Policymakers across Canada should study Michigan’s success
In a development that has implications for the entire country, Fiat Chrysler recently announced it will layoff 1,500 unionized workers from its plant in Windsor, Ontario. Although many factors drive a company’s employment decisions, the overall competitiveness of the jurisdiction is important. And Michigan’s smart policy choices helped turn around the state’s economic fortunes—a fact policymakers in Ontario, other provinces and Parliament Hill should understand.
Historically, Michigan has been a manufacturing powerhouse and home to the “Big Three” automakers in Detroit. Like Ontario, Michigan suffered a tremendous blow to employment and output in the wake of the Great Recession. However, Michigan responded with several key policy reforms.
For starters, it replaced the complex and onerous Michigan Business Tax with a simpler flat corporate income tax of 6 per cent. Indeed, a flat tax with a single rate applied to the widest possible base, which causes the least disruption to the economy, is preferable to a complex tax code with graduated brackets and special deductions or credits.
It reduced state spending, returning badly-needed resources to the private sector, laying the foundation for more sustainable growth.
And it passed so-called “right to work” legislation, which is not directly applicable in Canada. In the U.S. context, right-to-work states prevent unions from compelling non-union workers to pay “agency fees” to the union. Many observers noted that the Detroit automakers had been saddled with high labour costs, and the thinking was that a more flexible labour market would be better for everyone in the long run, workers included.
Although economists might disagree about the precise causes, there’s little doubt that Michigan’s economy (and state finances) turned around during after the above policy changes. For example, in each year from 2005 to 2011, Ontario had a higher rate of private-sector job growth than Michigan (in 2008 and 2009, both regions lost jobs, but Michigan’s losses were worse). Yet from 2012 to 2016, Michigan had higher rates of private employment growth.
We see a similar pattern with real GDP growth per person, which grew faster in Ontario than in Michigan from 2005 to 2009, but then flipped and grew faster in Michigan than in Ontario from 2010 to 2016 (except in 2014, when it was a bit higher in Ontario).
There’s also a big difference in how the two regions handled government finances after the Great Recession. Net public debt (as a share of the economy) dropped about five percentage points in Ontario during the early 2000s and hovered around 27 per cent up until the crisis in 2008. But then it rapidly increased during the Great Recession and its aftermath, resting just shy of 40 per cent as of fiscal year 2017.
In contrast, Michigan’s net debt (as a share of the state economy) gradually rose from 2000 through 2010, but never broke 5 per cent. The figure then fell slightly after the state’s sharp spending reductions in 2012, with the total net debt in 2016 about the same as pre-crisis levels.
Obviously, Michigan is a U.S. state with different types of government obligations. Even so, policymakers in Ontario and across Canada should study Michigan’s recent history, particularly now as economic storm clouds are gathering for multiple reasons. Competitive fiscal, tax and labour policies, which foster private-sector investment and growth, are the best bulwarks in tough times.