More at Stake in Budget Battle than Next Year’s Spending

(Note: The following is an expanded version of an Op-Ed that appeared Aug. 15, 2007, in the Traverse City Record-Eagle.)

The gap between desired spending and expected revenues in Michigan’s state budget for the fiscal year beginning Oct. 1, 2007, exceeds $1 billion, and the slow progress toward resolving it has generated tension that has some voices in the media and elsewhere urging, "Just get it done," even if that means higher taxes.

This is shortsighted. Next year’s budget is just the theater in which a deeper "class struggle" is being played out that has profound implications for this state’s long term economic health. On one side is the reactionary, tax-consuming class that benefits from Michigan’s big-government status quo. Their leaders have pulled out all the stops to jam through the massive tax increases necessary if class members are to retain their current perks and privileges. Opposing them are those who say that government and school establishments at all levels in Michigan must be "right-sized" as a precondition for reversing a deepening economic decline here.

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Mackinac Center analysts have made many recommendations that indicate what this right-sizing might look like. Michigan state government does too many things that are outside its proper scope, and many of its activities are organized in ways that serve politically well-connected insiders rather than the general public. In addition, a state where per capita personal income is now 6.7 percent below the national average cannot continue to pay its public employees substantially more than comparable private sector positions, and even more than government workers in most other places.

The excuse is often heard that the state's economic problems are unrelated to public policy, but are instead due to the decline of the U.S. auto industry and manufacturing in general. This won’t wash. For more than a decade, annual U.S. motor vehicle production has been steady at 12 million to 13 million units — it’s the number made in Michigan that’s fallen steadily. Dozens of new U.S. auto plants generating hundreds of thousands of jobs have opened in the past quarter century, and the reason they're not here is not because our state government spends, taxes or regulates too little.

More broadly, in 2006 the U.S. manufacturing sector as a whole set records in output, revenues, profits and return on investment. Nationally, between 2003 and this year a decades-long, productivity-driven decline in manufacturing employment slowed dramatically, with jobs in the sector falling from 14.5 million to 14.2 million, or just 2 percent. Total U.S. employment grew by some 8 million.

Again, the story in Michigan was different. Over the same period the state lost some 68,000 manufacturing jobs — almost 10 percent — and total employment fell by around 80,000. The strong national figures show that this state cannot blame its troubles on larger events such as national trade policy and increasing globalization. Michigan must look in the public policy mirror to see why it has failed to participate in the nation’s strong economic and job growth.

The need to do so now and not later is urgent. This state stands on a precipice. Population and incomes are falling, employment is shrinking during a period of strong national job growth, and ours was the only state where property values actually fell last year.

The "Detroitification" of Michigan has begun and won't be reversed by tax increases whose outcome would be to establish the same dynamic that destroyed that city: Hollowing out the private economy to prop up unsustainable government establishments.

The good news is Michigan can come back if we throw over old thinking and the special interests now demanding tax hikes. Restoring growth requires privatizing and right-sizing government at every level, ending "targeted" tax breaks to businesses, adopting environmental regulations no more restrictive than federal ones, leveling the playing field between business and labor with a right-to-work law and cutting taxes for all businesses and families.

The budget progress in Lansing is slow because a few "grownups" in both parties recognize that the real nightmare scenario is not how governments here will cope with less revenue, but what happens if necessary government and business climate reforms aren't in place before the next national recession hits.

They're opposed by the beneficiaries of an unsustainable status quo in unions, governments, prisons, public schools and universities, desperate for a tax hike that would allow them to retain privileges they view as entitlements.

Michigan loses if those interests prevail. That prospect is what should trouble those now saying "just get it done" without regard to the long term cost.


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.

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