How to Fix Michigan? Cut Cost of Living, Working and Investing Here

On Oct. 9, 2009, Michael LaFaive, director of the Mackinac Center's Morey Fiscal Policy Initiative, spoke at the invitation of Rep. Justin Amash, R-Kentwood, at an "Economic Town Hall" meeting convened by the representative. Here's what he told the participants: 

When I was first asked to participate here I was a bit taken back by the specificity of Representative Amash's request. He said, "Mike, my constituents have endured nearly a decade of bad news. I want you to tell them what we're doing right. Give them the good news." So, in conclusion let me say ...

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Obviously, I am joking but at the same time, I am not joking.

Economists typically use two or three major metrics to measure a state's economic well being: Gross State Product, personal income, and employment. There's a fourth — migration — that I think is extremely important, though it's less frequently used. How has Michigan fared in these metrics?

Just 10 years ago Michigan ranked 16th among the states in economic output (as measured by per-capita GSP). Today it is 41st. The Great Lake State is the only state in the union to experience negative growth from 1999 through 2008. We have been living though a "lost decade."

During that time Michigan's per-capita personal income ranking tumbled from 16th to 34th. Today it's a whopping 11.2 percent below the national average, the worst it has been since they started keeping track of this in 1929. We used to be a relatively wealthy state — today we're among the poor.

Our state currently has the nation's highest unemployment rate, 15.2 percent. That's even higher than Puerto Rico. Since we started getting comparable monthly figures in 1976, only two states have held this distinction: Michigan and Louisiana. Louisiana had more jobless than Puerto Rico the month after it was blasted by Hurricane Katrina. Apparently that doesn't even compare to Michigan's hurricane of bad public policies.

There is arguably no better metric for summing up quality of life issues than migration rates - people voting with their feet. It takes a lot to make people get up and go, and the preceding figures show why Michigan has what it takes. Last year, Michigan lost enough people to populate a city the size of Ann Arbor. Another metric — provided by United Van Lines — indicates that a whopping 70 percent of all their Michigan-related traffic is outbound.

The solution to Michigan's problems is simpler than are willing to admit. The economic science tells us that if you raise the price of anything — from wheat to cars to new houses, you will get less of it. There is an inverse relationship between price and quantity demanded.

So, the way to reverse Michigan's economic fortunes is to lower the cost of living, working and investing in the Great Lake State for families and job providers. Specifically the Mackinac Center has recommended:

Eliminate the Michigan Business Tax — not just the current surcharge on it — and replace the money it raises with cuts in government spending. States that live without one of the three major taxes (business, income and sales) typically outperform states that have all three.

Pass Right-to-Work legislation. There may be no greater single economic development policy that Michigan could adopt. Counties in states that have right-to-work laws and border counties in states that do not enjoy one-third more manufacturing employment as a percentage of their population than their neighbors across the border. That's about as apples-to-apples as you get in economics, and the result could not be clearer.

Rein in the Department of Environmental Quality. If a firm can't get a permit to start or expand a business here, it will never even get around to worrying about state taxes and labor laws — it just won't be doing business or creating jobs in Michigan, period. It's a 100 percent tax rate. My colleague Russ Harding, the former director of the DEQ, has described this department as out-of-control.

What should we not do? Rely on the big, newsy, flashy projects that involve the state promising millions of dollars in targeted tax credits or subsidies to slick operators in sexy industries who promise to "create" jobs. Every one of these handouts is an implicit admission that it costs too much to live, work and grow a business in Michigan. If that's true for the few then it's also true for all, and should be fixed for all, not just a politically well-connected minority.