What's the Matter With Michigan?
Rise and Collapse of an Economic Wonder
GroundSwell, November-December 2008]
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
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
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 Bull Moose T.R. state, 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
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, 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
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
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.
II. The stagnant Upper Peninsula (The U.P.)
Meantime the U.P. was stagnant. Longfellow in The Song of Hiawatha
had romanticized it as "Gitche Gumi" (Ojibway for Lake
Superior). Ben Smith, a retired engineer from Grand Rapids, saw it
more realistically as a land of barons and peasants, and not many of
Latifundia in Gitche Gumi). Its owners managed to escape
from Pingree's reforms, so the U.P. remained an economic desert, even
while the L.P. was making homes and jobs for millions. These owners
were and are few, and tightly organized to resist taxes. They are
timber firms and mining firms, or at least the owners of mineral land
that someone might mine some day.
The U.P. is not barren of resources. It has hundreds of miles of
shoreline on the Great Lakes hard by what was the industrial heartland
of the U.S. Inland it has vast forestlands and reserves of copper,
iron, and who knows what other minerals. Its problem is more like the
economists - "Dutch disease" of excessive easy riches.
Under Michigan's Forest Tax Law the State exempts all certified
commercial forests from the ad valorem property tax. 14% of the
U.P. is thus exempted. Instead, the owners pay 15? per acre -- and the
State pays the county 25? per acre with money drawn from L.P.
taxpayers (Smith, p.115). This break for timber is not unique to
Michigan: California is just as bad, so its northern forest counties
are also economic deserts, and parasites on the State fisc. Both
States have outstanding Schools of Forestry whose personnel, advising
legislators and owners, are complicit in these arrangements. Alabama
is even worse, as Law School Professor and Christian activist Susan
Pace Hamill and her ally, Governor Bob Riley, have recently brought
out as they bumped heads with the timberland owners, and lost. In New
Hampshire, forest landowners have led in squelching bills submitted by
Assemblyman Richard Noyes for a statewide land tax. Forest landowners
are a problem for Georgists everywhere -- a big topic for another day.
Under Michigan's mineral tax law, newly discovered ore is exempt for
10 years. In practice the effect of that and other laws is that "Virtually
all iron ore land is exempt from taxation." Before 1963 it was
done illegally; a 1963 Act made it legal (Smith pp. 115-17). There is
a nominal severance tax, but Smith illustrates how owners of iron ore
in the Marquette Range dodge it.
Smith's monograph is full of vignettes, such as that in Keweenaw
County (in 1975), 80% of the private surface land is owned by one
copper company, Calumet & Hecla Corporation, a subsidiary of
Universal Oil Products.
We omit the U.P., therefore, from the following history: it is a
stagnant world, living on the L.P., unrelieved by the cycles of at
least occasional prosperity that make the L.P. more livable.
III. Urban sprawl around Detroit in the 1920?s; it's awful
By 1930 Detroit had 68% more people than in 1920, again leading the
nation. 1920?s leaders, however, were not like the Progressive
Republicans of yore, they were New Era Republicans of what Michigan's
Professor Kenneth Boulding was to call "The Cowboy Economy".
They twisted Pingree's ideas by growing in area even more than in
people. Detroit's best-known product, marketed to millions, let
builders sprawl over outskirts and suburbs to a degree hitherto
unthinkable. Detroit's rich tax base, misspent, helped them do it.
Michigan Business Professor Ernest M. Fisher, normally a tame and
timid soul given to understatement, documented the damages in
monographs and articles that became minor classics of boom and bust in
urban expansion. Most American cities underwent the same process, but
Detroit, like Florida, sprawled well beyond the average. Hard-luck
Flint became a poster-child victim of sprawl and land speculation,
singled out for attention by leading planner Edmund Bacon (1940,
A Diagnosis). Harold S. Buttenheim, Georgist Editor of the
then-influential American City Magazine, focused on Detroit.
Today, as GM closes down Flint's life-support, publicist Michael Moore
is republicizing Flint as poster-child. Neither glare of publicity has
cured Flint's problems, however; that would require stronger measures.
IV. Michigan in the Great Depression
Detroit, like most big industrial cities, slowed down in the "Dirty
Thirties". Many cities shrunk; Detroit did better, growing by
3.5%. Still, its people knew hard times, and searched for new ideas
and leaders. It produced at least three prominent new men from outside
the establishment, who led it in the New Deal direction. These were
Charles Coughlin, Frank Murphy, and Walter Reuther. Coughlin and
Murphy flashed across history's stage and faded. Reuther, working in
the grubby trenches and staying home, was to have the more lasting
impact. In modern terms you could call him a "community organizer".
Fr. Charles Coughlin was pastor of a small church in Royal Oak, a
northern inner suburb of Detroit. He mastered early on the new medium
of radio, even before FDR, and amassed a huge following in the early
depression years. He saw social salvation in the 1931 Encyclical of
Pope Pius XI,
Quadragesimo Anno (40 Years Later), an update of Pope Leo
XIII?s Rerum Novarum, 1891. He popularized those messages as
never before. They bear an uncanny likeness to FDR's New Deal, much of
it framed by Irish and other Catholics whom they touched through
Coughlin. The story of Coughlin's sensational rise and tragic fall is
told at length in Gaffney, 2000, Henry George, Fr. Edward
McGlynn, and Pope Leo XIII. Suffice it here that Coughlin's
Michigan springboard rocketed him so fast to national and
international fame and influence and controversy that he had little
role in Michigan.
Frank Murphy, Detroit's Mayor 1930-33, was "a New Dealer before
there was a New Deal" (Sidney Fine, biographer, 1984), and helped
elect FDR. By all accounts he was of high character and ability and
ambition. FDR bundled him off to the Philippines as Governor-General
(possibly to exile a potential rival). Murphy returned to become one
of Michigan's few Democratic Governors. During his tenure (1936-38)
Walter Reuther's fledgling UAW pioneered the sit-down strike at GMs
plant in Flint. Governor Murphy called out the national guard, but
refused to authorize violence. Instead he negotiated a settlement that
legitimized the UAW, using the new national Wagner Act. It was "The
strike heard round the world". UAW membership exploded from
30,000 to 500,000. Industrial unionism had arrived to rival
and later join the old AFL. Organized labor, for better or worse, has
been a major political player ever since. Murphy went on to become
A.G. in 1939, and then a Justice of the U.S. Supreme Court, but thus
ended his role in Michigan.
Walter Reuther was a socialist from a socialist family, organizing
unions in a time of violence when employers controlled the police and
the FBI. He survived beatings by strikebreakers, and two assassination
attempts before finally falling to a third one in 1970. He couldn't
get elected even to the Detroit City Council, yet TIME Magazine
included him with the 100 most influential people of the 20th Century.
He turned Republican Michigan into a union state, and his union into a
major national political force. From 1939 he became a Democrat,
increasingly on intimate terms with Party leaders. He never stopped
supporting liberal causes (Martin Luther King, Jr., Cesar Chavez)
until he was slain. Even today, it is said, Senate Republicans oppose
bailing out Detroit auto-makers to avoid helping out Reuther's
creation, the UAW.
All this time, with all this excitement, with boom and bust in the
land market, Michigan fiscs depended mainly on the property tax. From
1932, other states were turning to sales taxes for 'property tax
relief', but not Michigan, not yet. Doughty Ben Smith of Grand Rapids,
he who wrote about the U.P., churned out reams of essays and tables of
data demonstrating that states progressed economically in the measure
that they used the property tax to finance government. It is tragic he
didn't live long enough to polish and package his works better; they
were diamonds in the rough.
V. Detroit in the arsenal of democracy, 1940-50
After 1940, and especially after Pearl Harbor, FDR naturally turned
to Detroit to convert its assembly lines and supply sources to war
production. The whole nation revived, but Detroit grew by 14% while
most cities grew by much less, and many shrank. This was the age of
Rosie the Riveter, but Rosie favored Detroit over most other venues.
Walter Reuther the anti-fascist converted to a Democrat; Reuther the
German-American squelched wildcat strikes against the war effort;
Reuther the born Marxist purged communists from his unions, joined the
cold war, and rated high in Washington. He was a man for his times. It
would appear that Detroit and Michigan were back on the fast track.
VI. Famous Governors and meager results, 1950-70
From 1950-60, Detroit shrank by 10%, the first break in its
sensational upward trajectory. What could the matter be? "Explainers"
could blame an exogenous force, the end of the war, but demand for
autos and trucks was booming: America was pouring billions into the
Interstate Highway System. The St. Lawrence Seaway was on track to
open in 1959. The world was buying American cars. The causes must have
1952 brought on Governor G. Mennen "Soapy" Williams, scion
of an old Detroit family (Mennen toiletries), handsome, personable, an
prodigy, eastern prep, Princeton, Michigan Law School,
ambitious, cover of TIME, and presidential timber. Like Murphy, he won
as a Democrat in a Republican state. In Michigan, party lines are
fuzzier and politicians more temperate than in Wisconsin and
Minnesota. (Ethnically, one might guess it reflects the Dutch
temperament vs. the central European, but that is speculative.
In 1952 the new Governor Williams allied with old warrior Reuther,
and represented some of his views. He saw a need for more state
services. Michigan had no state income tax at that time, only half the
states did, and Michigan's neighbors and competitors Indiana, Ohio,
and Illinois did not (Hines, p.11). Taxing "business" may
have sounded good to Reuther, the intellectual steeped in Marxist
Williams' 1953 tax was called the Business Activities Tax (BAT).
Technically it was an odd duck, a kind of modified VAT that "the
business community" (as Professor Hines calls it) preferred to a
tax on corporate income. If it and Williams' new welfare programs
helped Michigan grow one could not prove it from Detroit's falling
population. Michigan overall still grew, as Detroit was hollowing out;
but Michigan grew slower than the national average, losing another
Congressional seat. It stood still compared with, say, California. As
for Williams he was shuffled off, like Murphy before him, to minor
foreign posts. He came home and ended his career as Chief Justice of
the Michigan Supreme Court. His lasting memorial is the long expensive
Mackinac bridge, a 1950s version of a "bridge to nowhere",
for it links the L.P. only with the barren U.P., which remains barren
since it needs another kind of therapy.
The next famous Governor was George Romney, 1962-68, a hero because
he had rescued American Motors by promoting the Rambler (although it
was made in Wisconsin). Romney was a "liberal Republican"
(as the term was then understood), loosely allied with Nelson
Rockefeller who loaned him economic adviser George Gilder, co-author
with Jude Wanniski of early "supply-side" works. He viewed
Reuther as "the most dangerous man in America" because
Reuther had a visionary and idealistic side, when Romney might better
have sided with Reuther against primitive Jimmy Hoffa, Reuther's
arch-enemy. Romney introduced an income tax to help support public
schools and provide "property tax relief", a p.r. catchword
that caught on in the times.
Meantime the property tax itself was degenerating, nationwide, into
more of a tax on buildings, less on land, through confusion and
corruption in the assessment process. One can trace this openly in
professional and scholarly books and articles on appraisal and
assessment, material for another article. Manuals from the
International Association of Assessing Officers (IAAO) grew increasing
muddled. The John C. Lincoln Foundation, supposedly dedicated to
advancing the ideas found in Progress and Poverty by Henry
George, was devoting major funding to promote "Computer-Assisted
Mass Appraisal" (CAMA)of buildings, but not of land values.
Detroit was assessing land values at next to nil, using assessments
dating from the Great Depression (Andelson, 2000, p.163, citing James
Clarkson, Mayor of Southfield), and no one was doing anything about
it. Economists weren't even writing about it, not even talking about
it. So Ben Smith's faith in the invigorating powers of property
taxation had less basis than before, even as the property tax itself
was being diluted with other revenues. One Michigan city, Southfield,
made itself an outstanding exception with outstanding results, treated
Note in passing that the part of the property tax that falls on
capital, bad as it is, is not as bad as taxes on income, sales,
value-added, or business activity. The key word is activity. The
property tax penalizes capital for standing still; the activity taxes
penalize it for moving
The late 1960s saw riots related to race and civil rights in many
cities, but Detroit's in 1967 were so bad that President LBJ sent in
U.S. troops. Candidate Romney had courted blacks more than previous
Republicans had, but he was a prominent leader in his Mormon Church.
At that time (before 1978) this Church denied blacks full membership
its "priesthood", and had a long if ambiguous and arguable
record of discrimination in its sacred texts (blacks were "Lamanites").
That did not sit well in the new era of civil rights, although many
other churches discriminated too, de facto.
Governor Romney had also been preoccupied during this, his last term,
seeking the Republican nomination for U.S. President. The 12th Street
Detroit Riots in 1967 damaged both him and LBJ, both of whom dropped
out of the race. Romney was also condemned for opposing the war, and
LBJ for waging it, but as that does not make sense it seems likely
that their poor handling of the riots played a role. They never
recovered, and neither has Detroit.
In 1967, more quietly, Michigan dropped its "BAT" and
replaced it with a regular corporate income tax. This tax lacks some
of the worst features of the BAT, but they were soon to return in the
"Single Business Tax" (SBT), discussed below.
VII. Southfield booms while Detroit busts
While Detroit hollowed out, its suburb Southfield boomed. From
1950-70 it more than tripled from 19,000 to 69,000 people. It had a
Georgist Mayor, James Clarkson, who made a point of raising land
assessments and lowering building assessments. How can a mayor do
that? Clarkson observed there is wide latitude in the assessment
process, which most assessors were using to underassess land.
Southfield's Assessor had been valuing land at 10% or less of market
value. In 1960 Clarkson, like Pingree in 1890, campaigned for Mayor to
correct that. Meeting resistance, he hired a Georgist assessor, Ted
Gwartney, and had him upvalue land and downvalue buildings. Gwartney
had honed this skill earlier working for Dr. Irene Hickman, elected
Assessor of Sacramento County, California, who was also an activist
Georgist. Clarkson served four terms before the Michigan powers lured
him away with a judgeship (Andelson 2000, pp. 162 ff.). Gwartney left
to pursue a distinguished career elsewhere. Southfield immediately
leveled off at 76,000 people and has not grown since.
Harvard Law Professor Oliver Oldman, a leading tax authority, scoffed
at the evidence, at a meeting we both attended. Southfield was merely
taking advantage of Detroit's problems, in his view, and exploiting
white flight. Southfield was engaging in competitive undertaxation, a
race to the bottom. Such, unfortunately, has been the academic p.c.
mindset, screening out examples like Southfield's.
Southfield's tax base actually rose by 20% per year under
Clarkson/Gwartney, and it provided good utilities and public services.
Even the landowners whose assessments Gwartney raised made out well
because the benefit of the relief of potential buildings from
overtaxation was shifted to landowners in higher market values. It was
rather Detroit that was "racing to the bottom".
VIII. The "Single Business Tax" (SBT), 1975
In 1975 Michigan adopted its distinctive "Single Business Tax"
(SBT), replacing the corporate income tax. This is a variety of VAT, a
tax on gross receipts less certain deductions. First, as with any VAT,
one deducts purchases from other firms, reasoning they have been taxed
already on the value they added. One does NOT deduct labor costs.
Michigan's SBT has two especially bad features. One is that
unincorporated businesses, mostly small, are as subject to the tax as
corporations, some gigantic. The other is that buying real estate,
including land, is deductible as a current expense (Hines, p.16).
Logically buying land should not even be depreciable, since land does
not wear out, and
a fortiori should not be expensible in the year purchased.
Imagine owners A and B selling a parcel of land to each other in
alternate years, each buyer expensing it each time! It amounts to a
great subsidy for holding land. At any rate, by 1980 Detroit had
dropped another 20% of its people from 1970. No other state has
adopted this kind of tax.
IX. Governor John Engler scuppers the property tax, 1995
In 1995 Governor John Engler decided to heal Michigan by taking its
public schools off the property tax. This is when we Georgists met
with his staff at the Levy Institute. Playing Cassandra, here is the
advice I offered in 1995.
"What happens when a state radically slashes its
property tax? Michiganders are saying they must wait and see, but
there is no need for that: California can show you 17 years of
experience. To read your future, just study our past. Here is what
has happened since California passed Proposition 13 in 1978.
The obvious direct results have been to cut public services, raise
other taxes, and lose credit rating. Our school support fell from
#5, nationally, to #40 in 1985 when last seen, still falling. County
road maintenance is down to where my county (Riverside) is repaving
its roads at an annual rate of once every 130 years. Once in 20
years is recommended here, and up north you generally need higher
frequency. You can't just build infrastructure and then stop paying
for it, it's a perpetual commitment. Thanks to urban sprawl, a high
fraction of our population now depends on these county roads.
In 1978 we had a surplus in Sacramento. Since then we have raised
business taxes, income taxes, sales taxes and gas taxes, but go
broke every June. Now our State bond rating is last among the
states. One of our richest counties (Orange) has gone bankrupt; Los
Angeles is on the brink of it, saving itself by closing emergency
rooms and hospitals that serve as a last resort for the uninsured
The private sector is doing badly, too. Raising income taxes,
business taxes, and sales taxes is no way to stimulate an economy;
they are all a drag on work and enterprise. Our income pc was down
from #7 to #12 among the states by 1992, then fell some more. From
1992-94, California was one of three states where median household
income fell. Our unemployment rate is 9%, 50% higher than the
national mean of 6%. Our poverty rate is 18%, compared to 14.5%
nationally. Not surprisingly, therefore, the only government
function that grows now is building and operating prisons. One of
our few rebounding industries is cinema, the art of escaping from
reality: we excel at that. Another thriving activity is that of
auctioning off used machinery for export to the east.
In 1993 there was net outmigration (including international
migration) from this state that has symbolized American growth since
time immemorial. It is unheard of. 426,000 people were lost, nearly
2% of the population. This is a watershed change: imagine of all
states California, America's trend-setter, our El Dorado, The Golden
State, our Horn of Plenty, the safety-valve for job-seekers and
retirees and entrepreneurs from everywhere, the end of the rainbow,
losing population! It's almost enough to make a person click off the
tube and think.
The fall of our income pc is greater than appears from the purely
monetary measure. Real pay has fallen more, because of the drastic
rise of shelter prices. In San Francisco, shelter takes 50% of the
median income, with many other cities, especially coastal ones, not
far behind. It is unusual to find livable quarters for less than
$600/mo. The median home price rose 163% during the 1980s, to
$258,000 (remember that is just the median -- the mean is higher).
These rises are part of the C.O.L. of all renters and new buyers, a
part not fully incorporated in standard CPI measures (for various
unworthy reasons too technical to open up now).
Some cities are in desperate straits. San Bernardino in 1976 was
chosen an "All-America City, a City on the Go." It went,
all right: today, 40% of its people are on welfare.
California has always been earthquake country, but has always
renewed itself, routinely. It was different after the Northridge
quake in the San Fernando Valley, January, 1994. This is the
upper-middle neighborhood of Los Angeles, but now large pockets of
ruined buildings remain, unreconstructed, inhabited only by vagrants
and criminals: an instant Bronx West. These blighted sections,
ominous portents, spread more blight around them.
It should give one pause. It is, however, if you think about it,
the expectable result of what the voters did. They turned property
from a functional concept into a sacred one; from a commission to be
enterprising, hire people, produce goods, and pay taxes into a
welfare entitlement. They rejected the concept of a tax on inert
wealth in favor of the rival concept of taxing liquidity and cash
flow. The predictable result is to inhibit economic activity, and
encourage holding wealth inert and stagnant.
We had a construction boom in the 1980s, but it was not healthy. It
was marked by extreme sprawl, and extreme instability. Downtown L.A.
was to become a great new financial capital, but now has nearly the
highest office vacancy rate in the U.S., with of course a high rate
of builder bankruptcies. Speculative builders were led on to
overbuild, in part, by anticipated higher land rents and prices.
This Lorelei effect was magnified by national income-tax provisions
luring on speculative builders, but we have to ask why California
fell harder than other states, even with the object-lessons of the
oil states in clear view.
David Shulman tersely summarized the distributive effects of Prop.
13 as he left us for Salamon Brothers in Manhattan: "it
breached the social compact." Alienation is the result, and the
Rodney King riots, arson and looting are the results of alienation.
True, the Watts riots preceded Prop. 13, but they were part of a
national epidemic. By 1967 there were riots with arson and looting
in 70 or more American cities. The Rodney King riots were endemic to
California, and spread over a much wider area of Los Angeles than
the Watts riots did. The looters and arsonists were not all black,
and the targets were not all white, but mainly Korean-Americans who
just happened to be there minding their stores.
Conventional wisdom blames our bust on the end of the Cold War.
Surely that is a factor, but as a causal explanation it is too pat,
too easy, and a-historical. Compare today with 1945. Los Angeles'
economy depended much more on The Hot War, 1940-1945, than it ever
did on The Cold War. Los Angeles' wartime boom had swelled its
population as no other great city, 1940-45. After 1945 the U.S.
pulled the plug on defense spending, more than today. Jane Jacobs,
in The Economy of Cities, tells us what happened to military
spending in Los Angeles after 1945. It lost 3/4 of its aircraft
workers, and 80% of its shipbuilders. It lost its military and naval
overseas supply and replacement businesses. Troops stopped funneling
through. It got worse: petroleum and cinema and citrus, its
traditional exports, all declined.
Pundits then forecast a regional collapse. Yet, regardless, Los
Angeles never collapsed, nor missed a beat. The wartime immigrants
stayed put here. They formed creative, innovative small businesses
in large numbers, giving L.A. its deserved reputation for having the
most dynamic, flexible, adaptable industrial base in the nation.
Besides exporting goods, L.A. also became more self-contained,
providing itself with more of the goods it previously imported. How
could this be?
1/8 of all new businesses started in the U.S. were in L.A.,
1945-50. These were small, creative, flexible, and too varied to
classify. No Linnaeus could sort them in conventional categories:
the new Angelenos simply stayed here and started producing
everything for themselves, some things previously imported, and
others never seen before. Eastern firms established branch plants
here. Top eastern students came to California's great university
system, and stayed behind to make careers and jobs here. There was a
kind of regional "El Dorado Effect," as demand and supply
grew together, and growing local demand allowed for economies of
scale serving local markets. Food and shelter were cheap and
abundant. Land for business was accessible, providing a basis for
the whole self-contained phenomenon. A "continental tilt"
developed in both interest rates and wage rates, drawing in eastern
capital and labor.
Why is that not happening today, 1995? An invisible, pervasive
change is Proposition 13, which makes it possible to hold land at
negligible tax cost. In 1945 land was taxed at 3% every year,
building a fire under holdouts to turn their land to use. Today that
same tax cost is well below 1%. Using Gwartney's Rule of Thumb (see
below under B,1), it is about 1/8 of 1%: a rate of 1% applied to 1/8
of the true value.
Landowners are only taxed now if they use their land to hire people
and produce something useful. Then they meet the drag of our high
business and employment and sales taxes, necessitated by the fall of
property taxes. A handful of oligopolistic landowners control most
of the market; small businesses are squeezed out. This helps us
segue from being at the cutting edge of industrial progress to a
third-world economy - from the NH model to the AL model -- with
little relief in sight.
What was different then? One obvious difference was the high
property tax dependence in 1945, and the lower burdens of sales tax,
business tax, and income tax. We not only had high property tax
rates, they were more focused on land then than now. California was
more hospitable to Georgist thinking than perhaps any other state
then, shown by its long run of Georgist political action in the
prior thirty years. Several states had "single-tax"
movements and initiatives, 1910-14, but most of them petered out. In
California they continued through 1924, and then popped up again in
1934-38. Even while "losing," such campaigns raised
consciousness of the issue to such a degree that assessors were
focusing more attention on land. Thus, in California, 1917, tax
valuers focused on land value so much that it constituted 72% of the
assessment roll for property taxation -- a much higher fraction than
today. This became the California tradition.
In 1934 the "EPIC" campaign of Upton Sinclair included a
strong Georgist element -- he proposed to set up new factories on
idle land. Meantime, Jackson Ralston was pushing a purer land tax
initiative, 1934-38. Ralston lost, but the mere existence of such
political action in California, when the movement was torpid
elsewhere, tells us a lot. It reveals a large matrix of supportive
voters and workers to whom politicians (including tax assessors)
would naturally respond by focusing on land assessments.
California displayed amazing growth up to 1978, and the resilience
to shrug off the loss of war industries after 1945 and still grow "explosively"
(as Jane Jacobs put it). After 1978 we have a string of reverses.
The timing, along with a priori causative analysis, plus various
direct observations too numerous for this time-slot, support an
hypothesis that the reverses were aggravated by Prop. 13. Michigan,
be warned of our lot, and learn about taxes from us: "This
Could Happen to You."
The Lansing staff went home unmoved, and in 1995 Michigan, led by
Governor John Engler, took its schools off the property tax, putting
them on a State sales tax. The national media commented favorably,
crediting California's pioneering Prop. 13. Soon, however, Michigan
The press of March 11, 2007 reported the following:
- Michigan's unemployment rate is at 7% and has been for 4 years.
Only Mississippi is higher; the national average is 4.6%. Some
Michigan counties are at 10%. As old industries leave they are not
- Since June, 2000, Michigan has lost 300,000 jobs
- Personal income per capita dropped below the national average
in 2000 and has stayed below.
- 22,500 people aged 18-24 have left since 2000. Michigan's rate
of outmigration ranks among the U.S.'s highest.
- As everywhere, home foreclosures are up, sales and prices are
down, (Riverside, The Press-Enterprise, 3-11-07, page G-6)
Note again that first point, "As old industries leave they are
not being replaced." What is left behind then but idle land? Once
again, Detroit is riddled with holes, and in another of history's
ironies people today are growing food in them to subsist! "Pingree's
Potato Patches" again, 105 years later.
Those are not the results you would expect from a good tax system.
Michigan leaders are behaving foolishly. To protect homeowners, they
shift taxes to business gross sales, and the result is loss of jobs,
with homes dumped on the market for a big loss. Displaced workers
emigrate with little cash, to start new lives at the bottom of the job
ladder, and thank you, Governor Engler!
None of Michigan's postwar efforts at stimulative tax reform, save
one, have done the job. That one is Southfield 1960-1970, which
scholars and politicians have studiously ignored. Bellwether Detroit
has lost 50% of its people, 1950-2000. Flint has lost 40%. Benton
Harbor on Lake Michigan is a basket case. Now, to top it off, today in
2008 Michigan has moved on from mere decline to a Crash heard round
the world. All the Big 3 face bankruptcy and are begging Washington
for bailouts just to keep Michigan's once-proud auto industry going at
Should Washington refuse to bail Michigan, perhaps Michigan leaders
will finally look in the mirror, foreswear their foolish ways, and
begin a new round of prosperity. Let us hope and pray, yes, but also
furnish our minds with the facts and analyses needed to do our job of
pointing the way. What could be more timely, and of more permanent