The MC: The Mackinac Center Blog

As Michigan continues its economic recovery that has led to more jobs, higher real estate values and more government tax revenue, one might wonder what’s driving the state’s recent economic growth. Some point to the booming auto industry, praising the bailouts and speedy bankruptcies. Yet, while some pieces of the state economy are improving more than others, it’s all of them together that makes the difference.

Michigan’s recent economic growth is substantial. From the end of the recession in 2009 to March 2015, Michigan added 407,800 jobs, a 10.6 percent gain — seventh highest among the states. Michigan continues to add jobs and will soon have fully replaced all of the jobs lost during the recession.

Auto industry jobs rebounded even more. Jobs in auto and auto-part manufacturing are up 67 percent from their recessionary trough. Yet, compared to their peak in 2000, the state has fewer than half of the auto and auto-parts manufacturing jobs than it did 15 years ago.

Michigan’s growth in auto-manufacturing employment is a reflection of national trends. From 2000 to 2009, auto and auto-part manufacturing jobs fell nationally, with Michigan losing a greater proportion of jobs than the nation as a whole. Since then, these jobs have rebounded nationally, and Michigan, having lost more jobs, had more to gain. Subsequently, the state’s auto jobs growth has outpaced the national trend since the recession ended.

Michigan’s economy is a much different state than it was in 2000. Back then, one out of 14 jobs were in auto and auto-parts manufacturing. Even with the recovery of the auto industry, it’s currently one out of 24 jobs. Motor vehicle and parts manufacturing accounted for 12.8 percent of state GDP in 2000, but just 7.6 percent in 2012, the most recent breakdown available. And while not strictly comparable due to changing industrial classifications, motor vehicles and equipment manufacturing used to account for more than 20 percent of state GDP in the 1960s.

Michigan produces other things than cars and trucks. And this is where Michigan has seen some unexpected growth. Non-auto manufacturing jobs in Michigan have fully rebounded from the recession, bucking national trends. Nationally, these jobs have stayed at their ratcheted-down levels since the recession.

According to the most recent state gross domestic product release, which unfortunately only reports detailed industry information for 2012, the largest manufacturing growth in Michigan during the recovery is in chemical products, textile products and the ambiguous “miscellaneous manufacturing.” The value of products in these three industrial categories increased by more than 60 percent from just 2009 to 2012.

Michigan’s auto jobs recovery is great news for the state. But it is much more than just auto-related industries that have come back. In many ways, the state’s economy is more economically diverse than it has been in decades.

Residents should be grateful for this rebound. But these statistics also show how hard it is for anyone to predict the future and centrally plan a state economy. Yes, the heavily subsidized auto industry has rebounded, but so have many other industries that received no taxpayer support.

Policymakers should keep this in mind when designing policies that affect businesses. Business taxes and regulations should be fair and broad, applying equally to all, rather than to just a select few. A state economy is too diverse and complicated to nudge forward by subsidizing one or a few preferred industries.

In a recent Mlive column, Tim Skubick says critics of the House Republican road funding plan think it violates accounting principles. “If you are a respectable bean-counter you are loathed to predicate any budget on revenue that may or may not materialize,” he writes.

If this criticism were valid, Michigan’s and every other state’s budget process would be impossible. Budgets are always forward-looking and rely on estimates of future revenue. As the months pass, policymakers adjust the budget to reflect actual tax income. The state revised its budget per updated revenue estimates just four months ago, for example.

Critics also misread the House plan. The legislation earmarks set dollar amounts to roads from the state’s personal income tax. These earmarks on not contingent on growth in state tax revenues.

Nevertheless, projecting such growth is hardly wild-eyed. In just the past four years, state tax revenues (and spending) have increased by $3.5 billion. Recent fiscal agency reports project continued growth.

If critics find budgeting based on future revenue projections unsettling, they should be far more concerned by a much larger threat to future state spending: the grossly underfunded school employee pension system. The state is supposed to contribute $1.9 billion this year to begin catching up on $25.8 of unfunded pension liabilities. The long term plan is to increase this amount by 3.5 percent annually until the underfunding is erased. Every penny is money that won’t be available for other spending needs and desires, so the only way to meet this future cost without impacting current budgets is through new revenue growth.

Maybe the state will get caught up someday, but the only guaranteed method to avoid racking up even larger unfunded liabilities going forward is to close the system right now to new employees. Eventually, the current liabilities would be paid off.

Management of state finances requires making projections of an uncertain future. If that exercise worries those looking for more road funding, they should be tearing their hair out over pension underfunding, which is a far greater fiscal threat than unfilled potholes.

Schools of Choice Program Causes Greater Competition

Mackinac Center research cited on WILX News

Schools of Choice research conducted by Mackinac Center Director of Education Policy Audrey Spalding is cited in a WILX report.

More than 80 percent of Michigan's school districts are accepting students into their boundaries. More than 100,000 Michigan students use Schools of Choice, which is comparable to those students attending charter schools.

Many schools have reacted positively to Schools of Choice, making conscience efforts to be more competitive and attracting higher enrollment by meeting the needs of students and parents.

Mackinac Center Event Panelist on Frank Beckmann Show

IJ's Lee McGrath talks about civil asset forfeiture

Right now in Michigan the government can take the personal property of private citizens even if the citizen has not been charged with a crime. It's called civil asset forfeiture, and it's the topic of a Mackinac Center Issues and Ideas forum.

Lee McGrath, Institute for Justice legislative counsel and managing attorney of the Minnesota office, served as a guest on the Frank Beckmann Show on WJR 760AM Tuesday morning.

McGrath says in the last nine years in Michigan $149 million in property was siezed. He says last year $24 million was taken. It involves cars, cash, homes and other property. The citizen must then go to court and litigate whether the property is guilty of being associated with an alleged crime.

The other panelists joining McGrath for the Wednesday event will be Jeff Irwin (D-Ann Arbor) and ACLU of Michigan Attorney Dan Korobkin.

The event will be live-streamed and available for viewing at the link here.

Prevailing Wage Repeal is Sound Policy

However, not all reforms are cuts

For two decades the Mackinac Center for Public Policy has recommended repealing the state’s prevailing wage law. It is an expensive mandate that artificially raises the cost of state-funded construction projects. Bills to make prevailing wage an artifact of history have been adopted by the state Senate.

Mackinac Center research suggests repeal will eventually free up money for more road, school and other government construction projects. It's an example of how not all reforms that impact the budget are actually "cuts."

State prevailing wage laws mandate that construction projects funded by the state pay fabricated union scale wages. Our 2007 study, “The Effects of Michigan’s Prevailing Wage Law,” by Paul Kersey reported that the law increased construction costs by 10 percent to 15 percent.

With road construction and repair a topical issue some may regard repeal as akin to just cutting one department’s budget and shifting those funds to roads. That is not the case. In fact, savings accrue to new projects going forward.

One important caveat with repeal is that no federal money could be comingled with state dollars on state road projects. Federal dollars bring with them the Davis-Bacon Act wage mandates, which are the federal version of prevailing wage.

Yet repealing the prevailing wage law can still make road projects less expensive. Unlike state road projects that include federal dollars, only one third of roads managed by counties, cities and villages are eligible for federal funding. Those roads also are in need of repair, with around 47 percent rated in poor condition. Getting rid of prevailing wage mandates will help local road managers stretch tax dollars further.

School infrastructure funding does not have Davis-Bacon mandates hanging over it. If prevailing wage is successfully repealed, the cost of future school projects could fall by as much as $224 million annually, according to the Anderson Economic Group.

Editor's note: This story has been modified since it was originally posted.

Mackinac Expert Talks Film Incentives on NPR

No full-time jobs were created as a result of this corporate welfare

Michigan once had the most generous film incentive program in the nation, but economic realities caused legislators to trim back these subsidies. Recently, the state House voted to end the $50 million program altogether.

Policy Analyst Jarrett Skorup was on NPR’s “All Things Considered” to discuss state film incentives. He said work from independent economists show that this is one of the worst things state governments can spend taxpayer money on.

“In Michigan, a lot of the money goes to out-of-state producers who come in, film and then leave and then, of course, can go somewhere else the next time they make a film,” Skorup said.

He added, “The Michigan Film Office actually found last - in their latest report that there were no total full-time jobs created from the program.”

Stateline, a project of Pew Charitable Trusts, also recently covered the issue. The publication noted the cut backs to Michigan’s incentive program as well as other states. Some states, such as California and New York, are meanwhile boosting their subsidies.

The report quoted Robert Tannenwald, a retired Federal Reserve Bank economist, who has authored a study on state film incentives for the Center on Budget and Policy Priorities, a liberal think tank in Washington, D.C.:

“Film tax credits don’t pay for themselves, so states have to raise taxes or cut expenditures (to make up the difference),” Tannenwald said. “Those snuff out jobs as fast as film tax credits create them.”

Tannenwald said the competition among states puts them into “perpetual competitive purgatory. If one state backs out, and the other states keep doing it, the state loses an awful lot of film production.”

He said the benefits of the production are quickly visible – working carpenters and electricians and politicians getting calls from the locals saying it’s fun to watch those films take place. The costs are less visible—and spread out over time.

“People get excited about seeing movie stars in local cafes and walking down the street. You can’t do an anecdotal interview with a commuter who is sitting on a train platform with frozen hands because of the lack of money to upgrade public transportation,” Tannenwald said.

Michigan is still handing out credits to filmmakers while the bill to end the program sits in the state Senate.

Pure Michigan Scare Tactics

MEDC deploys 'Washington Monument syndrome'

The House Republicans recently released a proposal that would dedicate an extra $1 billion annually to roads by 2019. A chunk of the extra money comes from redirecting money from the Michigan Economic Development Corporation to the state’s transportation infrastructure.

The MEDC is the state’s corporate welfare arm, which hands out select subsidies to corporations and oversees the film incentive program and the Pure Michigan advertising campaign.

Specifically, the House GOP plan would redirect $185 million of spending on “economic development” programs to road construction and maintenance. The MEDC does not want its funding cut and responded with what is known as the “Washington Monument syndrome.” As noted by MIRS:

Steve Arwood, chief executive officer of the Michigan Economic Development Corporation (MEDC), said the plan "severely limits the state's ability to have an economic development strategy moving forward."

"Furthermore, it threatens to eliminate the entire Pure Michigan tourism effort – an industry which supports 214,333 jobs in our state," he continued. 

Here is a description of the Washington Monument syndrome, via Wikipedia:

The Washington Monument syndrome, also known as the Mount Rushmore syndrome, or the firemen first principle, is a term used to describe the phenomenon of government agencies in the United States cutting the most visible or appreciated service provided by the government when faced with budget cuts. It has been used in reference to cuts in popular services such as national parks and libraries or to valued public employees such as teachers and firefighters. This is done to put pressure on the public and lawmakers to rescind budget cuts.

Sure enough, after the press release from the MEDC, the media reports soon followed. An MLive headline said, “Pure Michigan campaign could disappear under House Republican road plan.”

The Pure Michigan advertising campaign is not nearly as valuable as the MEDC says, but it is undoubtedly more popular among the general public than the other programs the entity oversees. There are many, many MEDC programs that do a very poor job of creating jobs and those are the ones that should see a loss of funding first.

Gideon D’Assandro, spokesman for House Speaker Kevin Cotter, had a good response to the agency’s Washington Monument response: "If the MEDC needs help identifying the right priorities in their own budget, we are more than happy to help walk them through it and show them how."

Tourism marketing through Pure Michigan cost only $21.7 million out of the total “economic development” budget of over $600 million in 2014. There is plenty of room to cut before this program would need to be affected.

House Road Plan Relies on Reality

Detroit News errs in calling future tax revenue growth 'mostly fantasy'

The Detroit News calls the proposed House Republican roads plan “fantasy” because it provides additional road funding from future tax revenue growth. The plan, an editorial states, calls for finding money “out of thin air.”

Michigan is already operating on increased revenue from recent growth. The state budget spends $3.5 billion more state tax dollars than it did in fiscal year 2011.

And recent growth is expected to continue. According to the House Fiscal Agency, revenue is going to increase above and beyond the requirements of the House Republican plan. It estimates that school aid fund and general fund revenue will increase by a combined $577 million next year and $574.5 million the year after.

The estimates will change when the future gets closer. But Michigan’s growth is real and this means more money for the state budget. It is appropriate to devote some of that growth to the roads.

Last year, Michigan passed a bill that effectively prohibited the direct sale of automobiles. Caving to pressure from existing car dealerships, the state now makes it difficult to impossible for new car manufacturers, such as Tesla Motors, to gain a foothold in the state’s automobile market. As advocates of free markets and fair competition, the Mackinac Center signed on to a public letter earlier this year calling for the Michigan Legislature to reconsider this anti-competitive measure.

Michiganders should be free to choose how they want to purchase a vehicle and from whom, just like they do for most every other product. At least one legislator is trying to help: Sen. Darwin Booher (R-Evart). Last month, he introduced Senate Bill 268 that would allow manufacturers of three-wheeled motor vehicles (such as those made by Elio Motors) to bypass the protected car dealerships and sell directly to Michigan consumers. He also requested comment from the Federal Trade Commission on the issue.

The FTC replied that Sen. Booher’s bill was good first step, but encouraged him to go further and help eliminate Michigan’s unjustifiable prohibition on direct sale of automobiles. It stated, “Michigan consumers would more fully benefit from a complete repeal of the prohibition on direct sales by all manufacturers,” reasoning that “consumers are the ones best situated to choose for themselves both the vehicles they want to buy and how they want to buy them.”

The FTC also addressed the arguments used by car dealers for their protectionism. For example, it is said that the state needs to prohibit direct sales so as to protect dealers from abuse by their suppliers. But the FTC makes the point that the current law provides a “blanket prohibition ... not a narrowly crafted provision to protect franchised dealers from abuse in their franchise relationships.” Even if this really is a problem, Michigan’s current law uses a meat clever when only a scalpel is required.

Car dealerships also argue that forcing automobile sales through dealerships creates more competition, which results in lower prices for consumers. The FTC responds, “This view is inconsistent with modern economic learning and with the Supreme Court’s widely accepted observation that ... competition between rival manufacturers ... can suffice as a source of downward pressure on price.”

The FTC urges the Michigan Legislature to reconsider its direct sales prohibition. If Michigan is going to be “reinvented,” it should not hold on to protectionist policies of the past. Banning the direct sale of automobiles limits competition, harms consumers and thwarts innovation.

Interpreting Proposal 1’s Loss

First, look at current resources

The 80-20 loss on a $2 billion tax hike will guide subsequent road funding proposals; there is no shortage of interpretations (some odder than others) of the message voters intended to send. Some assert that voters will not approve complex proposals and suggest other tax hikes. The new House proposal, on the other hand, indicates that the proper message is to first look within the state government’s current resources to fix the roads.

And it’s an easier lift than residents might think. The current transportation budget contains $284 million in general taxpayer support in addition to the revenue distributed from state gas taxes and vehicle registration fees. Recently-passed Senate and House budgets contain $159 million in further support. This extra spending shows that there are ways to devote more money to the roads within the budget.

Even though this is a long way off from the $1.2 billion target, it makes a larger difference than you might expect. The state is just not yet ready to fully spend $1.2 billion on road repair. As MDOT director Kirk Steudle observed, it will take a while for the market to respond to the needed road repair. That’s why Proposal 1 phased in road spending and expedited debt payments.

Gradually increasing road funding is doable for legislators, and this is made even easier by the growth in the state economy. Michigan added 408,700 jobs since the end of the recession, a 10.6 percent growth that is the seventh highest in the country. The treasury received $3.7 billion more in state tax revenue than it did in 2011.

Even with growth and the gradual need for road funding, legislators should still look within the state budget. The money state government spends on economic incentive programs would be better used in constructing roads. The state’s university funding does not ensure that taxpayers get the biggest bang for their buck.

The new House plan recognizes this, increasing road funding over time while diverting funding from less-needed areas like the 21st Century Jobs Fund and Film Incentives to the transportation budget. It also begins devoting more tax revenue from the growing economy to needed road funding.

It is also encouraging the see the Senate consider a repeal of prevailing wages, a step towards saving on construction costs in state, local governments and school districts.

People should be coming together around proposals that look within the state budget and the House plan is an excellent starting point. It is the safe interpretation for Proposal 1’s loss. Through the gradual need for increasing road funding, the money that policymakers already found, the growing state economy and the waste in districts, finding a feasible plan to fix the roads within the state’s resources should be an easier lift than increasing taxes.