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Life Arts    H4'ed 10/25/11

What's The Matter With Michigan? The Rise And Collapse Of An Economic Wonder.

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In 1995, through an accident of scheduling, two separate meetings were merged at the Levy Institute, Annandale-on-Hudson, NY.   It was an odd coupling: one group was of Georgists; the other was of economic advisers to Governor John Engler of Michigan, intent on cutting the property tax. Possibly some hurried planner, we speculated, had confused Michigan's "Single Business Tax" with George's "Single Tax". Still for three days we talked to, or at least past each other.

We warned Michigan what had happened to California after Prop. 13.   In Lansing, however, the die had been cast.   Engler's advisors tuned out our words and went home to help him take public schools off the property tax and put them on a sales tax. Michigan's fatal downslide accelerated.   Let us trace her path from adolescence and vigor through long dominance down to senility, where famous firms are dying, industrial cities rotting, great universities shedding, public services declining, public schools starving, unemployment soaring, and youth fleeing. Michigan's number of apportioned U.S. Representatives has dropped from 19 in 1960 to 15 in 2000. The great University of Michigan now charges the highest tuition of any public university in the nation. Michigan's "Big 3" auto firms have crashed loudly and publicly, going to Washington to beg.

I.       Hazen Pingree, mass transit, high wages, and the birth of the auto industry.

From 1890-1900 Detroit's population grew, in spite of the depression, by 40%. That was faster than almost all other cities except Cleveland.   By 1910 it had boomed another 60%, leading the nation, and by 1920 another 113%.   The auto industry did it, but why in Detroit?   It helped that Michigan had produced horse-drawn carriages from its hardwood lumber, but so had other places. It was not low wages, for Detroit paid better than most, which of course is why so many people moved there so fast. It was not business-dominated politics, for Michigan was a Progressive state, a Teddy Roosevelt state that went with his "Bull Moose" splinter party in 1912, the first eastern state to adopt the Initiative and Referendum, an early Home-Rule-for-cities state, an early adopter of direct election of U.S. Senators, a high tax state (in an era when most state and local taxes were property taxes). Governor Hazen Pingree's 1897 message to the State Legislature is a strikingly radical document, even for its times, and moreso for today.

Mayor Hazen Pingree, soon to be Governor, was an early Georgist Progressive.   He found city taxes biased for the rich; he changed that, and pushed the single-tax principle. He was a mentor to and model for the Georgist soon-to-be Mayors Tom Johnson and Newton Baker of Cleveland, and Samuel Jones and Brand Whitlock of Toledo.   Pingree reformed assessments and raised property taxes in order to provide vital services for working men and their families.   Mass transit, then called "traction", was a central issue.  

The Progressive single-tax movement then went hand-in-hand with "traction" in all the growing cities of that, their Golden Age.   Property taxes were to cover fixed costs, so as to keep fares low. Pingree could not sway enough allies to municipalize traction, so instead he subsidized a competing firm, forcing the older one to lower fares and extend service. It is one of history's ironies: trolley cars nursed the auto industry that was later to rise up and slay them.  

Pingree plugged for public ownership of city monopolies and for low fares, an attitude later to be rationalized by many academics as "marginal-cost pricing". Property taxes also paid for public education, public health, public parks, water, sanitation, welfare, etc., all the public services that make a big city livable, and its small industries viable. Property tax rates of 2.5% were normal; there were no sales taxes, business taxes, or income taxes. Detroit's private sector was a big collection of small machine shops, little businesses and services providing a matrix for the famous innovators who were to spawn the auto industry. Jane Jacobs would have venerated it, as she did Tokyo and Birmingham (1969, The Economy of Cities, and later works).

Land speculation and monopoly were problems, so in 1891 Pingree campaigned for "higher taxes on the vast landed estates of the city", and won. In 1893 a big industry threatened to leave town if its taxes rose. Pingree was losing this battle when he called on his Georgism and raised just the land assessments. This won the support of businesses he had alienated by campaigning to soak the rich (Holli, Reform in Detroit, p.59).

Pingree saw, and ordinary voters could see, that Detroit could raise revenues from industry without driving it away, simply by focusing assessments more on land, less on capital. Since then a century of rococo decadence in economic analysis lets a leading Michigan tax authority write that "Michigan " is reluctant to impose taxes at high rates on economic activity that might thereby be reduced or encouraged to relocate. In this, Michigan faces the same dilemma that all taxing jurisdictions face" (James R. Hines, Jr., 2003, Michigan's Flirtation with The Single Business Tax.) To solve the dilemma, Hines touts Michigan's "Single Business Tax" (SBT), a form of Value-added Tax in which businesses can deduct purchases of real estate, but not labor payrolls, from the tax base. Deducting real estate purchases as though they were current expenses is supposed to help Michigan by untaxing capital formation, as though real estate were all capital, and buying old capital is the same as creating new. Professor Hines is Director of Research at a leading professional think-tank, The Office of Tax Policy Research (OTPR), University of Michigan. He is actually savvy and fair-minded in most respects, likable, credentialed, modern, and well-connected - too modern and well-connected to be free of Neo-classical bias that conflates land with capital.

The crash of 1893 hit Detroit soon after Pingree became Mayor. The City was riddled with holes held by land speculators. Pingree prevailed on them to let the unemployed plant vegetables there, and "Pingree's Potato Patches" won national renown, and inspired other cities to do likewise (Catlin, pp. 609, 616). To Pingree the publicist and politician this was a graphic way to demonstrate to his voters, fresh from following the plow, what people can do when given access to land, a goal he had for all industries. He used tax money on welfare for the unemployed, a move that did not spoil labor so much as it kept it on hand to man the next industrial boom. His majorities increased with each election.

Another irony is that the traction monopoly that Pingree fought was owned by none other than Tom Johnson.   The relationship was complex, but this is part of the process that converted Johnson to become the most prominent Georgist politician of his decade -- think Epiphany on the road to Damascus.

Pingree also supported academic freedom, a fragile seedling in that era. He did not quail at taking and probably paying for advice from economist Edward Bemis, whom Rockefeller's new University of Chicago had just fired for the solecism of supporting the Pullman strikers in 1894. Polite academicians just don't do things like that.

In 1897 Pingree became Governor. He centralized the assessment of property taxes, and had the State Board of Tax Commissioners revalue all property. They found so much untaxed land, especially railroad holdings, to put on the rolls that they actually lowered tax rates even as they raised more taxes (Lovett, p.37) -- a feat that inspired Robert LaFollette across the lake later to emulate in Wisconsin.   Arthur Laffer failed to duplicate the success later in Washington because Laffer and his boss, Ronald Reagan, never got the point that was so obvious to Pingree: lower bad taxes by raising the good one.

In the midst of reforms, Pingree died in 1901. He had not worked alone, however, and in 1904 new Governor Fred Warner resumed Pingree's work and in 1908 won his 3rd term. In 1909 Michigan adopted a new constitution with many basic progressive reforms. The State continued its extraordinary growth and prosperity. Detroit grew from 205,000 souls in 1890 to 1,850,000 in 1950, a faster percentage growth rate than any other city, rising to be   America's 4th biggest city. This was an extreme case of a national pattern for cities with pro-labor Georgist leadership to outgrow cities run by the opposition (Gaffney, 2006, New Growth in Old Cities, pp.34-36). As for urban sprawl, Pingree favored growth without annexation -- a formula that later growthmen were to forget, to their sorrow.

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Mason Gaffney first read Henry George when a high school junior , and became notorious among his classmates for preaching LVT to them . H e served in the S.W. Pacific during W.W. II, where he observed the results of land monopoly in The (more...)
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