As this year’s presidential, congressional and gubernatorial elections approach, the American public can expect a political debate filled with promises to enhance economic growth. As voters weigh the merits of the various proposals, they should consider which policies have worked well in specific states, and whether those successes have lessons that can applied elsewhere. In particular, the case of Michigan shows how smart policy reforms can help turn even an economic basket case into a healthy success story.
Before turning to describe Michigan’s economic turnaround, it’s important to emphasize just how dire the situation in the Wolverine State was just a few years ago. Michigan’s economy barely grew at all between 2000 and 2007, and then actually shrank considerably when the Great Recession decimated the economy of the Rust Belt. To call the first ten years of the century as a “lost decade” for Michigan would therefore be an overly rosy take on the state’s economic performance.
In the years following the Great Recession, however, all that has changed. In 2010, Michigan’s economy grew sharply — a predictable rebound following the deep recession.
What was less predictable, however, is that Michigan’s economy would continue to grow strongly in the following years. In fact, after adjusting for inflation, Michigan’s economy grew at an average annual rate of 2.1 percent between 2011 and 2014. This was faster than the U.S. average of 1.9 percent. Given that the Michigan economy consistently lagged the broader U.S. economy in terms of economic growth for a full decade prior, this represents a remarkable change in the state’s economic performance.
The return of sustained economic growth to Michigan brought more jobs to the state and helped push down its chronically high unemployment levels. From 2003-2010, Michigan’s unemployment rate was consistently one to three percentage points above the national average. Once growth returned to the state, that changed and between 2011 and 2014, Michigan’s unemployment rate has closely tracked the national rate.
Michigan’s economic turnaround was driven largely by a resurgence of its once seemingly moribund manufacturing sector. The state experienced significant growth in real manufacturing output as well as manufacturing employment during the 2011-2014 period.
So why did Michigan’s economy turn around after such a lengthy period of poor performance? The world is a complex place and it is always difficult to isolate cause and effect, but it is noteworthy that the state’s return to consistent economic growth occurred at the same time as the state was in the process of implementing an ambitious economic reform agenda immediately following the election of Governor Rick Snyder. The policy changes included:
#1. Right-to-work legislation (signed in 2012 and taking effect in March 2013). “Right-to-work” legislation means that workers in the state cannot be compelled to financially support unions in their workplace as a condition of employment.
#2. The replacement of the complex and onerous Michigan Business Tax (MBT) with a simpler and lighter flat corporate income tax of 6 percent, effective January 1, 2012. This reform caused the Tax Foundation to note in its 2012 ranking of U.S. states: “This improved [Michigan’s] overall rank from 18th to 12th best, and their corporate ranking from 49th to 7th best.”
#3. Sharp budget cuts in fiscal year 2012, and only modest growth in total state spending since then. This spending restraint helped the state government rebuild its budget “stabilization fund” and put public finances back on firmer footing.
These pro-growth policy reforms were dismissed as reckless and economically destructive by the critics at the time, but the data clearly shows that the economy has performed much better since their passage than it had in the years before.
As voters parse the political promises this election cycle, they should subject different policy ideas to close scrutiny, and ask which of them have actually been successfully implemented elsewhere in the country. Remarkably, Michigan, which for so long was an economic laggard now stands as an example of successful policy reform that deserves careful attention from politicians and voters from coast to coast.
Ben Eisen and Robert Murphy are co-authors of the recent study “Ontario vs Michigan: Policy Lessons from the Wolverine State,” published by the Fraser Institute.