The Leap

How do we fix this economic mess? Part II

Here is a follow up of the article I last posted. The quotes below are from an opinion piece written by Phil Gramm and Mike Solon printed in the September 13th edition of the Wall Street Journal. (page A13)

This quote was particularly interesting to me.

“Workers in the three least successful states had to contend with a quarter million fewer jobs rather than taking their pick of the 3.7 million new jobs that were available in the three fastest growing states….Families in Michigan, Ohio, and Illinois struggled not because they didn’t work hard enough or smart enough. They struggled because too many of their elected leaders represented special interest groups rather than their interests.”

So Texas, Florida, and Arizona created 3.7 million new jobs while during the same time frame Michigan, Ohio, and Illinois lost 258,000 jobs. Someone might assume those were low paying jobs but the facts show that the overall per capita income in those states grew faster than Michigan, Ohio, and Illinois.

As for the quote about elected leaders serving special interest groups, that is definitely an issue here in Michigan. Many of our elected leaders think that raising taxes is the way to increase the state budget so they can afford all the "special programs" they want to fund. However, these policies hinder business. The large automotive corporations looking to open plants in the United States end up opening those plants in South Carolina, Tennessee, and Alabama. This is one reason why Governor Granholm has not been able to get Toyota, Mercedes, Mazda, and others to build their vehicles here in Michigan.

“There also appears to be a clear difference between union interests and the worker interest. Texas, Florida and Arizona are right to work states while Michigan, Ohio, and Illinois are not. Michigan, Ohio, and Illinois impose significantly higher minimum wages than Texas, Florida, and Arizona. Yet, with all the proclaimed benefits of unionism and higher minimum wages, Texas, Florida, and Arizona saw their real income grow more than twice as fast as workers in Michigan, Ohio, and Illinois.”

Right to work states saw job growth and wage increases while heavily unionized states saw massive job losses and lower wage increases, even though they have large unions to protect workers and higher minimum wages. It appears the analysis of this article matches 100% with my real estate friend who said all the business owners he knows locally that are suffering under high taxes and unfavorable business law are moving their businesses to states that are more pro-business. This mass exodus has scared him. The question is if Washington implements on a national scale the policies and initiatives that Michigan, Ohio, and Illinois have done at the state level, what will happen? Would we have an exodus of business leaders who have the ability to move to countries with more favorable business laws? Who knows? I have always been in favor of Ronald Reagan and his quote that a rising tide lifts all ships. The key is to help small businesses and corporations grow which benefits everyone. Higher taxes, rebates, and economic stimulus packages are not the answer in my opinion. Once that money is spent the problems still remain. We need to create a free enterprise business environment to help businesses grow and thrive. This will in turn create jobs and wage increases, which is a true stimulus initiative that will solve the problem. Obama's quote to Joe the plumber, "We need to spread the wealth around" scares me. Isn't that socialism? How about we create environments where people have all the necessary tools to be successful if they choose to do so? What are your thoughts?

How do we fix this economic mess?

The Wall Street Journal featured an article in their opinion section last week that I felt is worth highlighting to our readers. Written by Phil Gramm and Mike Solon the title grabbed my attention right away, “If You Like Michigan’s Economy, You’ll Love Obama’s.” Not many Americans would say right now that they want a national economy that resembles what we have here in Michigan. Tonight airs the documentary “Saving GM” on national television as the nation turns its attention to a beleaguered auto industry that used to be the flagship of the American economy. Phil and Mike have some compelling points that Senator Obama's tax and spend policy might duplicate Michigan’s dismal performance for the entire nation. Here are some highlights from their opinion piece.

“Despite the federal governments growing economic dominance, individual states still exercise substantial freedom in pursuing their own economic fortune or misfortune. As a result, the states provide a laboratory for testing various policies….Growth in jobs, income and population are proof that a state is prospering. But figuring out why one state does well while another struggles requires in-depth analysis….The Competitiveness Index created by the American Legislative Exchange Council (ALEC) indentifies “16 policy variables that have a proven impact on the migration of capital – both investment capital and human capital – into and out of states.” Its analysis shows that “generally speaking, states that spend less, especially on income transfer programs, and states that tax less, particularly on productive activities such as working or investing, experience higher growth rates that states that tax and spend more.”

I have found this to be true here in Flint Michigan. Although I see a rebound taking place and there are many great success stories in the local area of small and up and coming businesses doing very well there is something changing in the local landscape that is telling. I asked a friend of mine who owns a real estate company here in Flint when he saw the market rebounding. He said he certainly saw it coming back but what he has been noticing is that many business owners and individuals who have the ability to make a choice are leaving due to increasing tax burden the state of Michigan continues to levy on its residents. He was worried that so many of these people are leaving and when they leave they take their business and jobs with them and open it up in states where the tax burden is less on them and their company. It is a vicious cycle. The state coffers run low and they can’t keep all their programs afloat and instead of making tough choices and cutting programs back they increase taxes to pay for it. However, this just further incentivizes many businesses and individuals of means to leave the state to escape this burden which hurts tax revenues and the cycle continues. The key is to attract investment in your state which creates growth and opportunity. Phil and Mike highlight states that have done this well in the next passage.

“Ranking states by domestic migration, per-capita income growth and employment growth, ALEC found that from 1996 to 2006, Texas, Florida, and Arizona were the three most successful states. Illinois, Ohio, and Michigan were the three least successful….The rewards for success were huge. Texas gained 1.7 million net new jobs, Florida gained 1.4 million and Arizona gained 600,000. While the U.S. average job growth percentage was 9.9%, Texas, Florida, and Arizona had a job growth of 18.5%, 21.4% and 28.9% respectively.”

Okay, so the winners gained jobs and the losers lost jobs, this isn’t a big surprise. However, Phil and Mike also point out that in the winning states per capita income for everyone grew by 21.4%! The statistics they share next are very compelling. I will post the rest of there analysis in the coming days.

The bottom line is this. As we look for ways to turn our economy around we don’t have guess what might or might not work. State economies offer a great petri dish for our national economists to see what is working and what isn’t around the country. Here’s an idea. Why don’t we benchmark the best performing states in the country and see what they are doing right and see if those policies can work on a national scale? We should also benchmark the failing states and make sure we do not duplicate their economic mistakes on a national scale. I am not saying I agree with Phil and Mike’s entire economic analysis of these states. However, at a time when the entire country is looking for a game plan to course correct our economy it only makes sense to look at what is currently working and what is not. Our individual state economies offer us a test bed and their results should carry more weight than the guesses of Wall Street pundits and career politicians who have never run a business.