Market Analysis

Michigan’s Tragi-Comedy

Unless you're a Lansing fourth-grader or a Latin geek, it's unlikely you can translate: "Si quaeris peninsulam amoenam circumspice.” But all Michiganders know "if you seek a pleasant peninsula, look about you.”

Unless you're a Lansing fourth-grader or a Latin geek, it's unlikely you can translate: "Si quaeris peninsulam amoenam circumspice." But all Michiganders know "if you seek a pleasant peninsula, look about you." Except, the peninsula hasn't been so pleasant in years, hosting the nation's highest statewide unemployment rate of 12.9% (Detroit's unemployment is 21%) and a steeply slumping economy.

If you studied Latin, you learned your Greek tragedies, and know what Michigan needs is a good deus ex machina. Michigan's fate is entwined with its autos and its position as a valuable swing state. National politicians must vow to "save" America's cars, else lose Michigan. President Obama's fix means at least two of the Big 3 finally see bankruptcy reorganization (the best thing for them, really). Then, perversely, they'll face Obama's aggressive new CAFE standards, forcing them to make more of the smaller cars that hobbled them in the first place. (In reckless disregard for their environmental impact, it appears Americans overwhelmingly prefer surviving car wrecks.)

We could bicker about what truly ails America's cars, and whether the government's hubristic foray into automaking is doomed to fail, or doomed to fail fast, but that misses the point. Washington could prop up Detroit for the next century, but if they were serious about helping the Wolverine State, they'd do something more radical—forget making cars and turn the entire state into a special economic zone.

SEZ's have helped emerging markets—why not Michigan? SEZs attract outside investment and new business with low (or no) taxes and liberal trade policies. They're supported, initially, by the public with loans, infrastructure development, etc. Taxpayers are already supporting government auto bailouts, and Michigan already has fine highways and working ports. This isn't much of a stretch! And, it worked in China. The tiny fishing village Shenzhen became, in just 20 years as an SEZ, a bustling economic powerhouse—home to the Shenzhen Stock Exchange and China's second busiest mainland port. Why can't Detroit do the same? Throw open Michigan's doors and yell, "Your investment dollars welcome here!"

Becoming an SEZ gives Michigan a fighting chance. Rather than politicians playing at making cars (though, to be fair, maybe a majority of senators secretly got degrees in mechanical engineering and are qualified), let any industry that chooses find its way to Michigan and give it a go in America's business-friendliest spot. (This is the point in Michigan's tragedy where Heracles swings in on a thunderbolt.)

Rather than swooping in to save the day, Michigan's legislature voted in 2007 to raise both its income and sales tax. That's going the wrong way! Michigan's primary industry is autos—they must rely on domestic cars because foreign firms wouldn't touch the state with a ten-foot catalytic converter. Meanwhile, BMW and Toyota employ many thousands in more business-friendly states like Alabama, South Carolina, Kentucky and Texas. (Texas has no state income tax. Pay attention, Michigan!) Yes! Foreign firms employing American workers on American soil. But if Michigan declared itself an SEZ and dropped tax rates, it gives both domestic and foreign firms with dollars (pounds, yen, ringgits) to invest another option.

What did Shenzhen understand that Michigan lawmakers don't? Jobs go where people do. And people don't want to pay higher taxes. This isn't theory—people have been voting with their feet—fleeing high-tax states for lower-tax states. From 1997 to 2006, notoriously high-tax New York and California lost 3.3 million people combined. Where did they go? Perhaps to no-tax Florida, Texas, Nevada, and Washington, who gained a combined 3 million over the same period. The top ten population losing states also included high-tax stalwarts New Jersey, Massachusetts, and yes, Michigan. The top-10 population-gainers include our no-tax states and low-tax Tennessee, South Carolina, Georgia, and Arizona.*

And somehow, the high-tax states don't get it. Their tax base shrinks, resulting in lower tax receipts and a deficit. To close the gap, they jack up taxes again (as California just did). Higher tax rates cause taxpayers to leave for friendlier locales, or perhaps just opt to earn less or report less income. Which leads to lower tax receipts which, etc., etc., death spiral-tragedy-like. It's just not economically wise to chase productive people from your state with higher taxes. A recent column in the WSJ said it best: "No-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts."

What has Michigan got to lose? A higher unemployment rate or an employer exodus? (Insert a tautological "too late" here.) Michigan really is a nice place. Good universities. Lovely lake fronts. Beautiful fall foliage. Zingerman's. Ridiculously cheap real estate. If politicians were truly interested in helping Michigan (as opposed to winning Michigan's dwindling electoral votes), they'd quit playing at being carmakers and do Michigan a real favor—lower in Zeus to declare the place a tax-free zone. End scene.

*Arthur B. Laffer and Stephen Moore, "Rich States, Poor States: ALEC-Laffer State Economic Competitive Index," American Legislative Exchange Council (2007), Washington DC. Page 15.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.