On Tuesday, Feb. 8, 2005,
Gov. Jennifer Granholm gave her annual State of the State address. In the
speech, the governor proposed borrowing $2 billion for
direct or indirect subsidies to companies in "technology and emerging
industries," while borrowing another $800,000 for public works spending. This
proposal was one of the centerpieces of her program to repair Michigan’s broken
Following the speech, Jack
McHugh, a legislative analyst for the Mackinac Center for Public Policy,
participated in a panel discussion on the Delta College public television
program "Currently Speaking." Shown below is an edited version of McHugh’s
prepared remarks for the program. Some of McHugh’s material was excerpted from
other Mackinac Center publications, such as
Lawrence W. Reed’s Jan. 31 "State of the State" address, but McHugh’s
remarks represent an original and specific response to the governor’s proposal.
To put the governor’s proposed
borrowing into perspective, it may be useful to view this as if the debt were
structured like a four-percent, 20-year mortgage, borrowed all at once and
amortized in monthly payments. Here is what those numbers look like:
Jennifer Granholm’s Borrowing Proposal As a 20-Year Mortgage
per man, woman and child
Principal amount borrowed
interest paid over 20 years
payments over 20 years
These numbers are for
illustration purposes only. The debt will probably not be structured like
a mortgage with monthly amortization payments, and the money will not be
borrowed all at once — the governor proposes stretching the $2 billion in
borrowing for "technology and emerging industries" over 10 years, and the $800
million in borrowing for public works spending over three years.
The figures in the table are intended to help put into perspective the magnitude
of the proposed principal and interest payments.
Here’s the real question: Why is
it that when bad public policies contribute to high unemployment, politicians
think that going into debt will make things better? This was the first response
recently of the City of Detroit and the
Detroit School District to an ongoing demographic and economic meltdown, and
now Gov. Granholm is going down the same path.
Let’s step back for a moment and
try to put our current situation into perspective. Since December 1995, Michigan
has finished 50th out of the 50 states in percentage employment growth. We’ve
placed 43rd in percentage per-capita income growth over roughly the same period,
and we have fallen from above the median in percentage per-capita gross state
product to well below the median.
Michigan was the only state to lose a large number of jobs last year, and our
7.3 percent unemployment rate is now the worst in the nation.
We did not get in this fix
because of a lack of subsidies and "targeted incentives" to favored businesses
and industries. Indeed, if these things worked, Michigan would be a leader in
economic growth, because we’ve done plenty of this sort of thing. Nor did we get
here because of a lack of public works spending. We’ve done plenty of that, too,
including many millions that were
misspent using so-called "Clean Michigan Initiative" bond money.
No, the reason that Michigan is
struggling is because we have a horrendous business climate.
Michigan ranks 34th out of 50
states in the
Pacific Research Institute’s
index of economic liberty. We’re 36th in the
business climate index, and the unemployment tax burden we place on job
providers is the ninth worst in the nation. On the issue of corporate income
taxes, the Tax Foundation ranks Michigan dead last — 50th out of 50 — and our
Single Business Tax has been found to take 50 percent more from employers than
the national average for state business taxes.
So why in the world would
anyone think that piling on more debt and public works spending would fix the
The real medicine that
Michigan’s sick economy needs is to
eliminate or drastically reduce the Single Business Tax and the property tax
that we impose on the tools and capital equipment that businesses use to make
things, provide services and create jobs. Given the demonstrable failure of
false economic cures like corporate welfare subsidies and public works spending,
prescribing more of them is like sending a cancer patient to a witch doctor
instead of an oncologist.
If we did take
a real cure and eliminate the SBT, Michigan would
move from 50th in the corporate tax ranking to a tie for first with four other
states. Our general business climate ranking would climb from 36th to 12th. If
we simply cut the SBT in half, Michigan would move from dead last on the
corporate tax ranking to approximately 20th place, and our general business
climate ranking would go from 36th to around 27th place.
why won’t spending $2 billion on subsidies for particular corporations and
researchers in "technology and emerging industries" work? In a dynamic
economy, no one can say which industries will replace the jobs that used to be
provided by manufacturing. To position our state to be a winner in such a fluid
environment, legislators and the governor essentially have two choices.
The first is to think that they
somehow can predict which businesses or industries will dominate the
future economy (if any), and then to tailor tax or training "incentives" for
just those particular enterprises. This approach is always tempting for
politicians because it is easy, has no immediate political cost and makes it
look like they are "doing something."
But these gimmicks will never
work, for two important reasons. First, politicians in Michigan are not the only
ones seduced by them. Most states have their own "economic incentive" programs.
The governor acknowledged that California has already trumped her $2 billion
subsidy proposal with a $3 billion corporate welfare handout of its own.
Separating yourself from the competition in this arena is difficult, and it’s
ultimately a losing game anyway.
Second, the basic assumption
behind special breaks for certain businesses is that central planners have
better information and make better decisions than the market, where the
aggregated knowledge and decisions of millions of individuals really do pick
winners and losers. This form of hubris was dubbed "the
fatal conceit" by Nobel Memorial Prize-winning economist
Friedrich Hayek. Handouts from Michigan taxpayers to firms like
Optical Imaging Systems are memorials to government planners’ folly.
The other choice is to adopt such major business tax and regulation reductions that Michigan becomes irresistible to investors and entrepreneurs who want to grow a business. This approach works every time it is tried.
Michigan can improve its
economy. We can reduce our unemployment rate. But doing so will require
political courage and an end to "business as usual" attitudes in Lansing.
Jack McHugh is a legislative analyst for 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.
Assuming a state population of roughly 10 million people.
The actual borrowing methods could reduce the overall size of the interest
payments — but they might increase it, too, since interest rates may climb
in the next few years. Ultimately, there won’t be major differences from the
debt calculated in the table above. Debt is debt, and however you structure
it, you can’t fool Mother Finance.
In percentage per-capita gross state product, we have fallen from above the
median — 18th from 1993 to 1997 — to well below the median — 44th from 1998
An analysis by James R. Hines Jr., a professor of economics at the
University of Michigan, found that from 1977 to 1995, Michigan corporate
taxes as a percentage of gross state product were on average 50 percent
higher than those of other states.