Does the Michigan Economic Development Corporation Even Matter?

In the debate over how best to balance Michigan’s state budget in 2004, several lawmakers have proposed eliminating about $59 million in state resources normally earmarked to operate the Michigan Economic Development Corporation (MEDC). The MEDC is a quasi-public agency of the state tasked with the mission of keeping “good jobs in Michigan and attracting more of them.”

Proponents of the MEDC argue that its work creates jobs for Michigan citizens by helping targeted companies with tax relief or job training subsidies or other services it provides. But if the MEDC and other states’ development agencies really had a positive effect on their state’s economic climate, we should see some empirical link between what states spend on economic development programs and their economic health. In fact, the reverse is often true.

Economists generally consider a state’s Gross State Product (GSP) — the value of all goods and services produced within a state — as one of the better indicators of its economic health, and often rank states against each other in terms of GSP per capita. This allows them to see which state economies are shrinking or growing, and how their numbers compare with one another. In 2001, Michigan ranked 30th among the states in per-capita GSP, down from 23rd in 1999, the year the MEDC was created. Since 1994, the year before John Engler created the MEDC’s predecessor agency, the Michigan Jobs Commission, Michigan has dropped 10 spots in per-capita GSP rankings among the states. This should raise some question regarding the MEDC’s ability to spur economic growth.

Every state in the union operates economic development programs and showers millions of dollars on them trying to make their state an economic powerhouse. These expenditures have been recorded in surveys by the National Association of State Development Agencies (NASDA). Using NASDA data it is possible to calculate each state’s per-capita economic development expenditures and compare them with each state’s GSP, and observe whether states that spent a lot on economic development were states that ranked high in economic growth. The Commonwealth Foundation, a Pennsylvania-based think tank, did this using data from 1996.

According to Commonwealth, in 1996 Michigan ranked 9th — in the top 10 — in per-capita state spending on economic development programs. That same year, Michigan ranked 24th in per-capita GSP. By contrast, Texas was ranked 50th, or dead last, in per-capita economic development spending, yet outpaced Michigan with a ranking of 18th in per-capita GSP. If economic development programs were as valuable as proponents claim, they should correlate more strongly with higher GSP. In other words, Michigan should rank above Texas. Another example: In 2001, Michigan ranked 20th among the states in economic development expenditures and 30th in GSP. By contrast, California ranked 41st in economic development expenditures, yet beat Michigan by 22 ranks, scoring a ranking of 8th in per-capita Gross State Product.

These are just a few of many examples. Through what statisticians call “regression analysis,” the Mackinac Center for Public Policy has determined that there is no significant correlation between state spending on economic development and state GSP. A graph showing the data and an explanation of it has been prepared.

Yet, news releases from the MEDC continue to cite factories here and there that came to or stayed in Michigan because of the agency’s discriminatory favors. Michigan-based news media provide plenty of uncritical coverage, parroting the MEDC line that subsidies or tax credits the agency provided saved or created jobs.

But why does Michigan fund more and more MEDC programs and still fall behind in economic output? How can there be little or no apparent correlation between what state agencies like the MEDC spend and do on the one hand and the improvement of economic output of their respective states on the other?

One reason is that the MEDC is simply doing what all other public or quasi-public institutions do: Justifying its existence in order to keep receiving funding. The MEDC has sponsored ads on Michigan radio stations taking credit as “the No. 1 driving force behind business growth in Michigan” (ahead even of risk-taking entrepreneurs who own and run the businesses whose jobs the MEDC takes credit for). The fact is that Michigan entrepreneurs were creating jobs long before the state developed exotic — one might say quixotic — policy schemes for “picking winners and losers” in the marketplace.

Another explanation is that MEDC fans see a few trees and ignore the forest. Imagine a thief who goes door to door in a neighborhood grabbing all the loot he can get his hands on, who then sells it, and spends the proceeds at the local shopping mall. If you only talked to the mall shopkeepers, you might come to regard the thief as a public benefactor; after all, he certainly stimulated the economy at the mall, as every shopkeeper there will attest.

But you have to take into consideration the economic losses suffered by the residents who were robbed. You can’t say the total economy has been stimulated when the MEDC gives millions in breaks and subsidies to Cabela’s if you don’t take into account the loss of business at Jay’s or umpteen other mom-and-pop sporting goods stores. And what about the new mom-and-pop stores that never get started because entrepreneurs get the message: “How can I possibly compete with a giant like Cabela’s when I could never get the goodies they get from the government?”

In other words, if you stimulate one business and thereby hurt another, total output may not change at all, or could even become less. Yet, despite what we know about economic theory — and that’s all this is, simply basic economics — MEDC bureaucrats don’t seem to be able to resist the idea of manipulating the state economy.

Lawmakers shouldn’t fail to identify the MEDC as a loser for the state of Michigan. The $59 million of general fund resources it spends should be redirected to higher budget priorities.

Michael LaFaive is director of fiscal policy for the Mackinac Center for Public Policy and James Hohman is an economics student at Northwood University.