Brief commentaries and opinion pieces on issues of the day. Published periodically, sometimes in conjunction with Michigan Roundup.

Written by various staff members.

The Best of Times: A Review of the 1980s’ Market Boom - January 16

January 16, 1998

The Best of Times: A Review of the 1990s’ Market Boom

On July 16, 1997, the stock market reached historic highs when the Dow Industrial Average broke past 8000. Even after a 554.26-point (7.2 percent) correction on October 27, the Dow is performing strongly and has almost reached its previous record level. Currently around 7600, the Dow is more than 350 percent higher than it was only seven years ago when it hovered around 2200.

Despite the October 27th plunge, both pessimists—those who think the bull market is coming to an end—and optimists—those who think a bear market is years down the road—agree on one thing: The Dow’s surpassing 8000 is a remarkable event. The question, however, is, what forces are behind it?

According to some gurus, the market splurge is like “Wile E. Coyote running off a cliff while chasing the Roadrunner;” the market is churning its legs furiously, but there’s nothing beneath it. In other words, the Dow is high because stock prices are inflated way beyond fundamentally justified prices. There is no good reason for the Dow to be at 8000, and even Federal Reserve Chairman Alan Greenspan warns against “irrational exuberance,” which occurs when investors look to cues from one another when buying stocks rather than basing their decisions on sound economic principles. Sooner or later, pessimists argue, the market is going to come down—with a crash.

Others say the Dow is legitimately high, particularly because the 1990s’ economy is different from that of past decades. First, corporate earnings are strong, and as long as this continues to be the case, the stock market will remain strong as well. Also, employment is high, productivity is up, and inflation is low. In fact, unemployment, which is around 5.4 percent, is below what economists traditionally consider “natural,” or the level it should be when the economy is performing at its best. Furthermore, baby boomers, who make up the largest segment of the labor force, are in their prime productive years, and their capacity to generate goods and services is aided significantly by their use of advanced technology.

High employment, however, can occasionally be bad news for the stock market. When workers are in demand, employers often must increase wages to attract new employees. The more employees are paid, however, the more producers must raise the price of goods; such wage-driven inflation has devastated the market in the past.

For example, inflation is the force that killed the stock market boom in the 1970s because it led to high interest rates, which are conducive to investing in bonds—not stocks. Inflation has remained in check during the 1990s, however, because wages have remained stable, productivity has increased, and demographic and global market forces are compelling producers to keep prices low.

Economists argue that wages have remained stable for two main reasons. First, employees are hesitant to seek raises because they fear downsizing. Although in the 1990s the proportion of workers who have been laid off has not been strikingly higher than in previous years, studies show that job security is among employees’ biggest concerns.

Second, a larger share of baby boomers’ income is going towards saving and investment, not consumption. In the 1980s, boomers—who account for almost 30 percent of the total U.S. population and started turning 50 years old in 1995 (at the rate of one every seven seconds)—were known as conspicuous consumers; they saved on average just over 3 percent of their income and spent the rest. By the time boomers reach age 45, they are saving on average 23 percent of their total income. If producers want boomers to continue spending money, prices have to remain low.

In addition to stable wage rates and the boomers’ newfound taste for investing, crashing markets abroad and free trade also have tamed inflation. The recent fall of Asian markets and the subsequent fall of markets elsewhere have made foreign products less expensive compared to U.S. goods. To compete, U.S. producers must keep their prices low. In addition, free trade with countries like Mexico—where goods can be produced at much lower cost and sold in the U.S. at prices that reflect this—compels U.S. producers to refrain from raising their prices.

Regardless of whether the booming stock market is a result of just investor “exuberance,” pessimists argue that the market’s climb cannot continue over time. They suggest that productivity will come to a standstill because the labor force, which grew by as much as 3.2 percent a year in the 1970s, will grow only about 0.9 percent a year in the next decade. According to the Social Security Administration, the labor force is expected to grow only 0.2 percent after the year 2020. Technology cannot make up for the declining labor force, argue pessimists, especially as boomers begin to retire in the next 15 years. Many also contend that stock values will begin a dramatic decline after 2011, when boomers start selling their retirement funds.

As for the short term, pessimists suggest that the October 27th correction is a sign of the market’s volatility; they suggest that investors who agree should begin to convert their stocks to cash to protect their investments. But optimists maintain that there is no clear evidence that a bear market is on the way; they argue that investors with a long-term horizon and steady nerves should welcome such volatility as a chance to invest further in the market—at a discount.

Copyright © 1998

Governor’s FY 1998–99 State Budget - February 20

February 20, 1998

Governor’s FY 1998–99 State Budget

by Robert Kleine, Vice President and Senior Economist

Last week Governor Engler released his budget recommendations for FY 1998–99. His general fund/general fund (GF/GP) recommendation of $8,772.7 million is up only 2 percent from FY 1997–98, the smallest increase he has recommended. The total budget recommendation of $31,992.5 million is up 3 percent, largely due to a 7.4 percent increase in federal funds. Of the $548.8 million increase expected in federal funds, about 88 percent is in four departments—Transportation, Community Health, Family Independence Agency, and Michigan Jobs Commission. Transportation is projected to receive a $200 million, or a 37.6 percent, increase, due in part to the increase in the gas tax, which will bring more matching funds to Michigan, and expected changes in the federal allocation formula.

The recommended increases for the major program areas are shown in the exhibit. The largest dollar increases are for law enforcement, school aid, and community health. Only six departments or program areas would receive an increase in excess of the projected inflation rate of 2.6 percent: Agriculture (12 percent), school aid (11.3 percent), Environmental Quality (7.1 percent), State (4.5 percent), Corrections (4.2 percent), and Attorney General (3.8 percent).

The large increase for Agriculture is due to a $3.5 million expansion of Project GREEEN (Generating Research and Extension to meet Economic and Environmental Needs), a joint initiative between Michigan State University and the Department of Agriculture designed to find solutions to preserve environmental quality while maintaining the safety of Michigan’s food supply.

Environmental Quality would receive an additional $5.7 million in GF/GP funds for cleanup of contaminated sites; this replaces a decline in restricted settlement revenues (from judgments against polluters). (The total budget recommendation for the department is down 1.9 percent from FY 1997–98).

The Department of State would receive additional funds for programs aimed at improving customer service.

The increase for Corrections is quite modest by historical standards. Most of the additional funds are needed to fully fund expansion of prison capacity for 1998 and to cover additional beds for 1999.

The above–average increase for the Attorney General would finance a Native American legal services program ($.24 million GF/GP) and updates in technology ($0.3 million).

The school aid budget includes an additional $22.9 million for school districts that choose to be part of a regional career preparation delivery system and a $17.8 million GF/GP increase in the supplement to the School Aid Fund. The total school aid budget is recommended at $9.1 billion, up 2 percent.

Reductions in FY 1998–99 are recommended for six departments or program areas. The largest is an $8.8 million, or 12.9 percent, cut for the Department of Treasury. This decline is due to the proposed elimination of the $10.2 million community policing program, an item just added in the FY 1997–98 budget. The total Treasury budget is up 1.8 percent.  The Michigan Jobs Commission budget is down 2.3 percent due largely to the replacement of $3.5 million in GF/GP monies with restricted funds to run the state’s 13 welcome centers. The total Jobs Commission budget is up 9.9 percent, with $30 million recommended for the new Welfare to Work program.

The most controversial recommendation is for higher education. The recommended increase for universities (including financial aid) was only 1.6 percent, and community colleges received no increase for operations (additional funds are proposed for financial aid and the Tuition Incentive Program). The administration’s rationale for this small increase is that (1) from 1990 to 1998, universities received an annual average increase of 3.9 percent, above the inflation rate of 2.8 percent; (2) several universities (Central Michigan, Eastern Michigan, Ferris State, Northern Michigan, Western Michigan, Michigan Technological, and Lake Superior) all have employees who are members of the Public School Employees’ Retirement System and will save a combined total of $6.2 million in retirement costs due to pension reforms enacted last year; and (3) community colleges will save $15.8 million in retirement costs due to the pension reforms, which equals a 5.8 percent increase in the appropriation (5.4 percent adjusted for a change in the payment schedule); the colleges also received a like amount of savings in the current fiscal year.

The FY 1998–99 budget assumes a moderate slowdown in economic growth. U.S. real Gross Domestic Product is expected to increase 2.5 percent in 1998 and 2.8 percent in 1999, down from 3.8 percent in 1997. Michigan real personal income is projected to increase 2.2 percent in 1998 and 1.6 percent in 1999 compared with 2.1 percent in 1997. Motor vehicle sales are forecast to remain flat in 1998 and 1999.

General fund and school aid fund revenue increased 4.7 percent in FY 1996–97. The forecast for FY 1997–98 is for a 4.3 percent increase before tax cuts and a 3.4 percent increase after tax cuts and adjustments. For FY 1998–99, general fund and school aid fund revenue growth is forecast at 3.8 percent before tax cuts and 2.9 percent after tax cuts and adjustments (amounting to about $315 million, up from about $143 million in FY 1997–98).

Copyright © 1998

Public Access to Michigan Waters - February 27

February 27, 1998

Public Access to Michigan Waters

by Keith Wilson, Affiliated Consultant

For almost 70 years, the Michigan Department of Natural Resources (DNR) has worked to assure some type of public access to Michigan’s navigable lakes and streams. Under the DNR’s Public Fishing Sites Program of the 1930s, walk-in sites were developed on vacant state-owned property and consisted of a graveled parking lot and a path to the water’s edge. The program’s budget was about $100,000 a year, most of which was spent on site maintenance. Since users were confined to a particular parcel of property with walk-in rights only, there was little opposition from local property owners.

Opposition increased, however, beginning in 1969 when the program became the Public Access Site (PAS) Program and allowed boating access to an entire lake or stream. Based on the doctrine that the waters of the state’s inland lakes are held in trust for public recreational use, the program obtains, develops, and maintains properties on inland lakes so that the boating public has access to such waters. With this change in emphasis, annual program operating expenditures leapt upward to their current level of about $8 million; almost all of the funding comes from taxes paid by recreational boat owners.

Opponents to public access are private property owners who dislike having to share use of the lake surface. Most will use every tool they can find to fight the placement of such a site on their particular body of water. One of the primary tools has been the Michigan Natural Resources and Environmental Protection Act, which requires that certain actions be taken before a site can be constructed, a process that often greatly delays site development. Another common tool is the use of local zoning ordinances, usually at the township level, which require local approval of site plans. This tactic always failed, however, because, according to the state Attorney General, the general rule of law was that the state was exempt from local zoning provisions. The DNR relied on this interpretation in its approach to purchasing and developing land for boating access sites. This rule of law was changed by a 1997 Court of Appeals decision in the case of Township of Burt v. Department of Natural Resources.

The case arose when the DNR purchased property on Burt Lake in order to construct a boat launching site. Local residents and riparian owners objected to both the site acquisition and the proposed construction, and the township agreed with them. After the acquisition process was completed, permits were applied for, a public hearing was held, and considerable cross-correspondence occurred, the DNR indicated its intention to proceed with construction of the proposed facilities (launching ramp, parking lot, entrance road, etc.). The township obtained a declaratory judgment in Circuit Court alleging successfully that the DNR had not complied with a township ordinance requiring it to submit its proposed plan to the township for review. The DNR appealed the case, and the Court of Appeals affirmed the lower court’s decision on December 30, 1997.

In the divided opinion, the Court of Appeals said that only the legislature could exempt the DNR from having to comply with township zoning ordinances and, after an extensive review of the various legal rulings relied upon by the DNR, decided that no such legislative intent could be established. As a result, the DNR must either comply with the ruling or appeal the decision to the Michigan Supreme Court in the hope it will be overturned. A third alternative is to seek support for legislation that would overturn the decision.

If the decision remains in force, it will deal a devastating blow to the DNR’s PAS Program and to all of its other recreation programs as well: All of the DNR’s various recreation programs that are statewide in scope will be subject to the whims of the zoning laws of any local government having jurisdiction over the property to be developed. The Court of Appeals says not to worry since “a zoning ordinance may not totally exclude a lawful land use where (1) there is a demonstrated need for the land use in the township or surrounding area, and (2) the use is appropriate for the location.” The problem however is that, the local zoning board makes these determinations.

The PAS Program already is regularly scrutinized because of the pressures brought to bear by local property owners. Governor Milliken, in the early 1970s, required the DNR to adopt program constraints, which in effect prohibited new sites on lakes of less than 100 acres except in special and rare situations. In addition, the DNR developed a system for identifying and prioritizing those lakes considered most desirable for new sites. This system relates the size and use of the lake to an artificial carrying capacity formula that determines the number of sites the lake can sustain and the size of the individual sites.

The legislature required the DNR to submit with its site acquisition funding requests a list of all the lakes in Michigan for which public access sites are proposed. This list, organized by county, can be reviewed by any legislator, who can then request that one or more lakes in his/her district be deleted. In a number of instances, legislators have deleted all lakes in an entire county.

Before a boating access site can be purchased, the lake on which it is to be located must be on the list of lakes approved for access site acquisition by the legislature. If such is the case, the DNR may purchase the site without further intervention by local officials and usually does so to protect the seller from being hounded or harassed by local property owners. Before the site can be developed, however, the DNR must secure the legislature’s approval of an appropriation of funds for that purpose. If the funds are approved, a permit from the Department of Environmental Quality (DEQ) is required; if the permit is contested, the DEQ must hold a public hearing.

The U.S. Army Corps of Engineers also has jurisdiction over construction on most of the state’s navigable waters and requires a permit. The Corps also can schedule a public hearing to receive input on the matter if it deems necessary. These procedures assure that the public has the right to address any and all issues raised by the proposed construction and requires the DNR to respond satisfactorily or propose changes that will address objections.

In view of this, what is the significance of the Burt Township decision? At the least, it appears the DNR will now have to prove to the satisfaction of local zoning boards that there is a need for a proposed project and that its construction is appropriate for the site. If local property owners object to the project, the process could be lengthy, time-consuming, and expensive because it is to the boards’ advantage to make it so if that is the only way a project can be prevented or slowed. This is because the issue usually isn’t where on a lake the site is to be located, but, rather, whether a site should be located on the lake at all.

In the Burt case, the township attempted to have the DNR locate the proposed boat launching site at a state forest campground already owned by the state. The DNR replied that the site already provided a launching ramp and parking for seven car/trailer units and was incapable of being further developed because of wetland concerns. In addition, the site is located on a shallow water bay that would require a 3,000-foot channel if any but the very smallest boats were to be accommodated.

The township pointed out that there were some 40 road-ends on Burt Lake, all of which could be used to access the lake. The DNR responded that such locations cannot be developed as boat launching sites because of their limited size and lack of parking space. As a result of other local complaints, the DEQ required the DNR to complete a littoral drift study, obtain bathymetric data, conduct a sieve analysis of dredged materials, prepare additional cross-sections and elevations of the site and proposed channel, complete a riparian survey, and analyze potential alternative sites. This was not adjudged to be enough, apparently, because the decision as to the location, design, and adequacy of the site was still being made by non-local permitting authorities.

The future of the PAS Program’s ability to increase access to inland lakes and streams is bleak. The Burt decision, if allowed to stand, will make it virtually impossible for the DNR to acquire properties because by the time (if ever) zoning officials are satisfied with the proposed facility, local property owners will either have purchased the property themselves or made the circumstances of the property owner so difficult that the offer to sell to the state will be withdrawn. This already has occurred under circumstances far less onerous to the property owner than those outlined above.

What the results will be to the state’s parks program, the trails program, the provision of shooting ranges, etc., is uncertain, but, obviously, these programs, if subject to local objections, will likewise suffer. The purpose of state programs is to provide recreation to the general public that they otherwise would not be able to enjoy. Making such programs subject to local zoning is the equivalent of putting the fox in charge of the chicken coop. The appointed or elected officials of the local unit of government are local residents, and it is these residents who are opposed to the use of local waters or land by nonresidents.

Copyright © 1998

Green Acres: Good for Business - March 6

March 6, 1998

Green Acres: Good for Business

by William R. Rustem, Senior Vice President

Michigan is in danger of losing its competitive advantage because of our current system of land use decision making and the publicly-funded subsidy system that encourages sprawl. In past decades, the Michigan legislature has placed about 70 local planning, zoning, and capital improvement statutes on the books. Because they were adopted independently, they differ in plan requirements, who implements them, and whether intergovernmental or interagency cooperation is expected.

More than 1,800 units of local government make planning and zoning decisions in the state. In addition, the legislature has created DDAs, LDFAs, TIFs, road commissions, school districts, EDCs, and countless other agencies charged by law with some function in determining how and where the face of the Michigan landscape is changed. These agencies are not required to coordinate their decision making.

In addition, our taxation system, state programs for building infrastructure, and government assistance programs help drive development outside of already-developed areas and into greenfields. This has led to helter-skelter development that threatens some of Michigan’s most important industries.

For literally decades, leaders in Michigan have emphasized the need to diversify the state’s economic base in order to reduce our dependence on the automobile industry. We have made great strides in that direction, but if we continue to scatter development across the state’s landscape, we threaten four land-based industries that provide precisely the kind of economic diversity we need so badly. These four industries are agriculture, tourism, forestry, and mining, all of which are absolutely dependent on land. To judge how important these industries are to Michigan’s economy, here are some facts:

  • Michigan’s 46,500 farms generate $4 billion in direct economic activity. That production value balloons to $40 billion in related economic activity each year. According to the Michigan Department of Agriculture, one of every eight Michigan jobs is linked to agriculture. It is our second-leading industry, and yet we are letting it disappear at the rate of ten acres every hour.
  • Michigan tourism provides direct employment to about 130,000 Michigan residents and about $8 billion in state economic activity, including nearly half a billion dollars in foreign travel.
  • The state’s forestry industry accounts for more than 17,000 jobs and more than $650 million in economic activity through lumber and wood products, another 30,000 jobs and $1.3 billion through wood furniture and fixtures, and roughly 21,000 jobs and $1.2 billion in pulp and paper manufacturing.
  • Twenty-one minerals are mined here, making Michigan one of the most diverse mineral-producing states in the nation. Our state’s nonfuel mining generates more than $1.5 billion and employs 9,000 people. On top of that, the state’s oil and gas industry contributes more than $600 million to the economy, providing jobs and income for 11,500 Michigan families.

Agriculture, tourism, forestry, and mining are cornerstones of a healthy Michigan economy, and all absolutely depend on an adequate land base. As our current system subsidizes haphazard changes in land use, we preclude access to resources that are critically important to our future. Sprawl inhibits new investment and limits the efficiency and productivity of existing investment.

There are some bright lights. Led by local chambers of commerce, communities like Grand Rapids and Traverse City are recognizing the important relationship between their economic future and their landscape.

These communities, and a handful of others around the state, are asking tough questions and seeking tougher solutions. They recognize that decisions about where to spend taxpayer money on road construction and maintenance, wastewater treatment, public drinking water systems, and utilities can drive where development occurs. And they understand that picking winners and losers in the business community on the basis of who was “last in the door” does not foster fair competition.

The federal government has started down the road of ending the subsidy and entitlement program for agriculture. States, including Michigan, have taken historic steps to limit entitlement programs for those unwilling to work.

It is time to take a hard look at state and local entitlement programs that benefit only those who speculate on land on our urban fringes at the expense of our state’s economic future.

Copyright © 1998

Status of the Detroit Casinos - March 13

March 13, 1998

Status of the Detroit Casinos

by Laurie Cummings, Senior Consultant for Economic and Education Policy

In November 1996 Michigan voters approved Proposal E, allowing up to three casinos to operate in Detroit. None of the casinos is yet under construction, but the planning process is underway. This Periscope updates readers about Detroit’s casino development, describes three major challenges, and provides a glimpse of the next steps.

The Winners

In late 1997 Detroit Mayor Dennis Archer selected the three companies that will be permitted to operate casinos subject to a city ordinance regulating such casinos. They include

  • Atwater/Circus Circus, which plans to open a $66-million complex that includes a 26-story, 801-room hotel, and several restaurants;
  • Greektown/Sault Ste. Marie Tribe of Chippewa Indians, which intends to open a $519-million complex in Detroit’s Greektown, comprising two 40-story towers, 1,000 rooms, a kids’ center, theater, restaurants, and retail businesses; and
  • MGM Grand, which plans to open an 800-room hotel complex with 11 restaurants and a 1,200-seat showroom; the owners estimate that the operation will create 3,400 jobs.

It is not surprising that Atwater and Greektown were selected since they fought to get the casino question on the ballot and the proposal stated that, because of that effort, they should be given special consideration in the selection process.

Challenges

Petition for Minority Casino Owner

In selecting the three casino operators, Mayor Archer eliminated several contenders. Among them was Don Bardon, an African-American businessman from Detroit who owns a riverboat casino in Indiana. Local community groups and others were outraged at the decision because it was the only minority-owned casino company in the list of finalists.

A group in the Detroit region, the Community Coalition, has formed to fight for a minority-owned casino. Community Coalition argues that since 80 percent of the city’s population is black, at least one of the casinos should be minority-owned. It has circulated petitions to amend the city’s casino ordinance so that a minority, very likely Don Bardon, would replace one of the three selected companies. If the city council does not amend the ordinance, the group plans to place the question on the August 4, 1998, ballot.

Should voters approve such a proposal, the mayor will be in a difficult position. Proposal E allows only three casinos to be built, and statewide voter approval would be needed to add a fourth. If the mayor follows the local community’s wishes, he would need to eliminate Atwater, Greektown, or MGM from the list. Since Proposal E gave Atwater and Greektown the right to special consideration, MGM Grand likely would be the odd man out. To eliminate any of the three selected casino owners, however, could possibly open the city to a lawsuit since these owners already have invested considerable money in their prospective casino ventures.

Petition to Overturn Proposal E

A coalition of casino opponents is attempting to collect the 247,000 signatures necessary to put the entire casino issue on the November 1998 ballot and, they hope, to overturn Proposal E. The group argues that the voters did not fully understand the ramifications of voting yes on the proposal and should be given another chance to decide the question. If the group gathers enough valid signatures, the state can expect a media battle between casino supporters, particularly the three prospective casino owners, and opponents. It is unclear what would happen if voters reversed Proposal E, but a lawsuit by the three casino companies would not be out of the question.

Casino Sites

Mayor Archer originally had proposed placing the casinos in the downtown district. He recently reversed that decision, preferring instead to put the casinos in the riverfront area about a mile east of Greektown. This decision may create new headaches for the mayor and others involved in casino development. First, the city must purchase the land at a price acceptable to the casinos (about $200 million), and city officials may be hard-pressed to buy the land at this price. Second, some areas of the prospective sites will need to be cleaned up before they can be developed, and the state has told the city not to expect any help with clean-up costs. Third, some of the residents and businesses in the areas surrounding the sites are not thrilled at the prospect of having a casino as a neighbor. Others have postponed plans until the siting process is completed; for example, General Motors decided to postpone renovations of its headquarters at the Renaissance Center until it knows how the casinos will affect local infrastructure.

The Next Steps

Before opening their doors, the three companies must receive a casino license from the Michigan Gaming Control Board, which is responsible for the licensing, regulation, and control of casino gaming in the state. The board will scrutinize company finances, run criminal background checks on owners and employees, and ensure that the operation will comply with the state’s gaming laws. Until the new complexes are constructed, the operators may open temporary casinos, and, if so, this may happen by the end of 1999. Mayor Archer, however, has ruled out riverboat casinos, which in other states often have been used as temporary facilities. The first permanent casino is unlikely to open before 2000.

Copyright © 1998

Budget Surpluses as Far as the Eye Can See: Can It be True? - April 17

April 17, 1998

Budget Surpluses as Far as the Eye Can See: 
Can It Be True?

by Robert J. Kleine, Vice President and Senior Economist

Last week the Congressional Budget Office (CBO) estimated that the federal budget surplus for FY 1997–98 would be about $15 billion, up from its earlier estimate of $8 billion. The new estimate, however, may still be much too low. The Federal Reserve Board estimates that the surplus could be as high as $75 billion, and some Wall Street estimates are as high as $100 billion. If the surplus for April and the remainder of the year is equal to the $89 billion surplus posted in the second half of FY 1996–97, the surplus would be $18 billion, but most budget analysts expect this year’s second-half surplus to be larger than last year’s. If revenue grows as fast in the second half of the fiscal year as it did in the first, the surplus could reach $75 billion.

These numbers are difficult to comprehend, particularly given that the federal budget has not been in surplus since 1969 and the deficit was $290 billion in FY 1992. In May 1996 the CBO projected the deficit for FY 1998 at $194 billion, rising steadily to $285 billion in 2002 and $403 billion in 2006. What has happened to change these forecasts? The main cause has been stronger-than-expected economic growth, which has increased federal revenues. The current CBO projection for revenues is $136 billion higher than the 1996 projection. Also, projected expenditures are $65 billion lower, principally in mandatory spending programs, such as Medicaid, Medicare, food stamps, and unemployment compensation.

Although the budget outlook has improved markedly, it is still not quite as good as it appears. The reason for the projected budget surplus is that Social Security revenues are now well in excess of expenditures—$100 billion according to the March 1998 CBO estimate. The on-budget deficit, which excludes Social Security and several small trust funds, was projected at $92 billion. In effect, the Social Security surplus is being used to finance other government operations. In about 30 years, however, the Social Security Trust Fund will begin to run large deficits that will require tax increases or benefit cuts if the system is to remain solvent.

The big question is, What do we do with the projected budget surpluses? The March CBO report projected that budget surpluses would total $679 billion over the next ten years (see exhibit). The latest estimates would push the total ten-year surpluses to over $1 trillion. Most economists favor paying down the federal debt held by the public, which totals $3.8 trillion. This would result in lower real interest rates and likely produce faster economic growth. Most supply-side economists, however, favor reducing tax rates. A $75 billion surplus would finance a ten percent reduction in the federal income tax. Tax cuts would increase consumption and also stimulate faster economic growth. Others, largely from the liberal end of the political spectrum, believe that the money should be invested in new schools or health care for needy children. There already is a huge spending bill to finance transportation infrastructure improvements moving through Congress that many lawmakers argue will make the economy more productive. President Clinton and others also have proposed using the surpluses to shore up the Social Security system. One interesting idea is to use the surpluses to set up privately-managed individual retirement accounts for every American, which would be used to supplement Social Security. Those who support full (or partial) privatization of the Social Security system would like to use the surpluses to cover the huge transition costs of moving from the current system to a privatized one.

The idea of paying down the debt is quite attractive. Long-term projections prepared by the Office of Management and Budget (OMB) indicate that it might be possible to retire the entire federal debt in about 30 years assuming steady, moderate economic growth. This may be somewhat optimistic as it is unlikely the economy could continue to dodge a recession (or several recessions). Also, the political pressure to reduce taxes or increase spending likely would be too great to resist.

One reason the OMB projections are so favorable is the large savings on interest payments that would result from reducing the debt. In FY 1998, interest payments are projected at $245 billion, almost 15 percent of total outlays. The March CBO budget outlook, which now appears pessimistic, projected interest payments at $194 billion in 2008, only 8 percent of total outlays.

We caution that if the surplus is used to increase spending or reduce taxes, it will overstimulate an already robust economy. This could lead to higher inflation, which would cause the Federal Reserve Board to raise interest rates, offsetting the economic benefits of the tax cut or spending increase.

Our view is that the projected surpluses should not be used until agreement is reached on a long-term plan to shore up Social Security. Once this is done, any remaining surpluses should be used to fund a new “rainy day” fund (similar to Michigan’s Budget Stabilization Fund) and pay down the federal debt. The rainy day fund could be used to finance tax cuts or spending increases when the economy begins to show signs of slowing down.

The projected federal budget surpluses provide us with a rare opportunity to put our financial house in order and to adopt policies that will increase the possibility of sustained economic growth for a period of years not previously imagined. To do this, Congress and the President must avoid the temptation to pander to the public and special interests with tax cuts and new programs. This President and this Congress have the opportunity to leave a positive legacy that will last well into the 21st Century.

Copyright © 1998

Global Warming and the Kyoto Protocol - April 24

April 24, 1998

Global Warming and the Kyoto Protocol

by Kelly Stewart, Consultant for Natural Resources

At the United Nations Framework Convention on Climate Change held in Kyoto, Japan, in December 1997, representatives of the 159 participating nations agreed to a protocol to reduce greenhouse gas emissions thought to be responsible for global warming. It may sound as if the controversy surrounding global warming has been resolved, but scientists remain divided on the issue. Environmental advocates warn of floods, drought, and disaster if global warming continues unchecked. Skeptics argue that the recent warming trend is natural fluctuation and warn of economic devastation if we reduce our greenhouse gas emissions in an attempt to curb “global warming.”

Here is the idea behind global warming. Solar energy strikes the earth and is reradiated into the atmosphere as heat. Gases in the atmosphere trap some of this heat like the glass in a greenhouse, keeping the earth warm. The gas molecules responsible for this heat trapping include carbon dioxide, methane, nitrous oxide, and ozone. There are many natural sources of these greenhouse gases, including marshes and wetlands, forest fires, and animals, to name a few. But the greatest source of the gases in the industrialized world is the combustion of fossil fuels. The United States is responsible for 19.1 percent of all greenhouse gas emissions. Some believe that the increased level of greenhouse gases from our cars and power plants will increase the amount of solar energy trapped by the atmosphere, leading to higher temperatures on earth.

Proponents of the global warming hypothesis insist that there will be devastating and irreversible consequences, perhaps ice cap melt, flooding, drought, disease, famine, and/or species extinction.

So is global warming a real problem? Since the last half of the 19th century, the average surface temperature of the earth has increased 0.5–1.1°F. The ten warmest years on record have occurred in the last fifteen years. The Environmental Protection Agency reports that in Michigan, temperatures in Ann Arbor have increased 1.1°F, and precipitation in some areas has increased as much as 20 percent. Climate change models predict that if greenhouse gas levels continue to rise, we can expect an increase in average global temperature of 2–6°F. While this may seem rather minor, keep in mind there is only a 5–9°F difference between today’s average global temperature and that at the end of the last ice age.

Not everyone finds these statistics convincing or indicative of global climate change. Some scientists still maintain that the recent warming trend is well within the range of natural variability. A Gallup poll found that only 17 percent of the members of the Meteorological Society and the Geophysical Society believe that the warming trend of the 20th century is a result of greenhouse gas emissions. Data also exist to refute global warming. NASA satellite measurements show no net warming over the last two decades, and December 1997 was the coldest month on record.

Though scientists still debate the validity of global warming, the U.N. convention resulted in a Kyoto Protocol to reduce greenhouse gas emissions to below-1990 levels. The key feature of the protocol is emission-reduction targets, which include six major greenhouse gases, for developed nations. Targets vary from country to country. For the United States, they are 8 percent below 1990 emission levels. For Japan and the European Union, 6 percent and 7 percent below 1990 emission levels, respectively. Beginning in 2008, participating countries must reach targets over a five-year period, during which emissions can be averaged to allow flexibility for short-term fluctuations due to weather and other factors. The protocol also encourages reforestation (the planting of trees, which absorb and store carbon), a low-cost and environmentally responsible approach to reducing carbon dioxide emissions.

The Kyoto Protocol also includes opportunities for emissions trading. Emissions trading allows countries or companies to purchase emission permits from countries that have unused emission permits. This arrangement, if well structured, will allow flexibility and more cost-effective emissions reductions. Guidelines for emissions trading will be developed at the next convention in November 1998. The protocol also includes mechanisms for involving developing countries (e.g., India and China) in the reduction of greenhouse gas emissions. Their participation has been a priority for the United States and the Clinton administration. One of the major criticisms of the protocol is that it does not go far enough in requiring participation from such countries.

The Kyoto Protocol will be open to signature in March 1998. It takes effect once it is ratified by the nations that produced 55 percent of 1990 emissions. U.S. ratification requires the consent of the Senate, which has begun debate on the key issues involved, such as cost.

Obviously, reducing greenhouse gas emissions is not without cost. Meeting emissions targets would require considerable investment in new technologies for automobiles, manufacturing, and power generation. As a result, consumers could see a significant increase in gasoline prices and consumer goods. White House economists have predicted the protocol would have a modest effect on household energy costs, increasing annual expenses $70–100 per household; others predict increases as high as $1,100 per household. Other economic drawbacks that have been predicted include the loss of thousands of manufacturing jobs, with small energy-intensive businesses likely to suffer as well as large manufacturers. Critics maintain that the cost of decreasing greenhouse gas emissions is too high and that global warming is unsubstantiated. They recommend additional research and allowing time for the development of cost-effective technology for controlling emissions. If global warming is substantiated, they contend that such a delay would not result in significant temperature increases. On the other hand, environmentalists warn that if we delay emissions reduction until there is full substantiation, we may not have enough time to find a feasible solution.

Regardless of the action taken on the Kyoto Protocol, the debate about global warming is not likely to cool down.

Copyright © 1998

Inflation: How It Is Measured and What It Means - May 1

May 1, 1998

Inflation: How It is Measured and What It Means

by Robert J. Kleine, Vice President and Senior Economist

The economy continues to enjoy the benefits of strong growth and low inflation. Many economists continue to be surprised at the low rates of inflation in light of strong employment growth and tightening labor markets. In 1997 the U.S. consumer price index (CPI) rose only 2.3 percent, and for the first three months of 1998, the CPI has increased at an annual rate of only 0.2 percent (due largely to a sharp decline in energy prices). The Detroit-Ann Arbor CPI (used for Michigan) increased 2.5 percent in 1997. (See Exhibit 1 for inflation rates since 1990.) But even these modest increase may overstate the real rate of inflation.

The CPI currently is based on the average change in prices paid by urban consumers for a fixed market basket of goods and services and assumes consumers do not change their spending pattern as prices change. For example, if beef prices increase, consumers may shift to buying lower-priced chicken. Last week the U.S. Bureau of Labor Statistics (BLS) announced that the procedure for determining the CPI will be changed to account for the fact that consumers respond to the rising prices of many items by shifting to lower-cost substitutes. This latest revision marks the end of a series of changes that were begun in 1995 to correct for the CPI’s tendency to overstate the actual rise in the cost of living. When this change takes effect next January, the cumulative effect of all the revisions will be to reduce the annual increase in the index by about 0.8 percentage points, about 0.2 percentage points of which is due to the most recent change.

The changes will affect all but 15 of the 211 categories in the CPI market basket, but these 15 account for about 30 percent of the total index. They include housing, most utilities, and some government fees such as automobile registration fees. The BLS decided not to apply the new method to these items because substitutes are not readily available unless consumers make major changes in their lives, such as moving to another location.

In recent years there has been a spirited debate about whether the CPI is an accurate measure of inflation. This debate was spurred in part by efforts to reduce the size of the federal deficit. Because many government programs and revenue sources, such as Social Security, government pensions, and income tax exemptions, are tied to the CPI, deficit hawks saw an opportunity to cut expenditures and raise revenues. In 1996 a commission headed by Michael Boskin of Stanford University concluded that the CPI was overstating inflation by 1.1 percentage points, although many analysts challenged the commission’s finding. Ironically, now that the changes in the CPI have been or are being made, the federal budget is projected to run substantial surpluses in the next few years. The changes in the CPI should result in even larger surpluses.

The two most visible effects of the CPI changes for most households will be on Social Security and state and federal taxes. For example, in January an average retiree with a check of $749 received an increase of $16 per month based on a 2.1-percent increase in the CPI from the third quarter of 1996 to the third quarter of 1997. If the rise in the CPI had been 2.9 percent, the likely figure if the BLS changes had not been made, the increase would have been about $22. While the difference is relatively small this year, it will increase in future years. For example, assuming the CPI increases atan annual rate 2.1 percent for the next few years, monthly benefits would be $33 less by 2001. Taxpayers also will feel the effects since both the Michigan and federal income tax exemptions are indexed to the CPI, as are property tax assessments. For income tax payers, the increase in the personal exemption will be smaller, resulting in higher federal and state income tax payments. Currently, Michigan property tax assessment increases are limited to 5 percent or the rate of inflation, whichever is less. Under the new CPI, property tax assessment increases will be lower, saving homeowners money but reducing tax revenue for local governments. For example, on a home assessed at $60,000 with a millage rate of 40 mills, the difference between a 2.1 percent increase in the assessment and a 2.9 percent increase is $19. Again, the difference will grow over time.

Despite all the recent good news about inflation and the prospects for even lower reported inflation in the future, many consumers may experience higher price increases or believe that price increase are higher than reported by the CPI. This in fact may be the case for many households as the CPI is a measure of the average change in prices paid by urban consumers for a fixed market basket of goods. Since there is no “average” family, everyone will be affected differently depending on a household’s spending pattern. Estimates of expenditures reported in the Consumer Expenditure Survey are used to produce “expenditure weights” for the CPI. These weights are shown in Exhibit 2. What these weights tell you, for example, is that changes in housing (includes utilities, repairs, etc.) prices (weight of 41.4 percent) have a larger effect on the CPI than apparel prices (weight of 6 percent). If housing prices rise at a faster rate than other prices and you spend more than 41.4 percent of your budget on housing, it is likely that your personal cost of living will rise at a faster rate than the overall CPI.

The recent CPI changes will provide a fairer and more honest measure of true increases in the cost of living. Like most changes, however, there will be winners and losers. The most visible winners will be the federal government and Michigan property tax payers. The losers will be Social Security recipients, other pensioners, Michigan local governments, and those who pay federal and Michigan income taxes. This is only a partial list as numerous payments, taxes, and government programs are tied to the CPI; however, most of these expected changes will be relatively minor.

Copyright © 1998

As Health Insurance Premiums Rise Again, Quality Can’t Be Ignored - May 15

May 15, 1998

As Health Insurance Premiums Rise Again, Quality Can’t Be Ignored

by Peter Pratt, Vice President for Health Policy

The Party Is Over

In 1996 we passed an auspicious milestone: national health expenditures exceeded one trillion dollars. There was some good news, however, as it took a few years longer to reach this watershed than most experts had expected. Health care cost increases slowed considerably between 1993 and 1996, and health insurance premiums for many employers grew little or not at all. According to the William M. Mercer Company’s “National Survey of Employer-Sponsored Health Plans,” total 1997 health plan costs grew only 0.2 percent in businesses with ten or more employees. The average cost was $3,924 per employee.

The halcyon days were bound to end. The New York Times reported late last month that some employers will see double-digit premium increases in the coming year. According to the front-page article, “benefits consultants estimate that the increases will average about 7 percent nationally, or five times the current 1.4 percent consumer inflation rate.” Michigan may not be hit as hard. Average 1998 rate increases for basic plans in twelve Michigan HMOs will be 4.5 percent, according to information from the Michigan Insurance Bureau reported in Michigan Health Care News.

The reasons for the health care cost and premium increases are varied and sometimes disputed:

  • To gain market share, managed-care plans have accepted lower revenue/profits; they cannot continue this practice and remain strong (in fact, Michigan HMOs reported collective losses of $49 million in 1997).
  • Managed-care plans have forced providers to accept reduced reimbursement for several years; providers are no longer willing to accept these reductions and are strengthening their negotiating leverage by forming their own groups (physician-hospital organizations, physician organizations, and provider-sponsored organizations).
  • The backlash among the public and providers against certain cost-control practices is leading (1) health plans to alter their practices and (2) lawmakers at the state and federal levels to press for legislation that limits how plans are permitted to cut costs.
  • Advances in medical technology—such as new AIDS drugs and progression in artificial limbs, valves, and organs—are expensive and life-prolonging; few people want any limit placed on their development and appropriate use.
  • Pharmaceutical costs are rising, fueled by increased demand fostered in part by direct marketing to consumers on television and in general readership magazines.
  • The population continues to age, and an older population uses more health care services.

Consumers and Health Care Cost

Lost in the battles among health plans, employers, government, and providers are health care consumers. Their role has much to do with the dynamics of health care cost and premium increases.

First, a different perspective on who pays for health care: From 1992 to 1996, employer-based private health insurance premiums rose an average of 3.8 percent annually. Some large companies were able to negotiate even lower rate increases with insurers. At the same time, employers have increased the employee share of the premium by an average of 7.2 percent each year from 1992 to 1996. In other words, workers are bearing a growing proportion of their health insurance costs. This is borne out in a spring 1997 article in Health Care Financing Review, in which the authors (Cowan and Braden) explain who ultimately pays what share of the health care bill:

  • Government paid for 38 percent of health services and supplies
  • Households paid for 34 percent
  • Businesses paid for 26 percent
  • The remaining 2 percent were other (nonpatient) sources of revenue

In these calculations, the employee’s copays, deductibles, and premium sharing are counted as household (not employer) spending and so is the employee Medicare payroll tax payment (because employees are seen as being “payers” of a portion of Medicare). Similarly, the employer’s share of the Medicare payroll tax is counted as employer spending, not government spending. Of course, government’s share is ultimately paid by households and businesses through the personal and corporate income taxes.

The Importance of Meaningful Quality Measures

If consumers are paying a larger and larger share of the nation’s health bill (unbeknownst to almost everyone, including most consumers themselves), they also may be making demands that will make their situation worse. Consumers must recognize that they control more and more health care spending and with that comes responsibilities as well as rights.

Some of the anti-managed-care legislation in the state legislature and Congress focuses on guaranteeing consumers the choice of a wide array of providers. This opening up of managed care plans’ provider networks may be necessary in certain cases (for example, persons with chronic illness whose long-established relationships with providers are essential to quality care), but it also may inhibit the legitimate cost control and quality improvement efforts of health plans and provider groups.

Managed-care plans and provider groups cannot be held entirely accountable for costs, coordination, and quality if employees can easily venture outside the plan for care. Most employers’ response to this has been understandable: If employees want freedom of choice, they will have to pay for it themselves, not only in higher copays, but in higher premium sharing. In the end, consumers pay more to see a provider with whom they are comfortable but do not really know is delivering quality care. Until consumers call out collectively for meaningful quality measurement that allows them to better assess and compare providers’ and health plans’ care, “comfort” alone—or dreamy pharmaceutical commercials with young women on horseback galloping through green pastures—will carry too much weight for consumers’ good.

Rising health care costs and insurance premiums threaten to reinforce the notion that cost is always more important than quality. But when will this line of reasoning finally end? Without a better consumer understanding of what constitutes quality care, we will address the retirement of the baby boomers—and the huge spike in demand for health services sure to follow—with irrational rationing, limits on care driven too much by cost. If we, as a society, are to manage health care costs and patients more wisely and humanely, we need more meaningful information on quality sooner rather than later. Efforts like the Foundation for Accountability (FACCT) consumer-defined categories of health performance are a big step in the right direction. Consumers must demand this information, but they also must understand that their behavior can impede the ability of health plans and provider groups to put in place the systems (that clunky, impersonal word) that will hasten the production of such valuable information.

Copyright © 1998

Supermajority Requirements: An Idea Whose Time Should Never Come - May 22

May 22, 1998

Supermajority Requirements: An Idea Whose Time Should Never Come

by Peter Pratt, Vice President for Health Policy

Earlier this month the Michigan Senate failed to approve a resolution to place on the ballot
a proposal that would amend the state constitution by requiring a two-thirds vote (“supermajority”) of the legislature to raise taxes. Fourteen states currently require a supermajority to increase some or all taxes. Some of these states require a three-fifths majority, while others require two-thirds or three-fourths.

The sole rationale for these supermajority requirements is to make it more difficult for states to raise taxes. Supporters point to evidence that states with such requirements have fewer tax increases and experience faster economic growth than other states. A 1996 Heritage Foundation study found that five of the seven states that have had supermajority requirements in place for a number of years experienced slower-than-average growth in revenue and faster economic growth than the average state. On this flimsy evidence, the study concluded, ” there is no escaping the logical relationship between supermajorities and superior state performance.” A problem with this type of analysis is that the states being compared are not randomly selected but rather self selected; that is, the states that have enacted supermajority requirements are predisposed toward lower taxes and conservative tax policies. Three of the seven states do not have an income tax, and four of the states are located in the south.

Other studies have found that if one measures state and local revenues, adjusts the time period to represent similar points in the business cycle, and looks at different measures of economic growth, supermajority states have had more tax increases and less economic growth than other states.

A recent article in State Tax Notes (May 11, 1998) points out that a supermajority requirement may have a number of unintended and damaging side effects.

  • It becomes easier to create special tax breaks than to close them. New tax breaks require a simple legislative majority, but eliminating these tax provisions requires a supermajority vote, which allows them to be protected by a small number of legislators.
  • It may lead to a shift in responsibility for funding government services from the state to the local level. This outcome places upward pressure on local property taxes and reduces the ability of the state to provide and finance services in an equitable manner.
  • It can lead to costly vote-swapping and an increase in special-interest provisions in budget legislation because a small number of legislators can use their power to hold the majority of legislators hostage to ancillary demands or pet projects in exchange for their vote to raise taxes.
  • Most important, it runs counter to the basic democratic principle of majority rule. Rather than allowing each session’s legislators to weigh evenhandedly the tradeoff between spending and tax cuts, these choices are constrained in favor of decisions that supporters of these requirements view as ideologically correct.

There is evidence that these side effects have occurred in at least one state with a supermajority requirement. The California Constitution require a two-thirds majority vote to increase taxes and to enact an annual budget. In a 1995 report, the California Citizens Budget Committee, a bipartisan group of prominent business and community leaders, concluded that supermajority requirements “have not fulfilled their original intentions and have even on occasion worked to the detriment of the state’s budgeting process.” The commission found that supermajority requirements lead to increased vote-swapping, contribute to delays in enacting the budget, and encourage the proliferation of tax expenditures. In its final report to be released next month, the commission is expected to recommend that the legislature be allowed to eliminate tax breaks by a simple majority vote.

There is no credible evidence that supermajority proposals accomplish their sole purpose, which is to slow the growth in taxes. With or without supermajority requirements, legislatures typically avoid tax increases. Taxes tend to be increased only as a last resort, such as when a legislature must close a recession-induced budget gap. That has certainly been the case in Michigan. The last major tax increase in Michigan, other than user or replacement taxes, was in 1983 and resulted in the recall of two state senators. During the last recession of the early 1990s, six of the seven states with the broadest supermajority requirements were among 43 states that enacted significant tax increases. Michigan was not among those states. In every state, taxes may be increased only when a strong consensus has developed around a spending goal, such as improving education or roads, and new revenue is needed to achieve that goal. This was the case with Michigan’s 1997 increase in the gas tax, which had been debated for several years and did not pass until strong public support was evident.

The framers of the U.S. Constitution rejected supermajority approval for basic functions such as raising taxes. Such approval was required under the Articles of Confederation, which was the governing document of the United States from 1781 until the U.S. Constitution was enacted in 1789. James Madison, one of the primary authors of the constitution, equated majority rule with “free government.” In his view, freedom consisted not just of protecting individuals from unreasonable intrusion by government, but also of the right of citizens to have an equal voice in the affairs of government. According to Madison, a person whose vote is diluted by supermajority rules is not an equal citizen and does not fully enjoy the fruits of freedom. Some ideas are timeless.

Copyright © 1998

Michigan State and Local Revenues and Expenditures: 1994–95 Update - September 4

September 4, 1998

Michigan State and Local Revenues and Expenditures:
1994–95 Update

by Robert G. Kleine, Vice President and Senior Economist

Recently, the U.S. Bureau of the Census released state-by-state data on state and local revenues and expenditures for fiscal year (FY) 1994–95. These data are of particular interest because for the first time since enactment of Michigan’s 1994 school finance reform plan (Proposal A), we have information that allows us to compare the “new Michigan” with the rest of the country. In the exhibit, I have included figures for four years to illustrate the (1) change in the Michigan tax burden since the state began to reduce taxes in 1991 and (2) relative change in state-local expenditures.

Revenue

As expected, the data show that the Michigan state and local revenue and tax burden as a share of personal income has fallen dramatically: In FY 1993–94 Michigan had ranked 11th among the states in state and local tax burden; after Proposal A, Michigan’s ranking dropped to 36th, a huge improvement. The following summarizes the changes from FY 1993–94 to FY 1994–95 (for more precise detail, see the exhibit):

  • Michigan state and local revenue (“own source,” which excludes federal aid) as a percentage of personal income dropped almost 7 percent: In FY 1993–94, this figure was pushing 17 percent (4 percent above the national average); in FY 1994–95, it was under 16 percent (about 4 percent below the national average)
  • Michigan state and local taxes (excluding charges and miscellaneous revenue) as a percentage of personal income dropped 10 percent: In FY 1993–94, the burden was more than 12 percent (6 percent+ above the national average); in FY 1994–95, it was less than 11 percent (more than 4 percent below the national average)

Proposal A dramatically changed the composition of the tax burden in Michigan.

  • State and local property taxes as a percentage of personal income dropped 40 percent: In FY 1993–94, the portion was 5 percent (nearly 39 percent above the national average); in FY 1994–95, it was about 3 percent (still above the national average but only by about 7 percent).
  • Sales tax collections as a percentage of personal income increased more than 17 percent: In FY 1993–94, the figure was 2.3 percent (about 15 percent below the national average); in FY 1994–95, reflecting the 50 percent increase in the tax rate (from 4 percent to 6 percent), the figure went up to 2.7 percent (still below the national average but by less than 2 percent).
  • Individual personal income taxes as a percentage of personal income increased 12.5 percent: In FY 1993–94, the share was 2.4 percent (4.5 percent above the national average); in FY 1994–95, it was 2.7 percent (more than 14 percent above the national average). This increase is misleading, however, because the decline in property taxes brought about by Proposal A also reduced property tax credits against the state income tax by an estimated $600 million, resulting in an increase in net income tax collections. Adjusted for this change, income tax collections increased only slightly, to 2.5 percent of personal income.

Expenditures

The exhibit also presents state and local expenditure data for four years. Michigan general expenditures are below the national average as measured either on a per capita basis or as a percentage of personal income: By the latter measure, state and local expenditures declined from nearly 102 percent of the U.S. average in FY 1993–94 to about 97 percent of the U.S. average in FY 1994–95 (more recent data, when they become available, likely will show a further decline relative to the national average).

  • Michigan state/local spending is well above the national average in education, corrections, and health and hospitals.
  • Michigan state/local spending is well below the national average in police/fire services, highways, and welfare.

Four years is too short a period to draw meaningful conclusions about changes in relative spending, but it is worth noting that there have been significant declines in three spending categories.

  • Michigan spending on welfare declined sharply from FY 1993–94 to FY 1994–95, relative to U.S. spending. The state accounts for 93 percent of state-local welfare expenditures, and spending is down both per capita and as a percentage of personal income.
  • Police and fire expenditures also declined significantly as a percentage of the U.S. average. The decline in this spending, of which about 90 percent is local, occurred mostly from FY 1991–92 to FY 1992–93.
  • Michigan spending on health and hospitals also fell significantly from FY 1991–92 to FY 1994–95. Spending in this category is split about evenly between state and local government.
  • Corrections spending is mixed. As a share of personal income, it was stable over the four-year period, but per capita spending increased from $119 to $153, or from around 6 percent above the U.S. average in FY 1991–92 to 12 percent above it in FY 1994–95.

These data hold no major surprises. Michigan’s transition from a high-tax, high-spending state to an average (or even below-average) taxing and spending state has been well publicized. This trend has continued since the most recent data were compiled in FY 1994–95, with additional tax cuts being enacted and modest increases in state spending being the norm (local spending probably has increased at a faster pace). As I mentioned above, when data for more recent years become available, Michigan likely will be shown to have fallen further below the national average in taxing and spending.

Copyright © 1998

What Goes Up Usually Comes Down - September 18

September 18, 1998

What Goes Up Usually Comes Down

by Nick Khouri, Vice President

Investors around the world are learning the meaning of the old adage “what goes up usually comes down.” Because the U.S. stock market has been remarkably strong since the late-1980s, some investors have come to believe that the market can only go one way, up. Historically, this has not been the case.

First, the recent bad news: Equity markets around the world have taken a beating over the last six weeks. The Dow Jones Industrial, a narrow measure of the top 30 largest U.S. companies, has fallen 19.7 percent, from a high of 9,338 on July 17 to 7,500 at the time of this writing. The Dow is now 5 percent below the 1997 year-end level.

Many current investors, and the brokers they rely on, have never lived through a bear market. Since the end of 1987, the U.S. has seen a spectacular run in the stock market. The Dow jumped from an average of approximately 2,000 during 1988 to 7,400 last year, a rise of 270 percent. This increase in the stock market was fueled by low inflation, meaning the “real” return on equities was close to a historic high.

As we have learned since July, the wise investor remembers that, except for the abnormal rise over the last 10 years, the stock market falls in nearly as many years as it rises. A look back over the past 43 years of the stock market reinforces this view.1

The exhibit shows the annual average of the Dow Jones Industrials from 1955 to the present. During an 18-year period, from 1960 to 1978, the Dow fell in 9 years and rose in 10. Also during this period, the Dow never increased in more than three consecutive years. From 1955 to 1988, the Dow rose in 20 years and fell in 14. It is only in the very unusual 1990s that we have grown accustomed to the Dow never falling.

In 1972, the Dow averaged 950. It then fell 20 percent to 753 during the next two years. Remarkably, by 1982, ten years later, the Dow stood at 884, 7 percent below the level of 1972.

No one knows where the current fall in the stock market will bottom out. What is clear, however, is that investors who use the unusually strong performance of the last ten years as the basis for predicting the next ten years, do so at their peril.

1We compare the annual average of the Dow for any given year, not its value on the last day of the year. The annual average better represents the market. s return for the investor buying or selling stocks throughout the year.

Copyright © 1998

Single Business Tax Revisited - October 9

October 9, 1998

Single Business Tax Revisited

Michigan’s single business tax (SBT), the state’s major levy on business, in FY 1996–97
generated more than $2.2 billion for the state. In October 1997 we published a Public Policy Advisor describing the sudden weakness of SBT collections, because at that time SBT revenue collections were running significantly below official projections. The cause of the slowdown was not clear, but we offered one likely explanation: a key legislative change in the tax that had taken effect in January 1997.

In fact, FY 1996–97 SBT revenues ultimately did come in below expectations, but in the fiscal year just ended (FY 1997–98), they regained their strength and have been running ahead of the consensus revenue forecast. (The final numbers are not in yet.) The cause of the FY 1997–98 strength, like the prior’s year’s sudden weakness, is a mystery.

Review of the Numbers

In FY 1996–97, the growth of SBT revenue collections slowed to a crawl. The exhibit compares the original official estimate of revenues to actual collections. In May 1997 the Consensus Revenue Conference (a meeting of state executive- and legislative-branch budget officials), which produces the official estimate used as the basis for the state budget, projected an annual 5.5 percent growth rate for the SBT. By fiscal year end, however, actual SBT revenues were up only 1.7 percent from the prior year, significantly below the projection. This slowdown in growth translated into an approximately $85 million revenue shortfall. We know that because of the strong growth in Michigan employment and corporate profits, the slowdown was not due to underlying economic conditions.

For FY 1997–98, the story is the opposite. The original budget forecast projected a 5.7 percent increase in SBT revenue, or about $127 million above the prior year. At the May 1998 consensus meeting, the tax’s earlier weakness convinced the meeting participants that they should lower the SBT projection to a 2.2 percent growth rate.

Since May, after months of unexplained weakness, the SBT has been showing unexplained strength. FY 1997–98 collections are up 5.3 percent from the prior year, and in the past four months alone, SBT collections averaged 11.7 percent above the previous year.

What Does It Mean?

Both FY 1996–97’s sudden SBT revenue fall and then the sudden rise in FY 1997–98 have most analysts perplexed. While stability long has been one of the major arguments that proponents have used to support the SBT, the tax recently has become quite volatile and difficult to predict. The underlying problem for state forecasters is that collections now seem less tied than before to the fundamental economic components of wages and profits. We believe legislative changes made to the tax in the last few years, while in some cases improving its fairness and efficiency, have had the unintended effect of making state budget planning more difficult.

Michigan Ballot Proposal C: Clean Michigan Initiative - October 16

October 16, 1998

Michigan Ballot Proposal C: Clean Michigan Initiative

by J. Chris Monsma, Senior Consultant for Natural Resources

The Clean Michigan Initiative (ballot proposal C) is a $675-million bond issue that will be before the voters on November 3; the precise wording of the ballot question is presented at the end of this narrative. Passage seems to be a sure thing. First, the initiative has been marketed well. Second, it has broad, bipartisan support (from U. S. Sen. Spencer Abraham to Detroit Mayor Dennis Archer, people on both side of the aisle are lining up in support), and there is no organized opposition. Third, environmental issues play well at the polls in this state: past performance includes overwhelming approval of the $800-million Quality of Life Bond (1988) and constitutional amendments protecting the Michigan Natural Resources Trust Fund (1984 and 1994).

The Clean Michigan Initiative has nine components.

  • $335 million for “brownfield” redevelopment and environmental cleanup
  • $90 million for a clean water fund
  • $50 million for “nonpoint” pollution-control grants
  • $25 million for cleanup of contaminated sediment
  • $50 million for waterfront reclamation and revitalization
  • $50 million for state park revitalization
  • $50 million to enhance local parks and recreation opportunities
  • $20 million for pollution prevention
  • $5 million for lead hazard control

With the exhaustion of funds generated from the 1988 Quality of Life bond this year, the Clean Michigan Initiative targets some familiar goals. As before, local and state parks will receive additional funding. In 1988 the focus for environmental cleanup was groundwater, while this time the focus is on urban brownfields (sites with public health and environmental problems and/or redevelopment potential), rivers, and waterfronts.

The State of Michigan contends the time is ripe for issuing bonds. With low inflation, an excellent bond rating, and reasonably low public indebtedness in Michigan, the Clean Michigan Initiative makes good economic sense. The proposal is solid and deserves passage, but the public must not be lulled into thinking that this bond issue will solve all the pressing needs of the environment.

As the proposal was being formulated, there was a late push, which was rejected, to have funds also dedicated to farmland protection. Urban sprawl and the accompanying loss of farmland to development are major environmental problems in this state. While brownfield redevelopment strengthens Michigan’s economy and environment, the Clean Michigan Initiative alone may be insufficient to reverse the tide of urban sprawl. Cleaning industrial sites may not serve to reverse—or even slow—the current trend of developing rural “greenfields” instead of reusing property in older industrial cities.

Michigan voters may ask why funding for certain environmental projects/questions have to be approached though the ballot. The answer is that despite broad public support for a clean, safe environment and high-quality outdoor recreation, state and local environment/recreation appropriations and policy frequently fall short of public desire in this regard.

Cleaning up orphaned, abandoned sites is a positive step by the state, and park improvements are needed as their infrastructure ages. But there are other large environment questions that remain to be addressed, and many need innovative solutions beyond the infusion of state bond dollars.

Proposal C

A Proposal to Authorize Bonds for Environmental and Natural Resources Protection Programs

This proposal would:

  1. Authorize the State of Michigan to borrow a sum not to exceed $675 million dollars to finance environmental and natural resources protection programs that would clean up and redevelop contaminated sites, protect and improve water quality, prevent pollution, abate lead contamination, reclaim and revitalize community waterfronts, enhance recreational opportunities, and clean up contaminated sediments in lakes, rivers, and streams.
  2. Authorize the state to issue general obligation bonds pledging the full faith and credit of the state for the payment of principal and interest on the bond.
  3. Provide for repayment of the bonds from the general fund of the state.

Should this proposal be approved? (Yes/No)

Copyright © 1998

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