How the State Should Encourage Economic Development

Thank you for that kind introduction, Representative. While I am director of fiscal policy at the Mackinac Center, I am an economist by training, and have followed Michigan’s “economic development” apparatus since 1995. I would like to spend the next ten minutes or so sharing a short history of the Michigan Economic Development Corporation (MEDC) with you, some economic principles, examples and evidence, and some ideas for changing the state’s “economic development” landscape. I will then be happy to field any questions that you may have on the subject.

The Michigan Economic Development Corporation 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 Michigan Jobs Commission was department originally 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, the Michigan Department of Career Development, and the MEDC. Career development focuses largely on implementing federal workforce programs while the MEDC is designed to “retain and expand jobs through business retention and visitation programs.”

As you know, the Mackinac Center for Public Policy has been a prominent critic of the agency. Before I explain some of our problems with it, let me assert some important contextual points:

1. Our concerns about the MEDC do NOT mean we think that Michigan is finished improving its business climate. Quite the contrary. We recognize that while progress has been made, we are still a high-tax state with significant additional barriers that must come down if we are to make the state permanently strong. When the MEDC works to accomplish such things, we applaud, though we may suggest they could be better accomplished through leadership from other state officials or departments.

2. Government picking of winners and losers or otherwise attempting to redirect or thwart market forces is a discredited concept of economic development. The best business climate is one in which government sticks to its knitting, does its particular assignments well and at the lowest possible cost, and creates a “fair field with no favors” environment for private enterprise to do its thing. This means fixing the schools, maintaining infrastructure, keeping the environment clean, cutting tax and regulatory burdens, protecting rights to contract and property, nurturing a free and peaceful labor market, and making sure the judicial system doesn’t get abused by special interests. Indeed, the first Engler term began moving Michigan decisively in this proper direction and before the MEDC was ever created, we became one of the nation’s top economic performers.

3. Selective (or discriminatory) tax abatements are always better than direct subsidies to businesses. Moreover, we never fault any business for accepting an abatement when it’s offered, for the same reasons that you and I should take every deduction or credit on our personal income taxes that we are entitled to. But that begs the question about what makes for the best overall policy for economic development. Now, some specifics regarding the MEDC.

The MEDC’s approach to economic development, from a purely economic perspective, is flawed for two major reasons:

• First, government has nothing to give anyone except what it first takes from someone else. If the MEDC takes tax dollars from a thousand businesses, and gives it to one, the one firm may have more resources to hire workers and create products, but the other thousand now have less. But this isn’t even a zero sum game. The money taken from others must be laundered through at least two expensive state bureaucracies (MEDC and Treasury) by way of state salaries that remove productive investment dollars from the economy.

• Second, There is an assumption that state bureaucrats, central planners if you will, know more about how to foster wealth and job creation better than business owners, consumers, workers, bankers, investors, and managers, whose collective decisions form our market economy.

Like the old central planners of pre-1989 Central Europe and the Soviet Union, many economic development officials continue to operate under the illusion that they can somehow create exotic policy schemes and marshal the information that is necessary to organize an economy and commercial concerns in such a way that it would improve our lives more than if we were simply left alone to shop for, or invest in, the products and firms that we as individuals prefer the most.

Consider some examples of state investments, and how they fit each of the two assumptions I just mentioned.

• Koegel Meats, Inc. In the late 1990s the [then] Michigan Jobs Commission promised New York-based Boar’s Head Provision Company — a meat products company an “economic development package” worth up to $5.1 million in federal, state, and local resources. Like Boar’s Head, Koegel makes meat products and has since 1916. In its all of its 87 years of business, 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. Aside from being grossly unfair, isn’t there something economically counterproductive about taking taxes from a Michigan businesses and giving it to their out-of-state rivals to come here and compete against them? The state robbed a Michigan Peter to pay a New York Paul.

• Jay’s Sporting Goods. Jay Poet, a lifelong Michigander and avid outdoorsman, opened Jay’s Sporting Goods in 1968 in Clare, Mich. His dream was to create a world-class sporting goods store that both locals and out-of-towners could visit on their way up north. Today, the family operates Jay’s from two Michigan locations, and has done so without a dime of taxpayer money. The same cannot be said for Jay's new competition, Cabela’s Retail Inc. In 1999, the MEDC informed Cabela’s that it would offer a package of incentives worth up to $27.8 million for locating a new, 200,000-square-foot store in Dundee, Mich. State officials think they’re helping the economy with such incentives, but if a thief stole money from a bank in Lansing and spent all the cash at the local mall, the MEDC wouldn't issue a press release celebrating how many jobs were “retained” or “created” at the mall. Of course not. Real people lose when the state’s attempt to “pick winners and losers” in the market.

• Careermatrix. Did you know that the state has operated two highly similar programs — one by the Michigan Economic Development Corporation (MEDC) and the other by the Michigan Department of Career Development (MDCD). They are similar to monster.com, the famous Internet jobs board. They have not only competed against each other, but against private, for profit alternatives. 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. 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.

Remember, it is a rare company that receives favors from the state of Michigan that doesn’t have very viable competition right here that does not receive favors. Could anything be more unfair? Other examples of state “jobs” intervention include:

• K-mart — This is a very recent example. Just 18 months after the MEDC offered it a new round of financial incentives, it declared bankruptcy. To date, K-mart received about $6 million in tax relief from the state for jobs that no longer exist. Yet they are not required to pay anything back.

• Webvan.com — In 1999 the MEDC offered over $20 million in incentives to what it called “the best financed retailers on the market.” It was bankrupt a year later.

• Aspen Bay Pulp and Fibre. Received an offer of $22 million worth of incentives. No private banker would loan them money, however.

The argument that Michigan can engage in a war with other states to win companies to its borders that otherwise might not have come, or expanded, is belied by survey research. Three come to mind. The first was conducted in 1993 by the International Association of Corporate and Real Estate Executives and the American Economic Development Council. Eight hundred corporate real estate executives and economic developers rated incentive packages very low (14 of 17 factors) relative to other factors in the overall site selection process. In 1994, a survey of North Carolina manufacturers produced similar results. Researchers at the University of North Carolina Charlotte, it showed that state business assistance and local business support programs ranked 22nd and 23rd among 34 factors.

It is highly likely that businesses choose where they want to locate and then search for some economic icing for their location cake. Why? Incentives don’t last forever so executives need to look for a location they can thrive in without them. They look for a good labor force, infrastructure, and other amenities and then play governments against each other in the hope of ratcheting up the goodies they get from their location of choice.

One solution to having companies play governments against each other is to eliminate the mechanism that facilitates this type of game. In 1995 over 100 economists — 33 from Michigan — signed a resolution calling for an end to state-sponsored business incentive programs.

If the Michigan Legislature, however, were to put an end to the MEDC, its selective abatement and subsidy programs, or both, it should not stop there. We have to recognize that Michigan competes in the country and in the world to attract and keep business.

In place of the discriminatory approach of the MEDC, we should do the things that we should do anyway, and that would be far more effective. Improve the labor climate, curtail state spending so we can bring our tax burden below the national average, and fix the schools so that businesses and their worker families will want to live here. And so on. To fail to do these things, and to rely instead on a handful of expensive bureaucrats in Lansing to dispense selective favors, would be an abdication of responsibility.