Friday, February 18, 2011

Wolfram: Captain Snyder leads

Captain Snyder has charted the right course in his first budget. There's finally leadership at the helm and Michigan has the opportunity to right its financial ship before it topples over into the depths of Lake Superior.
In order to do so programs will have to be shrunk and eliminated and those who are employed by the state will have to take a reduced compensation package. The governor is clearly aware that attempting to balance the budget through tax increases will only lead to less economic activity, less employment, more foreclosed homes, lower property values, and worsening living conditions.

The state cannot force businesses to expand in Michigan or to come here from other states. It cannot force entrepreneurs to risk their life savings in a place where the tax and regulatory burdens are high and uncertain. The economic reality is that keeping our children in Michigan once they have graduated requires us to make the state a hotbed for producers and employers.
In any budget of $19 billion (total budget of $46 billion) there will be plenty of elements for people to complain about.
There are some in this budget that have attracted a good deal of media attention. One is the assumption of $180 million in public employee concessions. The issue is not really whether public employees have sacrificed in the past or whether public employees have a larger compensation package than their private sector counterparts. The issue is that there is only so much revenue available in the short term and the state cannot pay the compensation packages that the public employee unions have come to expect.
Another hot button issue is the elimination of the Earned Income Tax Credit and the taxation of pensions under the state income tax.
As I have dealt with the EITC in an earlier column, let us focus on taxing pension benefits. The first question to ask is why should a single mother with two children be taxed on the income she earns as a school bus driver, while a married retired couple with the same income derived from pensions not be taxed?
The retired couple's Social Security benefits are not taxed, so the retired couple could have more total income than the mom and not have to pay any tax. Or two retired couples could have equal retirement income, but the first couple's retirement is made up of income from their 401k plan because their employer had a defined contribution plan and the other couple has a pension because their employer had a defined benefit plan.
Why should the first couple be taxed and not the second? The proper way to treat income is to tax it the same regardless of source, as most every public finance text will point out.
Cutting aid to K-12 schools is both a necessary and proper proposal. First, K-12 spending is a large item in the budget and if you are going to save real money it will have to include education. Second, the economics literature is uncontroversial that increased spending on public K-12 schools does not translate into higher school performance.
Unfortunately, the governor did not address the structural problem in K-12. As I noted often in my tenure on Michigan's State Board of Education, the incentive structure of public education is flawed. Removing the cap on charter schools would go a long way to both reducing spending on K-12 and improving education.
Corrections is another area that deserves reductions in spending. And again there are structural problems in the system. First, we need to look at the marginal benefits and marginal costs of putting people in prison. There are a number of crimes where the costs of imprisoning people far exceed the benefits. We can close prisons but if we don't reduce the inflow then the costs to society may well increase. The governor does well to propose privatization of prison services, but why not go further and allow companies to open up inside the prison?
Companies could be charged a fee to set up operations inside the prison and employ prisoners. This would not only generate revenue for the prison system, but it would allow prisoners to gain employment experience and give them a much better chance of remaining outside the criminal justice system as a productive member of society once they are released.
There are some places that I would prefer to see cuts that were not made, such as the Michigan Economic Development Corporation. To be consistent with a philosophy of allowing the market rather than central planners to determine who will be the producers in Michigan, the budget would zero out the credits that are granted by government bureaucrats to firms that gain favor in one way or another.
But on the whole, the governor's budget is a sign of leadership that has been lacking over the last eight years. And leadership is a welcome change.






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