Monday, December 1st, 2008

An American Commonwealth

A commenter in my Detroit posting said, “The Feds absolutely should not get into the game of helping turn around Detroit or Cleveland or Michigan or Ohio or anywhere else. It is the competition for jobs, talent, investment, and population that should be protected. The problem with usurping that natural competition among locales is that you fail to address the poor leadership and local inertia that contributed to the urban decline in the first place.”

I agree with a lot of this. People and businesses have choices about where to locate, and competition between those locations is key to maintaining efficient, innovative, and responsive governance. The government should not choose winners and losers. And clearly the leadership of much of the Midwest has not met the challenge it is facing.

But I think this misses a more important point. America cannot survive and thrive as a country if it is divided into a two tier society. We have to maintain the concept of a true commonwealth, where the prosperity of the county is broadly shared, and the costs of protecting it broadly borne. While there will be winners and losers, when entire broad sections of the entire country are in dire straits, where people struggle to obtain the basics, employment and wages are in seemingly permanent decline for a certain class of the population, this is not a recipe for civic health. The United States can survive with an Appalachian region, a relatively small, isolated, self-contained, and persistent blemish of poverty. But it will not thrive or reach its potential if a good 1/4 to 1/3 of the country does not see itself as benefiting from the globalized 21st century economy we live in today. Revolutions have happened over less in some countries. I won’t suggest that will happen here, but clearly at least some of the extreme polarization we’ve seen of late in our politics must be driven by the increasing polarization between the haves and have nots.

Does the Midwest deserve some of the blame for its current conditions? No doubt. But again, who among us can truly say that we’ve never done anything which could not have, by rights, ruined our lives permanently? I know I can’t. If such a thing has not yet happened to me, it’s not for lack of trying. I have been blessed with a pretty good life which I attribute to three primary things – good genes, good upbringing, and good luck – none of which I had anything to do with and which I must attribute to Providence. Others have not been so fortunate, or have taken the proverbial bullet while I dodged one. I doubt there is anyone who can say honestly that the the good things they have are all the just due of their actions, or that they did not sow a bitter harvest that they somehow avoided reaping. There but for the grace of God goes you and I.

What’s more, people in Detroit and the rest of these struggling Midwestern places are our fellow citizens. How can we go on reveling in what we have while they are left behind to lose their life’s possessions when they can’t afford the payments on the storage locker they rented after getting their house foreclosed on? Today, they need us. Just as in the past and perhaps again in the future, we’ll need them. As I’ve said before, it’s not charity. It’s a common people sticking together for the common good. Even purely selfish motives must concede that the situation in the Midwest and industrial Northeast is a deadweight drag on our economy.

Note that I’m not advocating a bailout. I’m not talking about the government protecting gold plated union contracts, politically connected car dealers, or any city’s delusions of future grandeur. Rather, it is realistic, pragmatic assistance that honestly addresses the fundamental challenges, and the in many cases unpleasant answers, facing a broad swath of this country. We’re not talking about picking the winners and losers. The losers have already been chosen. It’s now about helping the losers to pick themselves up, dust themselves off and get back in the game. I won’t be so arrogant as to say my suggestions are The Answer. But at least we need to be willing to try some new and different things so that we eventually arrive to an answer.

In a similar vein, the burdens of society must broadly be shared. I’m also concerned about the class warfare rhetoric being used to demonize the “top 2%” or whomever, as well as tax policies that are again separating America into a two-tier society: those who pay taxes and those who collect benefits. According to the Tax Foundation, out of 134 million tax returns filed, 43 million paid no income taxes whatsoever. That’s almost a third of everyone filing. And plenty of people surely didn’t file because they didn’t owe any taxes at all. The top 50% of filers pay virtually all income taxes. The top 1% already pay over 40% of all income taxes (versus receiving 20% of income) and pay as much in taxes as the bottom 95% combined.

While one can debate its utilitarian merits, I’ve certainly got no ethical issue with strongly progressive taxation. But when a small group of individuals pay the vast bulk of all income taxes, this is likewise not healthy for a society. Everyone except the poorest of the poor needs to have a personal financial stake in lean, efficient government, and in rational provision of services. Income taxes fail the test, and unfortunately that is the tax that dominates discussion of federal taxation policy. (Individual income taxes are the largest single source of federal revenues).

A great example of what I’m talking about happened in Indiana a year ago. For various reasons, property taxes in much of the state skyrocketed. Property taxes are progressive, but also broadly paid by all homeowners, and indirectly by renters. The result was a broad-based outrage that led to serious and significant reform to how Indiana organized and financed its local government. Several elected officials lost their jobs in the process, and a number of positions are being eliminated entirely as some functions are consolidated. Additional government consolidation it being proposed for next year. Had only a small slice of the population paid the bulk of that tax, it is unlikely any real reform would have happened.

Clearly there are other taxes such as sales taxes that are more regressive. So let us not make the mistake of viewing income taxes as the sole source of government funds. But the principle remains. Just as we should not view the suffering of a large chunk of our fellow citizens as their own personal problem to solve, neither should we view the financing of our big dreams and plans for our cities as someone else’s to fund. The principle should be clear, not absolute equality or an absence of winners and losers, but an American commonwealth, with prosperity broadly shared and costs broadly borne.

Update: I’d like to clarify the taxation point. I’m not saying you can’t have a strongly progressive taxation system or make the top 1-2% pay the bulk of the taxes. What I have a problem with is when large numbers of people don’t pay anything at all into the federal government’s top revenue category. Right now it looks like about 1/3 of households pay zero and probably another 1/4 pay next to nothing. Regardless of how much they pay of the total collected, which can be very small, almost everyone, say 85-90% of households should pay something, and something that is financially meaningful to them so that they have a stake in the tax rate and spending policies.

PS: If you want to see the reason why this is an imperative, watch this must see video from October that appeared on France24 TV (in English – hat tip Tales from the Rust Belt via Burgh Diaspora).

Topics: Public Policy
Cities: Detroit

19 Responses to “An American Commonwealth”

  1. Anonymous says:

    When states like Michigan are no longer donor states to places that can well afford to pay their way, then we can start talking about “natural competition”. But so long as states like Michigan are financing the government in places like Arizona or Oklahoma, let’s not pretend there’s anything like a level playing field.

  2. Anonymous says:

    That’s a great point to make about income taxes. There’s a second interesting statistic that says that when taxes increase, tax revenues decrease. Essentially, people try to find more and more ways to avoid paying taxes the higher they get. I like how you approached the subject. It’s not that the rich want to pay nothing, but rather that they feel like they foot a large chunk of the bill as you highlight so well.

  3. Anonymous says:

    Detroit and the citizens of Michigan in general have no one to blame but themselves for their plight. Their situation didn’t just happen this year. Michigan has been failing for at least the last 5+ years. Their politicians weren’t elected in a vacuum. Why should I pay to help them because of their poor choices? They could have easily made different choices but didn’t.

  4. Anonymous says:

    I disagree. There’s several points I would take issue with in this viewpoint. First, the rich pay such a high percentage of income taxes because they are so much more wealthy than everyone else. Numbers like this are typical of that disparity:

    “The wealthiest 13,000 families in America own nearly as much income as the bottom 20 million and the wealthiest one percent own more wealth than the bottom 90 percent.”

    When the top 1% control that much income, why are we surprised that their tax bill matches their income? We have a problem with them being asked to pay a proportional share of the taxes but don’t have a problem with them controlling that much of the wealth?

    Second, the focus on income taxes is deliberate to obscure the many regressive aspects of our tax system. Sales taxes, flat state income taxes, gas taxes and many other taxes are regressive and fall more heavily on the poor than the rich. In many states, these taxes, not the income tax, are a primary component of funding government operations at all levels. Several states have no state income tax at all. Instead, the states rely on regressive taxes, like sales tax, to pay for government operations. Even at the federal level, almost everyone is paying taxes through payroll taxes for Social Security and Medicare. The claim that a certain percentage of taxpayers pay nothing in income taxes ignores all of the other ways that they contribute in taxes to the operation of government at all levels.

    Finally, the focus on who pays what percentage obscures the real world impact of tax policy. A poor person who pays 20% of their income in taxes is materially more affected by taxation than the multimillionaire paying 50% of their income in taxes. That’s why I find the focus on the income tax to be deliberately dishonest. Why not talk about the entire tax system? Because then we would have to acknowledge how regressive taxes like sales tax are on the poor. A multimillionaire probably pays a fraction of a percent in sales tax in gas taxes. But a person of less affluent means pays a much higher percentage of their income to these taxes.

    I would argue that one of Michigan’s problem is that the state’s tax system is quite regressive. The main funding sources are a flat income tax, sales tax (which was increased to offset a cut in property taxes) and property taxes. During the 90s, the legislature and Governor pushed for lower income taxes and got voter approval for higher sales taxes. When the dot com bubble burst the national economy in 2000, this regressive system imploded, leading to 8 years of unbalanced state budgets and an ever increasing inability of the state to invest in education, infrastructure and services.

  5. The Urbanophile says:

    anon 7:48, You seem to be implying that Michigan’s problems are the result of being a donor state. I strongly disagree with that. Even if true, it’s a marginal factor at best.

    anon 10:01, I’m sorry you feel that way.

    anon 8:19 and 10:04, I don’t object to progressive taxation, merely a system whereby large chunks of the population pay little or nothing. If, say, 80% of the working population paid enough taxes such that they felt the sting when taxes were raised, as was the case with Indiana and property taxes, people would have much more concern over federal spending instead of looking at it as free money, which seems to be the case for all too many people today. This is regardless of how progressive the rates are. The idea is that everyone have a bona fide financial stake in the efficiency of the system.

  6. John M says:

    I don’t think your point makes sense, 10:01. You yourself say that this “didn’t just happen this year,” which is true. On the other hand, why is, for example, a 23 year old citizen of Michigan “responsible” for all of the missteps that occurred before he reached adulthood and even before he was born? I suppose it depends on your perspective. You seem to view state lines as something across which Americans owe no responsibility. I’m not suggesting handouts, but why is that hypothetical 23 year-old any more personally responsible for the collapse of the Michigan economy than you or I are? Yes, Michigan politicians and labor and management of the big 3 have made some bad decisions over the decades, but the people who will bear the brunt of this, today’s young people, had absolutely no say in the matter.

  7. Anonymous says:

    I second what Anon @ 10:04 said.

    All of this hand-wringing about the wealthy paying a lot of taxes misses the larger point: the wealthy–and especially the superwealthy–are pulling in a much larger share of America’s overall income and wealth. On the other hand, wages for average workers are basically at a standstill.

    The rich are paying a lot of income taxes because they are pulling in an astonishing amount of income.

  8. Anonymous says:

    It’s already a 2 tiered society.

    “We can’t recover the money from the companies now. They have extracted the profits and their CEOs have cashed their gilded paychecks. The speculators bought mansions, private jets, and small islands. Lehman Brothers declared bankruptcy on Monday and 25,000 workers are on the brink of unemployment.

    But Lehman CEO Richard Fuld is sitting pretty, with his $354 million compensation from the last five years and a mega-mansion in Greenwich, Connecticut.”

    You may be right about the rich paying a larger amount of taxes. So what? If I made $354 million the past 5 years, I’ll take that anyday and pay more taxes, than to worry about possibly losing my job.

  9. Anonymous says:

    Let’s try the link again. No spaces.

  10. thundermutt says:

    Y’all must be young. Michigan suffered similarly after the 1970’s oil shocks and in the 1981-81 recession. (In those days, Time magazine documented a phenomenon: Michigan’s license plates were black with white lettering, leading to the term “black-tag people” commonly used in the then-booming Sunbelt states.) The rising tide has always lifted their boats before, though never as high as the once were. This time there may be no tidal effect.

    Anon 7:48, Indiana has been a donor state forever, even when we had a native son as vice-president and later with a senior senator as chairman of the Ag committee.

  11. Anonymous says:

    This post makes some excellent points–however, the Tax Foundation’s finding is ludicrous and has been repeatedly debunked. Such a finding completely ignores payroll taxes, and the contention that payroll taxes are not in fact income taxes is pure semantics.

    Plus, waitresses and box-packers at off-ramp distribution facilities already shoulder a greater share of federal tax liability, according to the Congressional Budget Office:

  12. Anonymous says:

    Why not just sell Detroit to Canada? If the Lions were in the CFL they might even win a game.

  13. Boofer says:

    I’m the poster whose comment you led with in this piece. My point really boils down to two things. First, the idea you posed in your 11/23 “Do the Collapse” post suffers from the unfortunate disease called “LooksGoodOnPaper-itis.” That is, there may seem to be real logic in positing your hypothesis and extrapolating the outcome, but in reality, this idea is completely unworkable. Second, and perhaps more central to my opinion, is that you can not continue to rely upon the national government to solve local problems that are inherently the result of thousands of individuals making decisions about their own futures. I was struck by the 60-year-old Dave from the French video. He said he had four options – get another job, relocate, become a criminal, or kill himself. Two of those are bad choices, and I presume he meant the thievery and suicide options. But he never finished the thought – what’s wrong with relocation, Dave? Look at it this way – you live in Youngstown and you get laid off from the factory. Your best option might be to move to Tennessee or Georgia or Texas and start a new career. I know that can be scary, but for many of these people, leaving a dying area is the best option they have. So why don’t they – why doesn’t Dave relocate? Well, one might speculate that he’s incentivized to do exactly the opposite. He gets unemployment – that’s a good thing all around. But it delays his decision to leave. He might get other tax deductions or deferments since he’s unemployed. He can probably get food assistance and heating assitance. In a few years, he’ll get Medicare or if things get really bad, Medicaid. I’m not saying that any of those programs are bad by themselves – I believe that they are certainly each good programs and serve the local, state, and national interests. But in the aggregate, don’t social support programs have this unintended and perverse impact of interfering with what would otherwise be in individuals’ self interest? Now before the flames start, of course I realize that there are many reasons why people might decide not to relocate to another part of the country – family or health concerns, financial reasons, fear, etc. Indeed, it’s not a simple nor easy decision to make. But how bad does it have to get before you just have to pick up and go where the jobs are? Look, just a few generations ago, people were leaving Tennessee and Georgia and Texas and moving to Michigan and Ohio because that’s where the jobs were. The same thing has to happen in reverse now, and it will when enough people, individually, feel enough pain to start that migration en masse. And I submit that the fact that Detroit still has such a large population, for example, is a reflection of things not yet being painful enough. And without getting into another debate entirely, I also submit that the labor mobility and churn that is present in the U.S. economy is one of the pillars of our global success, a competitive advantage that is not easily replicated by other societies. And it would be wise not to mess with that.

  14. The Urbanophile says:

    Boofer, thanks for the comments. I really do appreciate thoughful, reasoned commentary that is different from my PoV. Otherwise I’d be out of a blog.

    I think we’re closer than you give me credit for. I likewise feel that the nature of cities is that they are bottoms up phenomena, shaped by the decisions of many individuals. And I don’t think we should try to patch over the failed policies of urban areas that won’t face reality. I also don’t think we should bailout auto maker unless one of the conditions is a bankruptcy filing.

    I think I just take the same basic situation and see it slightly differently. You see the Youngstown person as unwilling to move. That might be true. But he might also be unable to move, trapped in upside down mortgage in a house he can’t sell. I think this gets to the basic point. I would provide help to people like this to relocate. I would not try to create make work jobs in Youngstown so he could stay.

    Perhaps I’ll write more later.

  15. Anonymous says:

    “I’m the poster whose comment you led with in this piece.”

    The problem I have with both of your views expressed in this article is that you are selective in your criticism of government intervention. Let’s highlight some ways that government action have distorted the auto industry:

    – Foreign brands who have home governments that heavily subsidize those industries especially with national health care systems.
    – Southern states that provide huge government-funded incentive packages to attract foreign automakers.
    – Federal and state government regulations that distort car prices by slapping on numerous regulations that may or may not be market-oriented.

    I’ll be the first to criticize the practices of the Big 3 and the state and local governments in the communities where they locate. But for those of us in areas where these industries are a key part of the economy, most of the commentary coming from the rest of the country is frankly, uninformed and outright wrong. The idea that the Big 3 are a dinosaur industry ignores the massive amounts of engineering and IT brainpower that is part of the backbone of the modern auto industry.

  16. Alon Levy says:

    The US auto industry is even more protected than the Japanese and German ones. The EU and US markets are fairly open to each other. The Japanese market is less open, and the American market is less open to it, but that hurts Japan more than the US, which has both a higher population and higher per capita auto ownership. The only reason Honda and Toyota have plants in the South to begin with is that their Japanese plants are subject to exorbitant tariffs, which the US passed because the Big Three lobbied for them in the 1970s saying they only needed a few years’ protection to be able to compete in an open market.

    If you think universal health care is an unfair subsidy, you’re insane. By that standard, any government policy could be construed as unfair trade. Besides, Germany’s universal health care system is paid half by the government and half by one’s employer.

    Engineering goes into a lot of things. Even semi-literate 19th century farmers supported a small ancillary industry of accountants, bankers, and farm implement manufacturers, all of whom could be said to prove that agriculture is cutting-edge and is a backbone of a modern economy.

  17. Anonymous says:

    Well, when wages are depressed by government policies; importation of illegal aliens, unfair trade policies and the like, while the government also provides tax welfare (which is abused), the tax burden will become concentrated.

    Also, when a certain number of people are permitted to turn part of the economy into a casino and then have their loses covered by the government, I do not have much sympathy for those paying the most taxes when they have generally rigged the game for themselves. Unfortunately, there are many other people harmed by this false, rigged economy who work in the real economy that are indeed burdened by all of these financial machinations.

  18. Anonymous says:

    The guy in Youngstown can’t move because his house (even if it is paid off) is only worth $50,000 and there is no one available to buy it because it is in Youngstown (or any number of other cities with virtually no housing market)! Only the young people can move and they have and they will continue to move.

    And there is no reason to move when you own a home to another city and compete for depressed wage jobs with illegal aliens who live twenty to a house, especially when many of those illegal aliens were attracted to those cities by the false economy created over the least few decades.

    And as for the foreign automobile plants; the only reason that they are here is because of the federal government’s actions three decades ago. But then our stupid states and localities play their incentive game and pay wealthy companies to pick their state and waste important resources with no coherent long-term plan.

    For example, building new infrastructure for a Honda plant in the middle of nowhere should be illegal when there is existing infrastructure within many cities and towns that needs to be upgraded and could have been upgraded to accommodate a new plant. But instead we waste resources building fragmented infrastructure in the boonies and people applaud like trained seals.

  19. thundermutt says:

    One could argue that GM (genetically modified, not General Motors) grains and beans are cutting-edge stuff.

    Anything that requires scientists tinkering with genetic material seems pretty “life-sciency” and cutting-edge to me. It’s not something an Amish craftsman can do in his gas-lighted barn shed.

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