Crony Capitalism

Forty million dollars for “Oz: The Great and Powerful.” $20 million promised for “Transformers 4.” $18.3 million for “Real Steel.” Disney got an average of $9 from each Michigan taxpayer for agreeing to film Oz in Michigan, while Weinstein and Miramax got comparable amounts for their films.

If state policymakers were to design a program based on the faultiest of premises, they could scarcely do better than the film subsidy program. It operates under the following assumptions:

  • Centralized planning can create an industry.

  • Funding a tiny part of the overall economy with a large, uncapped amount of money will “bolster the economy.”

  • Giving money to groups of people who have little connection to the state will benefit Michigan.

  • Issuing funding to an industry that is extremely mobile and bid on by other states will create stable growth in Michigan.

  • Backing outlays with underfunded parts of the current budget will pay off in the future and not increase existing debt.

  • Support from economists and academics is immaterial; the government knows what’s best.

At its creation, Michigan’s film subsidy program contained all of these elements and most of them still live on.

The Michigan Film Office disperses the money to select production companies, favoring the companies which are the richest and most politically connected. The original incentive program was uncapped, giving state bureaucrats very little oversight or discretion on spending.

In total, about $400 million has been paid out through the state’s film subsidy program — to an industry made up of only a few thousand people.

In the meantime, other states are constantly attempting to outbid Michigan for these projects — lucky North Carolina outbid Michigan for the filming of “Iron Man III.” This results in productions being able to drive up the cost of their taxpayer subsidies while also taking money from several different states. A win-win for the rent seekers.

The moral authority of government officials shakes further when you consider the case of Pontiac. In 2009, the administration of former Gov. Jennifer Granholm made a deal with wealthy investors to back an $18 million agreement for Raleigh Studios, using public pension funds as collateral. When the film studio stopped making the bond payments, the state pension funds for teachers, police officers and other government employees were raided to cover the cost. Three payments have been missed so far and the bailout continues to this day.

In Allen Park, the city council and mayor — egged on by the state and county — saw an opportunity to use the program to enrich the town. They paid $40 million for Unity Studios with the state and county kicking in millions more in incentives; nothing ever materialized. A severe crisis, a huge budget deficit, attempted tax hikes and massive layoffs soon followed. The city is now under the guidance of an emergency manager.

Almost no economist or researcher not connected to the film industry who has looked at state movie incentive programs thinks they are a good idea. Those on the left and the right agree that the programs are a poor return on investment. The conservative Tax Foundation writes that they “are costly and fail to live up to their promises,” while the liberal Center on Budget and Policy Priorities calls the job predictions “more fiction than fact.” The Michigan Senate Fiscal Agency found that in 2010-11, the state spent $125 million for a $13.5 million return — just 11 cents on the dollar.

The worst parts of this Hollywood horror story? The original bill passed in 2008 by a combined House and Senate vote of 145-1 (truly bipartisan support). And the state has no more film jobs today than when the film subsidy bill passed. There were approximately 6,000 then and there are approximately 6,000 now.

The program is a bad scheme cooked up by self-interested people in power. In probably the most blatant example of this, native Michigan filmmaker Michael Moore applied for about $1 million dollars in state funding, receiving over $840,000. He used that money for the film “Capitalism: A Love Story,” which seeks to expose “the disastrous impact of corporate dominance on the everyday lives of Americans.” As a self-proclaimed champion of the little guy against big business receiving special favors from government, Moore himself used a great deal of government funding for his own enterprise.

Centralized planning schemes like the film program and select tax breaks through the Michigan Economic Development Corp. are sold to taxpayers and politicians as “business-friendly” job creators. Policymakers don’t appear to understand the difference between “pro-business” and “pro-free market.”

Dr. Luigi Zingales, a professor at the University of Chicago and author of “Capitalism for the People,” sums it up this way:

“Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions.”

Zingales goes on to explain that this can cause “tension” between existing businesses and those favoring the free market.

As a free-market think tank, the Mackinac Center is not necessarily “pro-business,” but rather supports a limited and fair government that allows ingenuity and entrepreneurship to flourish, which benefits everybody as well as creates positive incentives in society.

That’s a true happy ending.