High taxes can spur growth?

The headline caught my attention: “MSU researcher says high taxes can spur growth.”

The source—MSU’s bulletin of events and news—went on to say that the researcher found that “cities with high taxes and spending on public infrastructure and welfare … tend to experience more commercial growth.” On its own, such a statement might be simply a statement of the fact that vibrant cities will see both tax revenues and spending rise as growth occurs, although it seems to get the causation backwards. But the article suggested that the author’s point was different: the argument about taxes and growth was offered as a defense of high tax policy. The latter claim sounded wrong to me, so I went to see what I could make of it.

Igor Vojnovic's article, “Government and urban management in the 20th century: policies, contradictions, and weaknesses of the New Right,” was published in GeoJournal last December. Vojnovic is a professor of geography at MSU. Turns out that the article has little to do with the relationship between tax levels and economic growth: most of its thirty pages is a critique of neo-liberalism as a philosophical framework for urban development. While I could spend time on Vojnovic’s rather confused understanding of both neo-liberalism and its alternatives, my point in pursuing his argument was to see how he could be lead to believe that high taxes could led to economic growth. So I’ll stick to that argument here. We finally get to the point on page 19. Vojnovic summarizes the claim he is making this way: “Simply, U.S. cities that follow the minimal government strategy are not ranked as top private corporate investment destinations. The urban regions that attract private capital, in terms of concentrations of multinational headquarters and first-level subsidiaries, maintain some of the highest taxes and social service expenditures in the country.”

The leap of logic here confuses me. High taxes and social investment spur growth because urban areas that attract the head-quarters of large corporations and their major subsidiaries have high taxes and significant social investment? What does the presence of the head-quarters of large corporations have to do with economic growth in a region? And perhaps even more importantly, how is economic growth related to the decision of such corporations to set up new office locations? Few companies make significant location or relocation decisions each year (about 6%, if our research can be believed). No location or region could depend upon such relocations as the foundation for economic growth!

Most “commercial” growth, in fact, occurs among small- and medium-sized companies (note that commercial growth does not necessarily translate into growth in per-capita GDP, which is our usual measure of economic growth). Those companies often experience double-digit rates of growth as they go through the early stages of their life cycle. Their growth is quite sensitive to rates of taxation, and often do not depend upon the levels of what Vojnovic calls “social investment.” They tend to be driven by pragmatic issues: proximity to the relevant portion of their supply/value chain; access to human/intellectual capital; etc. Large centers get their share of these companies because of these issues, despite their disadvantageous tax environments! In short, Vojnovic has put the proverbial cart before the horse.

So should we adopt high taxes with correspondingly high levels of social investment to rebuild prosperity in Michigan? We already have relatively high taxes, so that is a moot point! What we need, however, is an environment conducive to the growth of innovative and entrepreneurial companies, regardless of their location within the state. Vojnovic’s development strategy is not helpful for that purpose.

Raising barriers isn't 'Fair Trade'

The following appeared Sunday, 5 August 2007 in the Lansing State Journal: LSJ Link

Michigan’s future hinges on the decisions we make in the next few months regarding … trade. You were expecting me to say union contract negotiations?

As important as those, and a variety of other issues are, the possibilities of punitive tariff threats against China by the US Congress tops my list. That’s why I recently signed a petition that was released in the Wall Street Journal on August 1 opposing the proposed tariffs.

There are those in the state who think that trade is a zero sum proposition: if China gets more, we get less. If our traditional industries aren’t winning, we must be losing. They argue that it is only fair to prevent further expansion of trade with China. Making trade “fair” is their mantra; and punitive tariff protection is the means they want to employ.

The problem with the “fair trade” mantra is that what they are calling for really isn’t fair. The expansion of trade with China has led to more affordable goods for ordinary Americans and Chinese, higher productivity in both countries, expanded opportunities for businesses in both countries, and a higher standard of living for both countries. Cutting off that trade would hurt us all. The biggest losers would be those without the political clout of the advocates of “fair trade”—small and medium size businesses, individual households, and ordinary citizens and businesses in the other country that don’t get to participate in our political process. That just wouldn’t be fair. Trade with China, India and the rest of the world has been, and continues to be, a win-win proposition.

The fair trade advocates will tell you that increased trade has taken jobs in traditional Michigan industries. But those industries thrived until we forgot that innovation and expanded opportunities through trade were the keys to their success. Michigan once supported a vibrant entrepreneurial culture which competed with the world and built industries that were strong because they were good at what they did. They won, but they did so because they created value for everyone affected by their industries. We need to regain their vision of creating value for the world, knowing that in the process, the value we need will be returned to us as well.

Fair trade advocates will tell you that free trade is fine as long as the playing field is level. But the reality is that the playing field is never level; various policies create barriers, as do simple things like geography and education. It is free trade, not “fair trade” that provides the greatest range of opportunities to overcome those obstacles.

Free trade promotes innovation, entrepreneurial activity, the efficient use of our resources, and prosperity. We need to resist the call for a return to “beggar thy neighbor” policies and instead promote free trade, innovation and prosperity.

Economists speak out about protectionist sentiments

Over 1,000 economists put their names to the following petition. A full-page ad ran in today's Wall Street Journal, along with an editorial by Pat Toomey, the president of the Club for Growth (sponsors of the petition). MCIEP co-director Ross Emmett was one of the signatories. The actual number of signatories was 1,028: the same number that signed a petition asking Hoover to veto the Smoot-Hawley tariff in 1930.

We, the undersigned, have serious concerns about the recent protectionist sentiments coming from Congress, especially with regards to China.

By the end of this year, China will most likely be the United States' second largest trading partner. Over the past six years, total trade between the two countries has soared, growing from $116 billion in 2000 to almost $343 billion in 2006. That's an average growth rate of almost 20% a year.

This marvelous growth has led to more affordable goods, higher productivity, strong job growth, and a higher standard of living for both countries. These economic benefits were made possible in large part because both China and the United States embraced freer trade.

As economists, we understand the vital and beneficial role that free trade plays in the world economy. Conversely, we believe that barriers to free trade destroy wealth and benefit no one in the long run. Because of these fundamental economic principles, we sign this letter to advise Congress against imposing retaliatory trade measures against China.

There is no foundation in economics that supports punitive tariffs. China currently supplies American consumers with inexpensive goods and low-interest rate loans. Retaliatory tariffs on China are tantamount to taxing ourselves as a punishment. Worse, such a move will likely encourage China to impose its own tariffs, increasing the possibility of a futile and harmful trade war. American consumers and businesses would pay the price for this senseless war through higher prices, worse jobs, and reduced economic growth.

We urge Congress to discard any plans for increased protectionism, and instead urge lawmakers to work towards fostering stronger global economic ties through free trade.

SBAM Expert Named to Entrepreneurship Board at MSU

News Release
Date: Apr 9 2007 10:26AM


SBAM Expert Named to Entrepreneurship Board at MSU
(SBAM: Small Business Association of Michigan)


Mark H. Clevey, vice president of SBAM’s Entrepreneurial Development Center and one of the nation’s leading experts on small business entrepreneurialism, has been named to the Board of Directors of the Michigan State University, Center for Innovation and Economic Prosperity (James Madison College).

Operated under the directorships of Dr.’s Brian K Ritchie and Ross B. Emmett, the Center calls for government to release the “entrepreneurial spirits of the private sector” to productively invest in the creation of an entrepreneurial culture in the state. The Center is built on four core strengths: the union of undergraduate teaching and research; a comparative political economy perspective, a focus on technology and innovation; and an applied public policy orientation

Clevey has over 30 years of successful experience in fostering economic development through robust entrepreneurship. As the previous director of Michigan’s “SBIR Support Program,” Clevey won several national and state awards for excellence, innovation and entrepreneurship. Of particular note was the “Tibbetts Award” for hosting the first conference in the nation (“Winners Conference”) focused on economic development through the robust commercialization of federally funded research by small business entrepreneurs in collaboration with Michigan universities and colleges. Clevey has also served as an SBIR/STTR Phase II Commercialization Plan reviewer for the National Science Foundation, Environmental Protection Agency and the U.S. Departments of Agriculture and Energy and a Business Plan Reviewer for the NIST Advanced Technology Program.

Michigan State students to unveil policy solutions for Michigan’s economy at the capitol

Official copy of Michigan State University Press Release

April 18, 2007

EAST LANSING, Mich. — The phrase “Michigan is in need of an economic turnaround” may seem like an obvious statement for which there is no easy solution.

That’s why a group of Michigan State University students has been hard at work coming up with a policy resolution that could be the cure for what’s ailing the state and which they will present at the capitol. The event will be held in the hallway of the second floor on the Senate-side of the Capitol Building from 11 a.m. to 2 p.m. on Wednesday, April 25.

At the beginning of the semester, students in the James Madison College’s Michigan Futures in the Global Economy research seminar were charged with the task of studying the state’s economic climate and key industries. They will present some of the policy solutions they believe can pull Michigan out of its economic slump and open the doors to businesses, especially high-tech startup companies.

“We hope to urge Michigan policymakers to acknowledge that Michigan's economy is in a state of crisis. Our research on key Michigan industries has led us to believe that our state needs to make the transition from old-world manufacturing to a new, high-technology economy of today,” said Amy Fredrickson, an international relations senior in the research seminar.

“Our resolution lists various policy recommendations based on our research to help turn this state around. We hope to gain support for our resolution by having interested parties sign the document,” she said.

The students’ research materials will be available to the public during their visit. These include copies of the resolution, executive summaries of industry reports, brochures for the Michigan Center for Innovation and Economic Development and one copy of each full industry report.

“Knowledge of how Michigan's high-tech sectors compare with similar sectors in other countries and other regions of the United States is crucial to our ability to understand both the challenges we face and the opportunities we may take advantage of as we continue to develop our new economy,” said Ross Emmett, a James Madison professor and co-director of the Michigan Center for Innovation and Economic Prosperity.

“The research the students have undertaken in the seminar is a large step toward providing that knowledge in a framework that can be used by entrepreneurs, industry leaders and policy makers,” he added.

The Michigan Futures seminar is the first applied public policy undergraduate research seminar in the state of Michigan. It is a core activity of the Michigan Center for Innovation and Economic Prosperity at MSU that explores the industries and policies that will propel Michigan into the 21st century economy.

Michigan Futures research seminar goes to Lansing

On Wednesday, April 25th, the students in the Michigan Futures in the Global Economy applied public policy research seminar went to the State Capitol to talk with legislators and their staffs about policies that would help transform Michigan's economy.

On the previous day, April 24, the students were featured on Michigan Radio (NPR) during drive time. You can listen to the podcast of the feature. The feature was picked up by a couple of other Michigan NPR stations.

Is Michigan a Third World Country?

By 1972 Singapore was in real trouble. Independent for just 13 years, it had failed to merge with Malaysia and, worse yet, the British Army, a major source of income, was going home. If something didn’t change dramatically, and soon, Singapore would cease to exist.

What does this have to do with Michigan? A few weeks ago I went to Detroit for the first time to see the Tigers play. My impression of Detroit was that it was in worse shape than many of the developing countries I had worked in as an executive for several different computer companies and now as an academic. To put it bluntly, Bangkok, Kuala Lumpur, Seoul, Taipei, Shanghai, and other Asian cities were rapidly eclipsing Detroit in terms of wealth and progress. Except for the area around Comerica Park, I saw mostly abandoned buildings, decaying infrastructure, and little if any sign of economic life.

Recent statistics reflect this general malaise. Michigan has the highest unemployment in the nation and Detroit the highest rate of poverty in a metropolitan area. The auto industry, the backbone of Michigan’s economy, seems hopelessly lost in an uncompetitive squeeze between unproductive labor policies promoted by out-of-touch unions on the one side and stale designs and tardy engineering fostered by unimaginative and risk averse executives on the other.

What can we do to reverse this slide and reclaim our position as an economic leader? Governor Granholm has suggested a classic Keynesian idea to invest $10 billion in our infrastructure to create jobs and demand that will jumpstart the economy. But if such infusions are not coupled with higher productivity and output over time, the result will be a one-time economic boost that will soon fall back into prior levels. Knowing this, the Governor plans attract high-tech firms and highly skilled people to “cool” cities. The problem, however, is the difficulty of matching supply and demand. Why do high-tech firms come if there are no well-trained people? And why to well-trained people remain if there are no firms? It’s certainly not because of Michigan’s mild winters, ocean beaches, or mountain skiing.

To solve this problem we need to take a page from the history books of successful developing countries. Last week I presented a paper on how Singapore simultaneously created highly skilled people and attracted high-tech companies. After my presentation, a well-known colleague inquired if I had ever applied my research to Michigan. To be honest, I had never considered it. But as he talked I saw the potential application: globalization and an increasingly complex and technical international economic system is driving the primary location of competition to the state level. Michigan is not competing only with other states. Michigan is competing directly with Singapore and every other developing country. If true, why not act like these other countries?

Singapore’s success in the world economy has come from a mixture of technocratic and bureaucratic professionalism, strong political leadership, and active private sector participation. And by participation I don’t mean simply consultation. Heads of companies, leaders of unions, and leading academics have all taken turns directing the entire public policy process in key economic areas including forming, implementing, monitoring compliance, and ensuring enforcement of policy. The key to making this work is tight coordination between the private sector and government—not government as a regulating force, but as a facilitating one.

In many ways Michigan is at the crossroads that Singapore was in 1972. The cash cow industry that we have depended on for so long is floundering. Our economy is overregulated, our workers underproductive, and our industries less than innovative. What we do next will determine whether we compete successfully in the global economy or whether we continue our slide into underdevelopment.

New Horizontal Thinking

A few months ago I suggested that saving, and even creating, new jobs in Michigan might not be in our best interest if they did not promote our transformation into a third-stage, upgrading economy. I’d like to push this assertion even farther by arguing that to survive, yes survive, we need to become a community of innovators.

How do we do this? It may be helpful to apply insights from the theory of evolution to the question. In a very simple form, organisms that adapt to new circumstances survive. Those that don’t, don’t. But some biologists suggest that in fact evolution is not a linear process. Instead, critical events lead to “punctuated equilibria” in which massive changes create entire new paradigms. Organisms that survive must change rapidly to survive. Then a period of stasis follows in which change happens primarily at the margins until the next critical event.

Economics might also work this way. Relatively long periods of stasis as one kind of economy gives way to another relatively rapidly. Interestingly, the period of stasis between critical events and the time it takes to move to a new paradigm have both shortened dramatically over time, putting increased pressure on firms, individuals, states, and countries to change ever more quickly.

We in Michigan are now facing just such a transformation. For almost an entire century we’ve benefited from a vertical agglomeration in a few industries, especially autos and agriculture. But then over a few short decades, the international economy changed. Oh, we knew changes were happening, but we didn’t really appreciate what they meant to us. Changes in consumer tastes, market access, technological capabilities, and foreign competitive capacity, among other things, have critically altered our system of wealth creation. So, what do we do next?

The answer is to strategically abandon our old economy and create a new one. Note the word strategic. We need to take our old, vertically integrated of manufacturing and turn it into a new, horizontal of innovation and capacity that can be applied to numerous industries and at numerous points in the production process.

In this new economy, value and wealth are created in the design and research phase. Agglomerations and linkages are based on talents, skills, knowledge, and capacity, most of it scientific. Centers of innovation emerge that produce knowledge applicable to numerous industries simultaneously. Industries are then linked horizontally: new generation automobile engines lead to alternative energy, which leads to advanced agriculture, which leads to pharmaceuticals, which leads to medical technologies, etc.

The same change can also be applied to humans. Global changes demand that unions remake themselves to be pertinent in this new economy. For example, in Singapore organized labor leads in training and skills development, recognizing that increased pay MUST be tied to productivity gains, not collective bargaining.

These changes undertaken in response to a shifting global economy will attract similar capacities, skills, knowledge, and capital. We must again become a capital, but one that produces ideas rather than cars.

An open letter to the governor

February 9, 2007

Dear Governor Granholm,

I listened with great interest to your state of the State address. I was pleased to hear you talk of investment, as indeed, investment is the ONLY variable correlated with economic growth and development over time. I was also pleased to hear you talk of encouraging high-tech, high-innovation business creation, since the type of investment also matters greatly. In short, I believe you have identified the key areas for success.

Yet despite moving in the right direction, I wonder if you really grasp the seriousness of our current situation and the height of the obstacles facing us. Historically, former economic powerhouses that fall from the top rarely, if ever, regain their former position. Two things prevent a recovery. First, the government assumes the entire burden of change. And second, (ironically) the government doesn’t do enough to change entrenched institutions and vested interests that would encourage the private sector to invest.

My experience in the United States as well as Thailand, Singapore, Malaysia, Indonesia, the Philippines, Korea, Taiwan, and Japan is that governments have a key role to play in economic development and growth. This role, however, is not to do everything themselves, but rather to release the entrepreneurial spirits of the private sector to invest productively. Some may lament our current economic vulnerability, but new research suggests that such vulnerability spawns creative responses that may in fact lead to long-term progress. Whether we release and channel appropriately our entrepreneurial spirits depends on policy and institutional choices we make now. I would suggest the following ideas.

Prioritize investment from a broad range of sources and in a broad range of activities. Your investment priorities, primarily in human capital, are too narrow and too state centric and ignore the importance of private-sector participation.

Refocus your economic plan on business creation rather than job creation. Focusing on jobs will lead you to make short-term decisions that may be detrimental to long-term growth. Focusing on jobs does not take into consideration externalities. In many cases the five person high-tech firm will be far better for our economic health in the long term than a 1,500 person transmission plant. I realize the latter is far better politically, but it is increasingly not better economically.

Emphasize and support entrepreneurialism and innovation. I applaud your willingness to "go anywhere and do anything" to bring businesses to Michigan. But the reality is that only a very small number of firms actually move locations, for any reason. The number is less than 6% per year. So, although this effort will be important, it is far more vital that we encourage entrepreneurship and innovation within our communities. We must create the new firms, just like Henry Ford did, that will power our economy into the future. As new firms form and naturally coalesce into industrial agglomerations, other firms will move into the state to join them. Medical equipment, insurance, financial services, pharmaceuticals, transportation R&D, and alternative energies are only a few of the industries that have begun to grow and might thrive in Michigan. The MEDC, universities, economic development agencies, smart zones, etc., should all be focused on generating innovation both in new firms and through expansion of existing firms.

Focusing on entrepreneurship also addresses a problem not touched upon in your address. Although we certainly need to improve the level of education for Michigan students, we are currently losing a large portion of our college educated 20-29 year olds every year. In my senior seminar I teach at James Madison College and MSU, every student for the past 3 years is leaving the state for employment reasons. The answer here is not to create cooler cities (like jobs, cool cities are an outcome, not a cause), but to create companies, and even better, help students create companies. What a great opportunity we have in our university system to not only provide an education, but to help in the application of the education to bettering our communities and society.

Next, quit playing the unfair trade card. While some of the accusations may be true, there is little we can do from a state perspective and, far more importantly, it matters very little for the industries of the new knowledge economy. This is also true for the criticism the political right often makes about labor, regulation, and taxation. All of these variables are far more important in the old economy than in the new and should be de-emphasized.

Now, that said, taxes are a direct incentive for industry. Fewer business taxes mean that more money can be invested. But it doesn’t guarantee that it will be. From my perspective, you should move as many of the taxes as possible to final consumption. Ideas for “service” taxes and “beer and soft drink” taxes for example, are an excellent way to generate income from consumption. Although we need consumption for our economic health, less consumption is not always bad, especially if the surplus is saved and invested. The key is to provide concomitant incentives to invest surplus. I would counsel you to lower business taxes while increasing consumer taxes and simultaneously providing incentives to invest surplus.

Finally, to return to our entrepreneurial roots will require significant reform of existing institutions. I mentioned above that regulation, labor, and taxes should be de-emphasized. But the institutions they have created should be dramatically reformed. Incentives that will help K-12 and university education cooperate with labor and business to improve skills, create knowledge, and then transfer and disseminate that knowledge will add to our competitive advantage.

Governor, I realize that the task ahead of our great state is a daunting one. But greatness never emerges in times of ease. I have been encouraged by the new direction you are taking and I hope you’ll make decisions that are more economically and socially correct than politically correct. But with challenge comes opportunity. As best exemplified by one of my favorite politicians, Harry Truman, now is the time to speak and do the right thing.

Sincerely,

Bryan K. Ritchie

Co-Director
Michigan Center for Innovation and Economic Prosperity
Associate Professor, International Relations
James Madison College 302 Case Hall
Michigan State University
East Lansing, MI 48824
(517) 353-8614
(517) 974-1353
ritchieb@msu.edu
www.msu.edu/~ritchieb

Michigan must nurture innovators and ideas

A shorter version of the following appeared in the Lansing State Journal on Sunday, March 18, 2007.


Comerica’s decision to move its headquarters from Detroit to Dallas is one more piece of bad news for the state. But what does it mean? Are we to surmise that the tax environment remains too onerous for business, despite the elimination of the Single Business Tax at the end of 2007? Although Texas ranks 6th, and Michigan 27th, on the Tax Foundation’s State Business Tax Climate Index for 2007, Comerica’s CEO Ralph Babb, Jr. did not cite taxes as a major reason for the move. And he’s probably right, at least about the fact that taxes did not prompt the company to leave Michigan. Research we have been conducting in the Michigan Center for Innovation & Economic Prosperity suggests that the tax environment is not the key deterrent to business activity in Michigan by state residents; there are enough other obstacles to overcome! But our research does suggest that companies considering moves to Michigan do consider the tax environment an obstacle. One could say the following about Comerica’s decision: the company left Michigan for business reasons, but Texas’ low tax environment made it an attractive location relative to the company’s other choices. Comerica’s other major markets are Arizona (ranked one spot behind Michigan at 28th), California (ranked 45th), and Florida (ranked 5th). Texas may have won because it provided a low tax environment close to the majority of the company’s customer base.

But saying that taxes didn’t matter to Comerica’s decision to leave Michigan doesn’t let the state off the hook! Comerica is a financial services company, and thrives when it operates in an environment where people are starting up new businesses and existing companies are growing. Comerica can find funds anywhere (notice, it will keep its branch facilities open in Michigan), but its company operations need to be near its commercial and investment customers. And they, in turn, need to be in a location conducive to business startup and expansion. Michigan’s bureaucratic and regulatory structure right now is not designed promote entrepreneurial activity. And that needs to change.

The state’s economic focus continues to be jobs, jobs, jobs. I understand the motivation behind that focus, but it needs to shift. We need to focus on creating an environment conducive to innovation and to encouraging companies to serve customers around the world. The focus on jobs comes from the old notion that capitalism is about the accumulation of capital and the employment of labor. We assumed for decades that economic growth in Michigan was built on wedding the capital of companies like GM and Ford to our labor. Instant prosperity. Except that it wasn’t their capital and our labor that were the real keys to that prosperity. It was their innovation and the world’s demand. Innovation is about people having new ideas about how to use things. Increased demand is also about people having new ideas about how to use things. In short, the economy is not first and foremost about capital and labor: it is about people, ideas, and things. Thomas Edison, Henry Ford, Ransom Olds, and the Kellogg brothers understood that. We somehow forgot it along the way, settling instead for jobs, any jobs.

How do we move as a state from a conception of economic development built upon the old economy to one that helps people find new ideas and new ways to use things? We need to streamline the process of business startup and expansion: reducing the confusion of paperwork and office-jumping would help; a real one-stop shop would be even better. We need to stop trying to pick “winners” (companies that will provide lots of jobs in Michigan) and provide an incentive structure that encourage Michigan entrepreneurs to devote their activity to serving customers around the globe. We need to facilitate the interaction of entrepreneurs and innovators in our universities with entrepreneurs and innovators in the private sector. Perhaps most of all, we need not only to upgrade our children’s education, but connect them more often to activities of private sector businesses and non-profit organizations so that they can become people who have new ideas about how to use things.

Profs, students study Michigan’s economic future in research seminar

The link provides access to an article in MSU's News Bulletin about the "Michigan Futures in the Global Economy" undergraduate applied public policy research seminar that Professors Emmett and Ritchie run. More information about the seminar can be found at the seminar's web site.