(Note: Following is an edited version of a speech delivered by economist David L. Littmann at an Oct. 26 meeting of the Engineering Society of Detroit.)
Many academic economists in Michigan deny the galvanizing economic effects of tax cuts.
It should not take a rocket scientist or Ph.D. economist to comprehend the marvelous impact on human incentives — both firms’ and individuals’ — of lower tax rates, especially income tax rates. This fundamental economic principle has been demonstrated repeatedly in a bipartisan fashion at the national level: when President Kennedy cut taxes in 1962; when President Reagan reduced marginal income tax rates in 1982; and when President Bush signed a series of tax cuts in 2003. In addition, Michigan’s own economic history shows that the state was a pre-eminent performer in the years prior to enactment of the 1967 personal income tax.
Michigan’s economic, financial and demographic fortunes have slipped consistently as our tax burden has risen relative to most other states. Today, Michigan, with the nation’s highest unemployment rate, most intractable big-city and state budget deficits (reflecting a stagnant tax base), and nationally inferior growth in income, jobs, home appreciation, population and overall credit expansion, may be fast approaching the dubious economic reputation Mississippi held for many decades.
After all, even in the best of times, with auto sales averaging a phenomenal pace in excess of 17 million units annually, and with inflation and interest rates at levels that have always catapulted Michigan’s economic expansion far ahead of its neighbors, Michigan has instead just experienced its fifth consecutive year as a below-average income state. This has not occurred since 1934!
But that’s not the worst of it. The national forces that have favored Michigan’s industrial economy over other states for the past four years — namely, low inflation and financing rates — are now on the upsurge, compounded by escalating energy prices, which are yet to unleash their full debilitating impact on consumer confidence and discretionary spending.
The primary explanation for these sorry conditions and bleak prospects goes well beyond the structural adjustments occurring in the manufacturing sectors of the U.S. economy, or the auto industry in particular. To be blunt about it, Michigan’s business climate stinks and is rapidly deteriorating as this business cycle grows longer in the tooth. With higher energy prices permeating consumer and business budgets in the form of winter heating bills, plus the effects of add-on charges to other goods, services and utilities, what do you imagine consumer or investment spending will do in the absence of further reductions in tax burdens?
Yet many public sector economists want Michigan’s high tax burdens to persist. In fact, some are advocating even higher tax revenues as the means for allocating funds to "strapped" institutions like the University of Michigan! They claim this is a way to reverse Michigan’s economic fortunes by educating high-tech graduates. This muddled thinking becomes painfully gratuitous and self-serving when you consider that the flower of Michigan’s youth (ages 25-34) happen to be exiting the state in search of better jobs with upward mobility. Why? Because Michigan’s policies (taxation, regulation and legislation) are "stuck on stupid." They fail to improve incentives that would attract or retain graduates from any of the state’s institutions of higher learning.
Michigan’s economic growth potential is enormous. Consider the Kalkaska and offshore Michigan energy basins; consider the pharmaceutical and allied health care industries; consider the recycling and trash-conversion industries; consider telecommunications. Each of these is a high-tech and evolving sector of the U.S. and world economies. Current prices are ideal for pursuing opportunities in these sectors. Yet over the past decade, Michigan’s legislation, taxation and regulation have been inimical to these industries. As a result, capital and workers, on balance, have gone elsewhere, even to states like Connecticut and Colorado.
Happily, you can always identify a tax-and-spend advocate or "political" economist. They distance themselves from reality. They systematically deny that better incentives and lower tax burdens work wonders in making an economy more competitive, more wealth-enhancing and more job-friendly.
David L. Littmann is senior economist at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.