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Lawmakers care about creating jobs. They boast about their leadership when things go well, and it is a shameful mark for them when things do not. But given that there is no button they can press to instantly create jobs, they have to decide between a couple of approaches. One is to give incentives or subsidies to selected businesses. Another is to improve the business climate.
While selecting favored businesses is expensive and ineffective, improving the business climate is effective and indirect. Michigan went all-in on special subsidies for most of the 2000s. Now it is on a better track by doing less of the direct subsidies and more business climate improvements.
In the 2000s, Michigan faced a period of stagnation wedged between two recessions. The job losses were steep and spanned the economic sectors. Lawmakers responded to these deep challenges with targeted programs that awarded certain businesses billions of taxpayer dollars. A number of programs were created and a variety of companies were given special deals: battery firms, venture capital, alternative energy, “anchor companies,” film producers, high-tech firms, rural companies and others. Support was bipartisan and political opposition was rare.
The programs were expensive; the state awarded roughly $9 billion of incentives — the equivalent of $2,300 for each Michigan household. The costs tended to be deferred, which allowed lawmakers to claim credit for the awards while leaving others to deal with the bill later.
Hunting for businesses to subsidize with taxpayer dollars is unfair, but it also doesn’t work. The economy moves too quickly — and without political permission. Lawmakers try to select winners that promise dozens, sometimes hundreds of jobs. Meanwhile, the rest of the economy is gaining and losing hundreds of thousands of jobs. For example, in the first three months of 2016, according to the Bureau of Labor Statistics, Michigan private sector businesses added 196,117 jobs and eliminated 179,106. That equates to adding about one job for every 18 in the state and losing one out of every 20. A similar amount of “job churn” happens each quarter.
It was encouraging when Gov. Rick Snyder took office and his 2011 tax reform phased out most of the programs. Under his plan, the state would continue to honor any deal that it had made, but it would no longer offer new ones. The state did, however, replace some of the programs with smaller versions that required annual appropriations.
Lawmakers decided to go even further than the governor. Michigan’s film subsidies were the most lavish in the country, having spent roughly $500 million and creating no sustainable film industry in Michigan. Lawmakers eliminated this program on mostly partisan grounds, with the bulk of state Republicans voting to end this giveaway.
Michigan continued to add jobs without handing out these gifts. Since 2012, Michigan’s workforce increased by 326,700 jobs, an 8.2 percent gain that is the highest in the region.
There is plenty left to cut when it comes to selective favors. Michigan created the 21st Century Jobs Fund and its programs in 2005, which have failed to live up to expectations. The state refuses to abide by its transparency requirements and release information about who is getting state grants and how many jobs came of them.
There is always a danger that lawmakers will backslide into crony capitalism. A number of bills, for example, have been introduced to ramp up and create new business subsidies. One new package of bills has been pushed by real estate developers, who assuredly have in mind projects that would qualify.
During the 2000s, proposals like this were certain to be approved. But things have changed. The elimination of some of the state’s economic development programs showed that the public’s attitude has changed.
We’ve worked hard for over 20 years arguing that Lansing lawmakers will not improve the economy by picking winners and losers in the marketplace. We’ve shown people a number of its failures, performed multiple economic analyses and told stories about how the practice is unfair. The newfound skepticism has moved the needle on this issue, but the latest proposals remind us that the battle is not over yet.
