The Michigan Miracle: A Model for the 21st Century

Ideas in Action

“It’s the economy, stupid.” The slogan is as fresh today as it was during the presidential campaign four years ago that cost Republicans the White House. Why? Because, despite White House press releases to the contrary, the performance of the American economy in the 1990s continues to be of concern. The U.S. Commerce Department reports that the nation’s gross domestic product (GDP) expanded by only 2.3 percent in the first quarter of 1996. Stephen Moore of the Cato Institute observes that if the GDP sputters ahead at this pace through the year 2000—which is what most economists are forecasting—then the 1990s will go down as this century’s second poorest decade for economic growth and income growth. Only the 1930s were worse.

Further, the American middle class is feeling the pinch. According to the Bureau of Labor Statistics, real average weekly wages are 5.5 percent lower today than during the Reagan administration. As a result, many families are in debt. Spouses are entering the workforce to help make ends meet, and they raise total family income by about one-third. Yet these same families must pay almost 28 percent of their income to the federal government. In effect, mothers are having to work just to pay off Washington, D.C.

It is useful to put the burden on our families in historical perspective. Washington, D.C. has not always been so greedy. Back in 1954, the last year Republicans were in control of the White House and both houses of Congress, federal taxes amounted to less than the tithe to one’s local church—8 percent of total family income. Quite often both parents did not have to work unless they chose to do so. But that’s the point: Families were free to choose.

Given the tough going for many middle class families, our nation must ask: What is to be done? At the very least, we should take note of the ideas that do work. As National Center for Neighborhood Enterprise founder Bob Woodson says, “We must study success.” There is no better place to study success than in the states, those laboratories of democracy where ideas can be tested.

Perhaps no state in the 1990s has had more success in solving its economic woes than Michigan. The “old” Michigan of the 1970s and 1980s could have been the poster child of the “Rust Belt.” In fact, Michigan unemployment was above the national average for 192 months in a row (1978-1993). By contrast, it has been at or below the national average for the past 28 months. Now, we are being hailed as the center of the nation’s “Growth Belt.” A Wall Street Journal headline summed up the turnaround: “Go Midwest, Young Man!”

Under Republican leadership in the last five years, Michigan has made a dramatic turnaround by:

• eliminating a $1.8 billion deficit,
• balancing the budget five years in a row,
• cutting taxes an incredible 21 times,
• downsizing state bureaucracy while improving state services, and
• eliminating regulatory red tape.

Michigan is living proof that what the liberal establishment has decreed is impossible is possible. We aren’t just talking about “supply-side theory” anymore; we are talking about “supply-side success.”

One of our most popular and innovative projects is our newly established Office of Regulatory Reform, which in its first year has cut 1,000 obsolete, burdensome, and often contradictory rules and regulations from the rollbooks of state government. By the time you read this, 1,000 more will be on the chopping block.

Of the 21 tax cuts in our first 60 months in office, the most dramatic was cutting school operating property taxes from an average 36 mills to 6 mills. This was the biggest tax cut in Michigan history, amounting to $3.6 billion. Associated with this cut is a cap that keeps assessments from rising more than the inflation rate. The effect? When I took office in 1991, our property tax burden was the third worst in the nation. Now, our property taxes are below the nation’s, and our average millage rate is the lowest it has been in three decades.

We also axed Michigan’s erstwhile “intangibles tax” because it was really a capital gains tax, and as such, it had a serious negative impact on savings, dividends, and investment. When we first proposed cutting this tax, liberals went on the attack. Across the state, slanted newspaper, magazine, and television editorials accused Michigan Republicans of trying to help the rich at the expense of the poor and the middle class. They failed to mention that one of their patron saints, President John F. Kennedy, supported tax cuts because, he said, “a rising tide lifts all boats.”

But it is reality, not rhetoric, that has proved the liberals wrong. Here is what Michigan’s real-life experience has demonstrated: When citizens pay lower taxes on dividend income, they invest more. Their investment pumps more money into the economy and spurs banks to cut interest rates, since there is more cash chasing new projects out there. When the cost of borrowing money is cheaper, manufacturers not only create more jobs and hire more workers but they can buy better equipment, which increases productivity. Greater productivity results in lower costs for consumers and higher wages for workers.

Have Michigan’s 21 tax cuts helped or hurt our economy? You be the judge:

• For three years, Michigan has led the nation in wage increases.
• For the past two years, our unemployment rate has been consistently lower than the nation’s for the first time in a quarter of a century.
• In 1995, one of every five new manufacturing jobs in America was created in Michigan.
• Michigan is now widely acknowledged as the high-performance heart of America’s heartland.

Ever since the Reagan Revolution, liberal journalists, economists, and politicians have tried to convince Americans that tax cuts are “wacky” and doomed to failure. But in Michigan we have tried them, and we know this: Tax cuts not only work; they work wonders.

Laboratories of Democracy

The states have been called “laboratories of democracy” for good reason. As I indicated earlier, they are the proving grounds for ideas. Compared to the federal government, they are more responsive to the electorate, more efficient when it comes to fulfilling legitimate government functions, more flexible when it comes to trying new approaches, and—let’s all cheer—more economical. But for decades now, the states have lost out to an increasingly unresponsive, inefficient, inflexible, and expensive bureaucracy in Washington, D.C. One reason is that this bureaucracy is able to confiscate more and more tax dollars to finance its power grabs.

This confiscation isn’t just about the loss of money either. It is about the loss of one of the most precious resources of all: time. Currently, the Internal Revenue Service estimates that Americans spend about 1.7 billion hours on tax-related paperwork by the time their returns are completed. Businesses spend another 3.4 billion hours. As Arizona Senator John Kyl has observed, “If that is not evidence that our tax code is one of the most inefficient and wasteful ever created, I do not know what is.”

Restoring money, time, and authority to individual citizens is called “devolution.” Its agenda is twofold: First, Congress must balance the budget and reduce taxes. Second, in welfare, Medicaid, job training, and education, Congress must free the states. It must send revenues back, hold us accountable, and judge us by one criterion—performance.

Welfare Reform

The states will do far better by their citizens than the federal government. How can I be so sure that there won’t be a “race to the bottom” once devolution is set in motion? I am sure because I have seen what has already happened in Michigan. “Exhibit A” is our state’s extraordinary progress in the area of welfare reform:

• Because Michigan requires recipients to work, over 89,500 Michigan families have moved from a welfare roll to a payroll.
• Welfare caseloads are lower in our state than they have been in two decades.
• In Michigan, almost one in three recipients of Aid to Families with Dependent Children (AFDC) is working; nationally, only one in 12 is working.
• Abstinence, not “safe sex,” has become the focus of our state campaign to deter teen pregnancy and single motherhood.

Education Reform

The states are also our best hope for genuine education reform—reform that is desperately needed. Each year, America spends almost $300 billion on education. A student who graduates from a Detroit public school represents an investment of $75,000—that’s how much taxpayers spend on his elementary and secondary education. Yet there is good evidence to suggest that many of our graduates are illiterate, and others can only read at a 4th-grade level. It is no wonder that today’s businesses are forced to spend an additional $30 billion—in effect, a 10 percent surcharge on what has already been spent—on remedial education for their employees.

Michigan’s answer is to improve public schools by introducing market forces that will give families more freedom of choice and inject competition into a monopolistic system. In 1993, the Michigan legislature passed one of the best charter school laws in the nation. In the last three years, more than 40 charter schools have opened their doors. As a result, our state has the third highest number of such schools in the U.S. The demand to enter these schools is proof positive of parents’ desire for more choice. The effect is already being felt. One school superintendent told me that the mere possibility of charter schools in his district was encouraging reform throughout the system.

Why is the fight for more school choice and educational quality so important? A recent University of Michigan survey shows that the Big Three will hire as many as 129,000 new workers in our state by the year 2003. They don’t need strong backs to do their jobs—they need strong academic skills. Our choice is stark: We either train young people in Michigan today or we lose jobs in Michigan tomorrow. It is that simple. We must do better and we must establish benchmarks for our neighborhood public schools in order to know what the best schools look like and how they get the job done. We must reward excellence and foster competition. And we must make sure our schools measure up to parents’ standards and traditional, time-tested values.

Our Moral Patrimony

Above all, we must find ways for all our state governments to help strengthen our moral patrimony. Only if we are a moral people can we be a free and prosperous people. The 18th-century philosopher Adam Smith made this point forcefully in The Wealth of Nations and A Theory of Moral Sentiments. So, too, have 20th-century writers like economist Ludwig von Mises in Human Action and historian Russell Kirk in The Roots of American Order.

But the wisdom of the ages reveals that our moral compass cannot ultimately come from Lansing or from any other state capital, any more than it can come from the nation’s capital, or Hollywood, or the United Nations, or some abstract liberal conception of the “Village.” It comes from deep within us—it comes from our character, which is forged in our families and our faith and tempered in the arena of decisionmaking and action.