and auto sales suggest the traditional patterns are reappearing. It is fortunate that Ford Motor Co. and General Motors Co. have capitalized on improved products, and focused and sustained their marketing efforts during 2011 — a year that has been pocked with turbulent events thanks to nature, revolutions, global financial uncertainty, and stock-market buffeting. Chrysler is also showing steady growth, and has reintroduced its Fiat brand to the North American marketplace in hopes of boosting further sales.

As much positive energy as these improvements may seem to bode for the year ahead, there remain too many unresolved issues to confidently forecast what otherwise would be robust growth in 2012 (using historical trends as a guide). Instead, there’s talk of a secondary recession even before Michigan or the country have returned to pre-2008 peaks in output, income, or employment.

So what’s souring the outlook? The University of Michigan’s consumer sentiment index reveals the wrench currently stuck in our economic gears. In one word, it’s “uncertainty.” The economic pessimism that enveloped Michigan’s automotive sector for most of the new century’s first decade now seems to engulf the entire nation. The pall is characterized by a prolonged lack of hiring in the private sector and by threats of financial chaos stalking nearly every government unit, from Washington to local school districts. These money worries pervade every facet of the market system, extending the “wait and see” attitudes geographically across the full spectrum of households and industries.  

In Michigan, there are lingering questions concerning Lansing’s capacity for reforming our business climate enough to compete with other states and other nations, particularly in the automotive, construction, manufacturing, and IT industries. How resistant to a national double-dip recession would Michigan be? Has Michigan been strengthening its economic base?

 

Report cards, along with spontaneous focus group polling, seem fashionable today for assessing success or failure in the policy realm. But fairness dictates that evaluating Gov. Rick Snyder’s policy initiatives awaits a minimum of one year’s tenure in office. Nevertheless, judging by partisan attacks on fellow governors in contiguous states — Scott Walker in Wisconsin, Mitch Daniels in Indiana, and John Kasich in Ohio — no such luxury is accorded to any governor, much less Snyder. Talk of a recall emerged by mid-2011, although more as a means of communicating a special interest’s “fear of change in the economic status quo” rather than signaling an active recall campaign.

Regardless of politics, Michigan’s economy has often been the proverbial canary in the coal mine — that is, a good leading indicator of what could prove to be a very positive or negative direction for the entire American scene. To that end, let’s examine the reforms of the new Snyder administration and the policy changes he’s supported and signed into law with the help of the Michigan Senate and House. To the extent successful reforms are being implemented in neighboring states, Michigan could find itself teaming up with a groundswell of movements that will apply pressure for similar financial repairs at the national level. In turn, an improved U.S. economy will add strength to Michigan’s fortunes.

The Good:

Can Michigan join the ranks of higher-performing states? Economically speaking, since January, when Snyder took office, policies have moved in a constructive direction in five irrefutable ways.

• First, the state’s business tax was trimmed by nearly $600 million. Over time, this simplification and reduction of cost burdens on firms will improve the state’s business climate by widening profit margins and encouraging entrepreneurship.

• Second, by appointing and inserting emergency financial managers as key budgetary authorities in large but failing units of government, including school districts across the state (e.g., Detroit, Pontiac, Ecorse, Benton Harbor), Snyder became a primary force contributing to the upgrade of bonds and the creditworthiness of Michigan’s existing and future debt issuan-ces, according to national credit agencies such as Moody’s, Fitch, and Standard & Poor’s. Emergency managers use their experience and expertise in government finance to bring discipline and long-term planning to budgetary processes. On a related front, the Legislature recently passed a series of bills that limits teacher tenure and seniority rules. According to Capitol Confidential, among 156 tenure cases initiated by Michigan public school districts since 2006, the cost of removing, or attempting to remove, an underperforming teacher has cost school districts (taxpayers) at least $7.7 million. Michael Van Beek, director of education policy at the Mackinac Center for Public Policy, says the changes are good, but more needs to be done to protect taxpayer money. “These tenure reforms empower school boards and principals to better manage their teaching staff,” Van Beek says. “But we’ll have to wait and see if schools decide to use this new power to positively impact student achievement or whether they’ll continue to operate like they have in the past.”

• Third, Snyder, working with senators and representatives, passed legislation that will relieve Michigan taxpayers of the burden of subsidizing the costs associated with an extra six weeks of unemployment payments (20 weeks total, starting in January 2012). The law could save taxpayers up to $240 million annually. In turn, Snyder signed legislation in early September setting a four-year lifetime limit on cash welfare benefits, with some exemptions. In some cases, people had been receiving welfare for as long as 14 years.

 

• Fourth, Snyder devised a significant cost-containment program for state and local government workforces in Michigan (school districts are exempt). He imposed a system whereby employees contribute 20 percent of the cost of their health care, leaving 80 percent as the balance to be covered by government employers (taxpayers). There is an opt-out option granted to the governmental units, but opting out requires a two-thirds vote of the legislative body of the respective community. Annual cost savings to taxpayers could reach $1 billion, according to the Mackinac Center. The legislation becomes effective in 2012, but its passage already has begun a scramble among some municipalities to enact three-year contracts with municipal workers that pre-empt the reform law. Rather than accept the cost-saving flexibility provided in the new law, it appears some local governments prefer to kick the can down the road by binding themselves and their taxpayers to expensive contracts that avoid reform for another three years.

• A fifth major reform with great economic implications is Michigan’s rejection of the Union-Only Project Labor Agreement, or contracts known as “PLAs.” In fact, during July, a series of states — including Maine, Louisiana, and Michigan — passed laws rolling back PLAs. This measure effectively prohibits state and local entities from requiring contractors to sign a PLA as a condition of performing taxpayer-funded construction. Savings annually in good times will run in the tens of millions of dollars for Michigan taxpayers, because the same or better quality work will be 10 percent to 15 percent less expensive on average, according to most independent studies. In taking this courageous first step in regaining flexibility and control over labor costs and performance accountability on taxpayer-funded projects, Michigan joined the ranks of Arizona, Idaho, and Tennessee — states that had already taken membership in the club earlier in 2011.

Other notable pluses on the report card for Michigan’s economic reform ledger include the removal of item-pricing regulations in retail establishments, along with the probable removal of some occupational licensing regulations (especially meaningful to the profitability of entry-level small businesses).

The Bad:

• Despite these constructive reforms, it must be acknowledged that the Snyder administration has thrown its political capital into supporting some of the same tax-and-spend policies that are keeping Michigan a relatively poor state. Here are the chief economic liabilities to the aforementioned policy assets:  

First, Snyder signed into law tax increases on personal pension income. Lansing will take more revenue from taxpayers for increased government spending under the claim that such a move is justified on grounds of fairness, simplicity (efficiency), and transparency. The initiative, however, conveniently overlooks the classical definition of a good system of taxation, especially the No. 1 axiom: When taxes become burdensome upon a people, they are counterproductive and cause an exodus of wealth, effort, productive individuals, and population.

As it stands, the new law created three tiers for pensioners. In 2012, a person aged 67 years or older will not be affected. Private pensions will only be taxed if they’re more than $45,120 for an individual or $90,240 for couples. The other tiers detail age groups and pension amounts based on a given year. The overall changes are projected to generate $225 million in tax revenue in 2012 and $343 million in 2013. The Michigan Supreme Court is currently reviewing the constitutionality of the tax, and a decision is expected by the end of the year.

If Lansing’s intention in having passed this monstrosity of a “revenue-raiser” was to achieve tax equity between public and private pensions, then reducing or eliminating existing taxes on private-sector pensions would have far better served economic justice. Another march toward fiscal solvency and compensation equity would occur were Snyder to redress the existing disparity between government and private sector compensation: Every year, public employees take home $5.7 billion more in average pay and benefits than their private-sector counterparts. By not instigating more benefit and tax reforms, Michigan’s beleaguered residents now face yet another quarter-billion-dollar tax bill.

 

Furthermore, diverting more revenue from households to Lansing at this stage of Michigan’s economic distress is obtuse at best, and economic suicide when viewed as a step toward convincing others that we are serious about enacting durable reforms that will attract or retain job-creating talent. Moreover, most retirees who are targeted for these new pension-tax hits never received pensions that one could call “golden parachutes.”   

• Another inexplicable policy initiative emanating from the governor’s office is the support of a redundant bridge from Detroit to Canada at a time when logic, empirical evidence, and good economics all militate against another such spending project. Even Lansing is forced to concede that the owners of the Ambassador Bridge have done a superlative job in facility maintenance, traffic flow, security, and development of access to the bridge. Empirically, existing traffic is 60 percent (or less) of capacity, meaning traffic volumes haven’t reached anywhere near the estimates projected by the state transportation consultants over the past dozen years. What’s more, most supporters of a second bridge offer up lame reasons: “Build it, and they will come” or “I don’t want to look back 10 years from now and wish we had built that bridge.” Economically, 21st century America is already rife with evidence that large, public-run infrastructure projects (e.g. Boston’s “Big Dig” subway extension) can run as much as seven times to 10 times the originally promised costs to taxpayers.

By promising the people of Michigan that a Lansing-sanctioned bridge would cost them nothing, at least two red flag warnings need to be raised. One, Canada was intelligent enough to write into the bridge contract that it would not underwrite any cost overruns whatsoever. Hence, any costs above $550 million become the tab of Michigan’s beleaguered tax base. Two, the Michigan Department of Transportation is responsible for “eminent domain,” which involves all payments for land and the clearing of lands and facilities pertinent to building the bridge and its accesses. As the renowned writer Oscar Levant once observed: “A politician is a man who will double-cross that bridge when he comes to it.” Michigan cannot endure another government bridge to financial oblivion.    

MIA (Missing in Action):

It appears 2012 will be the year in which Lansing ramps up its heavy-hitting reform of onerous regulations. Transformative economic change is what brings new firms and jobs to Michigan without taxpayer subsidy. What kind of reform is transformative?  

• One illustration is the opposite of what Illinois Gov. Pat Quinn announced, and more in line with how the governors of Indiana and Wisconsin immediately responded to Illinois’ folly. In January 2011, Quinn and Democrat legislators hiked corporate tax rates by 67 percent (from 4.8 to 7.0 percent) and personal income tax rates by 46 percent (from 3 to 5 percent). Instantly, there were rumblings by major employers like Caterpillar and Motorola about moving operations from Illinois. Within a day of the passage of the tax hike, governors of contiguous states had invited Caterpillar and other impacted employers, big and small, to move to their states, listing the bottom-line business advantages of doing so; Indiana even posted billboards prominently displaying the message: “Illinoyed Enough? Come to Indiana.”

Unfortunately, Michigan was not an early responder. Instead (and sadly), the personal income tax hike that former Gov. Jennifer Granholm’s administration foisted on our sinking economy (from 3.9 to 4.35 percent, an increase of 11.5 percent) remains in place.

• As noted earlier, Michigan can save taxpayers nearly $6 billion annually, according to James Hohman, assistant director of fiscal policy at the Mackinac Center, by bringing public-sector employee compensation (pay and benefits) into alignment with that of the average private-sector worker.

Happily, such savings could furnish Snyder with a seamless means for phasing out the odious Personal Property Tax, an unusually onerous $1.2 billion annual levy on the office equipment, furniture, and other furnishings that are owned or stored by firms on their properties. Proceeds from the tax go chiefly to local government units. By urging an annual $5.7 billion savings that local governments could realize from converging public sector compensation toward the private sector norm, revenues from the personal property taxes would no longer be needed. By touting this swap, Lansing could boast a major victory in its struggle to gain credibility and visibility in Michigan’s business climate and economic comeback.

 

• Another means of putting us on the map as a venue for profitable, job-creating activities is leadership in support of making Michigan a “right-to-work” state. Snyder could go a long way toward placing Michigan in the 21st century by articulating the very clear reasons why our population, income levels, employment, and venture capital startups would surge if workers were given the choice of joining unions and paying union dues, rather than continuing to follow the current practice, whereby it is often a condition of employment that workers be unionized and pay dues.  

Failing this stance in support of a Michigan right-to-work law, it behooves the governor either to prohibit collective bargaining to government workers (which was President Franklin Roosevelt’s stance with respect to government unions) or to permit collective bargaining only at the discretion of local government officials, where there would be either a win-win deal with taxpayers or no deal at all.

State Reforms Needed Now

Considering the slow growth expected for the national economy in 2012, it is all the more imperative that Michigan hasten its efforts to rein in government spending and make the business environment as enticing and market-friendly as possible. The aforementioned reforms would offer greater flexibility, economically and fiscally, in meeting and surviving the unprecedented threats posed by national or international turmoil.  

The U.S. economy cannot expand at even an anemic 2-percent real growth rate if current Obama-era policies remain in place, most especially the national health care reform act. Mounting fiscal deficits and debt, inflation-threatening monetary escalation, and the ever-tightening noose of regulatory policies are more likely to produce full-scale recession, with greater financial crises, than to return the national economy to its historic 3-percent growth potential. Unfortunately, most economists predict considerably less growth in 2012.

But more worrisome is the prospect for 2013-14, especially if insufficient discipline is exerted on Washington’s out-of-control power grabs for new spending and taxing programs. Spending, tax rates, and especially regulatory burdens must be rolled back dramatically, not simply slowed, in order to reignite confidence and growth opportunities in marketplaces throughout the country.  

Chances are that 2013-14 will prove pivotal to the long-term economic prospects for the U.S. and Michigan. Either we will enact the necessary reforms, allowing the competitive private sector to expand the pie of prosperity, or we will witness a mighty unpleasant convergence of what we once termed “third-world economies.” db

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