Appropriations Summary

Actual[1]

Recommended

Savings

Interdepartmental Grants/Transfers

$100,900

$0

$100,900

Federal Funds

$62,953,300

$0

$62,953,300

General Fund/General Purpose

$37,224,200

$0

$43,080,200

Special Revenue Funds

$45,903,100

$0

$45,903,100

Gross Appropriation

$146,181,500

$0

$152,037,500[2]

The Michigan Economic Development Corporation (MEDC) is a quasi-public agency of the state.  For budgeting purposes, the MEDC is not officially recognized as a state agency.  The Strategic Fund, which was created in the 1980s, is the recipient of state and other funds that are used to operate the MEDC.  The MEDC was created in 1999 and took over a portion of duties once held by the Michigan Jobs Commission (MJC).  The MJC was a department designed to house all of the state’s disparate “economic development” programs in one single unit.  An executive order split the MJC in 1999 in favor of two newly created departments, known as the Michigan Department of Career Development and the MEDC.

The MEDC oversees work designed to “retain and expand jobs through business retention visitation programs.”[3] The 231-employee MEDC is Michigan’s chief dispenser of corporate welfare.

The MEDC is arguably the least necessary entity in state government. Its existence is based on several flawed premises and political considerations, such as:

  • The assumption that state bureaucrats can foster wealth and job creation better than individual consumers, workers, bankers, insurers, investors and managers, whose collective decisions form the market economy.

  • The assumption that the efforts of trade associations, industry groups, chambers of commerce, law and accounting firms, universities and a host of specialty consultants are insufficient to provide businesses with the expertise they need to grow and prosper in Michigan, and that state bureaucrats can supplement the services these organizations already provide.

  • The assumption that engaging in an economic “war between the states” through selective tax credits and subsidies for large corporations is a more effective economic development strategy than across-the-board tax relief.

  • The political fear that public officials will be seen as “doing nothing” to encourage economic development if they only remove barriers to the efficient operation of the free-market economy and refrain from state intervention.

The fact is that all the business support services provided by the MEDC, if needed at all, can be, and most often are already, provided by private-sector firms.  The programs are subject to political considerations, and there is no reason to believe that state bureaucrats can invest capital any better than private-sector financial institutions and Michigan companies themselves.  Michigan does not need a government-directed industrial policy; it needs leadership that understands and respects the operation of a free-market economy.

It is therefore recommended that the MEDC be eliminated entirely.  Doing so will liberate significant state resources to be returned to Michigan citizens and businesses.  State legislators also should change the law to ensure that all Strategic Fund revenues generated through Indian Gaming Compacts be redirected to the General Fund.  Doing so will raise approximately $11.5 million annually for state coffers.[4]

Program: Administrative positions

Appropriation:

All From GF/GP:

$5,228,100

 

Total:

$5,228,100[5]

Program Description:

This appropriation funds the department’s administration positions.

Recommended Action:

This line item should be eliminated with the rest of the department.  Savings: $5,228,100.

Program: Job creation services

Appropriation:

Interdepartmental Grants:

$100,900

 

Federal Funds:

$2,953,300

 

Special Revenue Funds:

$903,100

 

GF/GP:

$19,861,600

 

Total:

$23,818,900[6]

Program Description:

This appropriation funds the work of full-time employees who support the work associated with MEDC programs.  These programs include, for example, Travel Michigan, E-MEDC, the MEDC’s public affairs office, and the Michigan Economic Growth Authority, to name a few.  The following is a description of each of the four most notable programs supported by the job-creation services appropriation.

Program Recommendation:

These functions should be eliminated with the rest of the department. 

Travel Michigan: Travel Michigan helps the Michigan Travel Commission by marketing the state as a destination for tourists.  According to its web site, it also maintains a telephone service that the public can call to get information about traveling in Michigan.  The marketing services of this group should be left to private groups such as businesses and their trade representatives. 

E-MEDC: This section is described in House Fiscal Agency documents as coordinating “information technology and e-business efforts; customer assistance and customer advocacy units; export services and ombudsman office.”  According to officials at the E-MEDC office, information technology and e-business efforts include internal web support to MEDC staff and Michigan “Careersite” operations.  The MEDC’s creation and maintenance of Careersite is an example of a state agency that uses state funds to compete directly with a private, for-profit, taxpaying businesses.

It also underscores the fact that Michigan state government is now so big and bewildering that it competes against itself.  Consider the case of “Careersite,” operated by the MEDC, and “Michigan Talent Bank,” operated by the Michigan Department of Career Development (MDCD). Each agency carries out the same function — bringing job seekers and job providers together — and competes not just with each other, but also with hundreds of private, Michigan-based job recruitment companies.

Why does the state run these redundant websites? According to the MEDC, Michigan Careersite was created to help attract “skilled workers in Information Technology, Life Sciences, and Advanced Manufacturing.” The MDCD says its Michigan Talent Bank is intended to “bring employers and employees together,” but since it does not exclude skilled workers from any field, the two sites end up performing overlapping duties. In addition, an MEDC brochure about Michigan Careersite boasts of its ability to “grab” jobs posted on Michigan’s Talent Bank and move them to its own.

Private recruitment companies have long helped employers find qualified workers to fill jobs. During the 1990s, Michigan alone saw 348 new human resource firms spring up to fill this role. Michigan also is home to many privately run labor exchange web sites, such as Careermatrix.com.  Its founder, Dennis Hoyle, is not thrilled with the state’s involvement in his business: “It really is irksome to see the state using our tax dollars to compete against us,” he said. “Moreover, it’s bizarre watching the agencies competing against each other. There really isn’t much difference between the two sites.”

Unfair competition from the state is all the more striking given then-Gov. Engler’s comment in November 1999: “Tax policy is best which is simple and uniform, and which treats similarly situated activities in the same manner.” There is nothing fair about subsidized state agencies paying zero taxes while competing with private, for-profit, taxpaying firms.

Additionally, a number of general web sites in the state, such as mlive.com, operate labor exchanges, and many online newspapers post their want ads electronically. There are over 6,000 web sites specifically dedicated to job recruitment nationwide, and most of these private organizations do their work without costing the taxpayer a cent. Meanwhile, the MEDC is spending about $500,000 taxpayer dollars per year to operate Michigan Careersite for its first two years. The MDCD does not know what it costs to operate the Michigan Talent Bank.[7]

Michigan Economic Growth Authority In April 1995, the state created the Michigan Economic Growth Authority (MEGA), an agency empowered to issue tax credits to companies that promise to expand in or relocate to, Michigan.  

No company should be blamed for accepting a legal tax credit when it is offered, just as no individual should be faulted for taking a credit on his personal income tax form. But what makes these discriminatory MEGA credits problematic is that they are both unnecessary and unfair. Businesses — and the economy generally — would be better off with a fair field and no favor, a climate of lower tax burdens for all and discriminatory treatment for none. To date MEGA officials, working in concert with the MEDC, have arranged for companies to receive as much as $2 billion in tax credits, abatements and job training subsidies. For more on this subject see the Mackinac Center for Public Policy web module on economic development at http://www.mackinac.org/depts/ecodevo/.  Savings: $23,818,900.

Program: Michigan promotion program

Appropriation:

All from GF/GP:

$7,442,500

 

Total:

$7,442,500[8]

 Program Description:

This appropriation funds the Michigan Promotion Program.  This program is designed to market Michigan as a destination choice for tourists.  The funding helps create and distribute publications, such as “Michigan Travel Ideas,” that tout the Great Lakes State as a great place to visit.   Another example of marketing funded by this line item involves the so-called, “Warm Weather Media” campaign of fiscal year 2002.  This was a $4 million advertising initiative targeted to people in Chicago, Indianapolis, Cleveland, and Green Bay, to encourage them to think about Michigan as a summer destination.[9]

Recommended Action:

The Michigan Promotion Program should be eliminated with the rest of the MEDC.  There are at least three compelling reasons for ceasing this operation.  First, it is unnecessary.  Thousands of Michigan businesses have every incentive to encourage tourism in Michigan on their own, or by using their respective industry associations.  The Tourism Industry Coalition of Michigan, which exists to increase awareness of tourism in the Great Lakes State; the West Michigan Tourist Association, which does the same for the west side of Michigan; and the Travel Industry of America are all good examples. Second, it is unfair.  Thousands of Michigan businesses derive no direct benefit from tourism yet are taxed to pay for the benefits of advertising for those who do.  Third, there is no empirical evidence to prove that this program delivers more tourism to Michigan than would have occurred if central planners simply left tourism to the private sector. 

During fiscal year 2002 this line item funded $100,000 in advertising for the for-profit company Cabela’s Retail, Inc.  Cabela’s is a mammoth catalog and retail outlet for everything related to outfitting outdoor sports enthusiasts.  It ships over 60 million catalogs to every state and 120 countries every year and maintains seven retail outlets.  The MEDC arranged for Cabela’s to receive millions in financial incentives in exchange for opening a 200,000-square-foot store in Dundee, Mich.[10] Cabela’s accepted the state’s offer and opened its Dundee store in October, 2000.  One component of the incentive package was subsidized advertising.  The MEDC also arranged for Cabela’s to get other promotional assistance, including:

  • $300,000 in catalog advertising from Cabela’s Retail, Inc. over a three-year period;
  • One full-page ad in the state’s tourism publication, “Michigan Travel Ideas,” to Cabela’s ($100,000 in value);
  • Full access to the state’s “Travel Michigan” database, which contains the names and addresses of over a million people seeking information about travel in Michigan ($80,000 in value);
  • Free marketing and publicity assistance surrounding the official grand opening ceremony of Cabela’s in Dundee ($25,000 in value);
  • Cabela’s “free” membership in the state’s “Circle Michigan” tour promotional organization ($4,500 in value). Circle Michigan is a private association that works with bus operators to help increase tours for groups to attend trade shows and other special events.

Businesses and trade groups should do their own marketing.  There is no reason for the state to reach into the pockets of small and medium-sized sports retailers (there are more than 1,000 in Michigan) to subsidize the operations of the state’s biggest sports retailer. (For more on Cabela’s Retail, Inc., and the MEDC see subsequent reference below, and the article, “A Tale of Two Sporting Goods Stores,” in the Summer 2002 edition of Michigan Privatization Report.[11] Savings: $7,442,500.

Program: Economic development job training grants

Appropriation:

All from GF/GP:

$13,548,000

 

Total:

$13,548,000[12]

Program Description:

This appropriation funds job training grants to firms that MEDC officials believe are worthy of special job training assistance. 

Program Recommendation:

Businesses have always been able to train employees to suit their needs.  When state officials grant subsidies to one company to train employees they often put their in- or out-of-state rivals at a competitive disadvantage. 

Consider one example first highlighted by the Mackinac Center for Public Policy in 2000.  Boar’s Head Provision Company is a meat products company headquartered in Brooklyn, N.Y.  In exchange for that company’s promise to invest $14 million and create 450 new jobs in Michigan, the Michigan Jobs Commission arranged in 1998 to give Boar’s Head an “economic development package” worth up to $5.1 million in federal, state and local resources— including up to $450,000 in economic development job training grants.  Armed with these incentives, the company opened a processing plant near Holland, Mich., on Dec. 13, 1999.

The Michigan Jobs Commission, now the MEDC, counted 450 “new” jobs as the agency’s contribution to the Michigan economy through the Boar’s Head deal.  What the agency’s self-serving pronouncements do not state is the impact of the deal on other Michigan businesses, such as Koegel Meats, Inc., in Flint.

Like Boar’s Head, Koegel makes meat products.  A Michigan-based family business for three generations, Koegel produces an extensive line of cold cuts and the popular “Koegel’s Vienna Frankfurters” that are grilled by the millions in Michigan back yards every summer.  The company’s meat products still use recipes devised by Albert Koegel when he emigrated from Germany to Michigan and started the company in 1916.  The firm sells 99 percent of its product in Michigan and employs 110 people at its Flint facility.

Al Koegel, son of the founder, is not one to make a big fuss about unfair competition.  Like his father before him and his son John who will carry on after him, Al would rather run the business than spend time lobbying politicians.  He cannot help but point out when asked, however, that for all of its 84 years, Koegel Meats always paid its taxes and never took a dime of taxpayer money: no abatements, no subsidies.  The company always trained its own employees with its own funds, and continues to do so to this day.

Such targeted assistance may be called “economic development” by government officials, but, it is more likely just another example of robbing Peter to pay Paul.[13] Savings: $13,548,000.

Program: Community development block grant program

Appropriation:

All from Federal Funds:

$60,000,000

 

Total:

$60,000,000[14]

Program Description:

This appropriation funds the Community Development Block Grant program.  This line item involves $60 million in federal grants that are passed down to the state and made available to local units of government for infrastructure projects such as new sewers in low- and –moderate-income areas.  Such matters should be handled exclusively by the local unit that derives all of the benefits.  The state should refuse these federal grants.  For more on refusing federal funds, see Appendix I.

At the very least, this money should not be passed through the Michigan Economic Development Corporation.  The spirit of these grants is to help low- and –moderate-income people, but it has been largely used to subsidize the costs of large, for-profit businesses.   For instance, in association with the state’s Michigan Economic Growth Authority (MEGA), the MEDC has offered more than $55 million in Community Development Block Grants (CDBG) to indirectly subsidize the location or expansion of businesses in Michigan.  Consider one example:

Cabela’s Retail, Inc., which is referenced above for having received hundreds of thousands in promotion money, also got $1.3 million from state grant makers that was earmarked for such things as storm drain construction through the federal government’s CDGB program.  The reason the state can get away with using CDBG money to help Cabela’s is that the Dundee area qualifies as a lower income area of the state.  But the primary beneficiary of the program — Cabela’s — is far from being low income. 

It is worth noting that one reason people have relatively fewer employment opportunities in the Dundee area is that they choose to live in an area with a less-developed economic base.  This does not, by default, mean that government should deliver that economic base and corresponding opportunity to their doorsteps with corporate welfare programs.  The decision by a firm to locate in a particular area should be driven solely by the calculus of the firm operating in a free market, not based on what government officials are willing to give it. Savings: $60,000,000.

Program: Life Sciences Corridor Initiative

Appropriation:

All from Special Revenue Funds:

$45,000,000

 

Total:

$45,000,000[15]

Program Description:

This appropriation funds the Life Sciences Corridor Initiative (LCSI).  This initiative is funded solely through money obtained though tobacco settlement proceeds.  By 1998, 40 states sued tobacco companies under a variety of legal theories.  One of the dominant theories is that tobacco companies are responsible for large health costs borne by the state for smoking-related illnesses. 

The LSCI was created in 1999 to help facilitate the growth of biotech firms in the state of Michigan. There are at least 45 LSCI-type programs sponsored by units of government around the country, and many of these are funded through the $8.5 billion state tobacco settlement money.  Michigan’s program is effectively corporate welfare for a specific industry.  Consider just two of the grants issued through the LSCI.

GeneGo, Inc. — GeneGo is a private firm that works in what is known as the “post-genome bioinformatics and systems biology” field.  That is, the company maintains a database of models for human tissues and diseases to help researchers discover previously unrecognizable ways that people acquire and suffer from certain diseases and even new ways to treat those diseases.  GeneGo, Inc., moved to New Buffalo, Michigan (about one mile inside Michigan’s border) from its original home in Portage, Indiana.  According to The Detroit News, GeneGo moved to Michigan after being promised a “$200,000 state grant and the possibility of future funding” from state officials. 

The initial state favor provided to GeneGo appears to have come in the form of a very low-interest loan of $210,000[16] made by the MEDC through a private venture capital fund, known as Sloan Enterprises, L.L.C.  Sloan is the recipient of $843,000 awarded through the 2001 fiscal year LSCI grant process.   The loan rate is 6 percent.  According to one Michigan venture capitalist, who asked to remain anonymous for fear of MEDC retribution, this loan rate is about 24 percent less than most venture capitalists demand for taking outrageously high risks.  In other words, since MEDC officials are not risking their own money, why charge a risk premium in exchange for loaning money to ventures with a high likelihood of failure?  Governments have an overall poor record of picking winners and losers in the marketplace.  Governments should not be making such investment decisions.  If venture capitalists won’t voluntarily risk their own money for a 30 percent return on investment, Michigan citizens should not have to watch their tobacco settlement dollars placed at risk for a 6 percent return. 

How have venture capitalists been responding to today’s investment environment?  They have been retreating.  According to Thomson Venture Economics and the National Venture Capital Association, the venture capital industry was able to raise $107.7 billion dollars for investment in new industries and firms in the year 2000.  In 2002 it is on pace to raise just $7 billion, a 94 percent drop in less than two years.  Yet during this same time, the MEDC has overseen a dramatic and direct increase in investments in firms that venture capital investors are avoiding with good reason.  The National Association of Securities Dealers’ Automated Quotation Biotech Index, which measures the performance of a basket of publicly traded biotech companies, has declined from a high of 1,600 in 2000 to 400 in 2002, a drop of 75 percent — and a much larger percentage drop than the Dow Jones Industrial Average or the S&P 500 over the same time period.

State officials might respond by saying, “Well, we are not investing taxpayer’s money, it is tobacco settlement money.”  That’s correct, but it is important to remember that everything has a cost, even if it is just an opportunity cost.  If we direct tobacco settlement money to high-risk industrial policy we have to find other money to fund the core, but unglamorous needs of the state, such as road improvements and police.  Savings from eliminating this program should be redirected to the General Fund/General Purpose component of the state budget.  Savings: $45,000,000.

Michigan Biosciences Industry Association — This group does not show up in the state budget, but it received $1.6 million from the MEDC to subsidize its “human resource” work.  It is essentially a “head hunter” subsidy, designed to give hand-picked, for-profit businesses the opportunity to let the state pay for finding highly skilled employees.  Besides being unfair to those biotech companies who have to use their own funds to hire firms for this research, this subsidy is another blow to Michigan’s staffing services industry (see discussions on CareerSite, above).[17]