On March 18, Mackinac Center for Public Policy Director of Fiscal Policy Michael LaFaive took part in a panel discussion on economic development at the Michigan Economic Developers Association’s "Capitol Day" meeting in Lansing. He and two other panelists were asked to address five questions. The questions posed to Mr. LaFaive and his answers can be found below.
What Can/Should Michigan Do Over the Long Term to Attract and Retain Business?
The state of Michigan needs to make sweeping reforms to ensure its competitiveness with other states and nations. Sweeping reforms are not cosmetic window-dressing. I do not mean a subsidy here and a tax credit there that impact a handful of firms, but systemic changes that would effect more businesses and individuals. Here are three ideas:
Adopt a Right-to-Work law. Right-to-work (RTW) statutes "establish a legal right of employees to decide for themselves whether or not to join or financially support a union," according to Dr. Bill Wilson, a Mackinac Center adjunct scholar, and author of our study, "The Effect of Right-to-Work Laws on Economic Development."
According to Wilson, 22 states have adopted RTW laws since the 1940s and have benefited from doing so. Right-to-work states have higher gross state product, higher per-capita disposable income, lower unemployment rates, and faster jobs growth overall. Indeed, from 1970 to 2000 RTW states added 1.4 million new manufacturing jobs while non-RTW states lost 2.1 million manufacturing jobs. If Michigan can’t muster the courage to pass a Right-to-work law, then we don’t have much reason to complain about job losses. Our non-RTW status is an effective labor climate tax that must be overcome for Michigan to thrive.
Eliminate the Single Business Tax (SBT). As you know, the SBT is set to disappear at the end of 2009. But instead of letting it die a justified death, Gov. Granholm has tasked state Treasurer Jay Rising with developing an alternative system that would be revenue neutral, that is, one that would raise the same amount of revenue as is currently being raised. The earliest indications are that the proposal may include expanding sales taxes to certain services. This proposal has partial merit because the sales tax is a much more efficient way of raising revenue. But we at the Mackinac Center would recommend that any change should result in a net tax cut, particularly if we do not adopt a RTW law.
Adopt a bold school choice plan, such as the Mackinac Center’s Universal Tuition Tax Credit. Education is going to be an absolutely vital component of American economic well being for two reasons. First, it is essential for improving productivity and therefore also for improving pay and standard of living. Second, America’s comparative economic advantage (relative to other nations) is and will be in the brain industries: health, science, engineering and high finance. Making more schools compete for students will force them to improve their programs, which will improve education outcomes, knowledge and productivity.
What can/should Michigan do in the short-term to attract & retain business?
State officials should take an "economic Hippocratic oath" and "First, do no harm." The Senate Fiscal Agency reported last fall that of the jobs lost in the entire nation from 2001 to late 2003, those lost right here in Michigan accounted for 23.3 percent.
Despite such alarming numbers officials are still toying with policies that harm economic growth. My colleague Russ Harding, former director of the Michigan Department of Environmental Quality, tells me that the recently proposed "Water Legacy Act," which requires groundwater users to seek permits, will be the biggest job killer proposed in Michigan in 20 years. Passage will make it much easier for people opposed to development to thwart it. This will kill the economic advantage Michigan has over other states as far as the water resources necessary to run particular industries, such as auto manufacturing.
More than any positive economic policies it might pursue, our state government should stick to the proper roles of government: administration of justice and law enforcement, and road construction and maintenance, for instance. Job creation and attraction does not require exotic policy schemes, just attention to unexciting, mundane protection of private property and the system of free exchange.
What is your view of Michigan’s future reliance on manufacturing?
Without a RTW statute or significant tax cuts and regulatory reform, Michigan may be forced to rely on industries other than manufacturing for economic opportunities. As I mentioned earlier, southern states with RTW laws are attracting manufacturing jobs — many of those from foreign companies.
Are some jobs worth fighting for and others not?
That depends on how you intend to fight for them. Every time the state gives tax credits to a company, it admits that business taxes are too high. But they’re too high for all Michigan businesses, not just the favored few. Michigan has 100,000 businesses with Single Business Tax liability, but few of them are lucky enough to get the kind of relief that the Michigan Economic Growth Authority (MEGA) hands out. As you know, MEGA is the highest profile incentive tool that the state has in its economic development arsenal.
The Center recommends a "fair field and no favors" approach to fighting for jobs and job growth, as opposed to the targeted type of fighting. Cut everyone’s cost of doing business and then let Michigan’s citizens themselves, through their choices in the free market, decide which type of employment makeup they should enjoy.
Is there anything that competes against a "one-dollar-an-hour" wage overseas?
Yes, there are two things: productivity and the law of comparative advantage. If a U.S. firm pays its workers 10 times that of a Mexican worker doing the same job, but the U.S. worker is 10 times as productive, the wage difference means nothing. That’s why education reform is so important.
We do have to recognize that we can’t have an advantage in every industry. If there is one settled truth in economics, it is that trade is good for nations because it allows people to specialize, and allows nations to develop comparative advantages. There are certainly instances in which lower wages combined with higher productivity will induce a company to move out of state or overseas.
What’s wrong is in our perception of what’s happening in that situation.
If refrigerators can be produced in Mexico better than in the United States, and pharmaceuticals can be produced more effectively in the United States than in Mexico, it behooves the citizens of both countries — who want to buy these goods at the highest quality and the lowest price — each to specialize in what they do best, and then trade with each other for these goods.
The money saved by both countries goes back into the economy, creating new industries and producing new and better jobs.
Michael LaFaive is fiscal policy director for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.