A $457 Million Surplus

When two of the big three automakers – General Motors and Chrysler – filed for Chapter 11 protection under our bankruptcy law in June of 2009, as collective bargaining agreements and job tenure collapsed, Michigan began scrambling to slice and dice, slash and burn as much in the way of state expenditures as they could. The strongest element of their tax base had just rolled over and hovered near death. The economic malaise that infected just about every other state since 2008 had been Michigan’s lot in life since 2000 (revenues had been flat during that time period except for one year). The recession slammed the state even harder.

Unemployment peaked in 2009 at 14.1% and dropped to a manageable (but still above US average) 9.3% in December, but manufacturing jobs have begun to pick up, notwithstanding a belief that the rust belt had finally rusted all the way through. GM returned as the world’s largest carmaker. The cuts to police forces, education (schools were closed and teachers were laid off), infrastructure maintenance deferred, that prisons were closed, libraries cut back, daycare reduced, raises to state employees ceased (many of whom were let go) left Michigan with a pretty austere reality, but the seemingly never-ending deficit finally… ended. Growth, albeit modest, returned. The state just reported a $457 million surplus for the current fiscal year. Can we expect the Michigan experience to replicate?

“Now, however, as a majority of states have begun collecting tax revenues that are on par with or even above expectations, they face some measure of Michigan’s situation — trying to sort out whether the worst is really over, whether it is safe to start spending again, or whether a rainy day fund may be the prudent course… ‘Revenues are definitely improving, but it’s just unsure where it’s going to head from here,’ said Todd Haggerty, an analyst with the National Conference of State Legislatures, who noted that although revenues in many states have not returned to pre-recession levels, 17 states exceeded their expected personal income tax collections in the first quarter of the current budget year, and 18 states got more in sales tax than they had anticipated.” New York Times, February 8^th.

California’s still underwater, but even that state could see a rebound. And of course, the instant a surplus becomes apparent, all those lost and crushed constituencies want to be restored as close to their former glory as possible: “The [Michigan] attorney general wants 1,000 new police officers after 3,200 were cut around the state over the last decade. Schools leaders say they need to offset cutbacks that have left teachers laid off and schools closed. Child advocates want money for early education for toddlers from poor families; construction workers want money for Michigan’s crumbling roads; and on and on.” NY Times. And then there’s Detroit, a roiling sea of failed government and desperate deficits, still deeply underwater. Spending that money would create jobs, and both education and infrastructure are really longer-term investments that actually pay dividends and not merely expenditures, but exactly how certain is the sustainability of the new levels of tax revenues? Could a collapse of the European market, notwithstanding the recent progress on the situation in Greece, rekindle the fire that killed jobs and tanked growth? What would you decide?

I’m Peter Dekom, and even in a world of teetering economics and lowered expectations, growth can and does return.