End the War Between the States

An Economic War Between the States has broken out.

This war is not the healthy competition favored by most economists, whereby states attempt to attract businesses by improving their overall climate for enterprise and making state government itself lean, unobtrusive and inexpensive. That broad-based approach, which plays no favorites among particular companies, affirms what columnist Irving Kristol once wrote: "Economies aren't machines to be fine-tuned. They're more like gardens to be watered and tilled."

Rather, this war is being fought with an arsenal of corporate welfare: selective tax abatements and credits, outright grants to specific, high-profile businesses, job training subsidies, low-interest loans and tax exempt municipal bonds issued for private benefit. States are using these weapons in an effort to retain or lure businesses away from each other. In the economic development trade, they are better known as "incentives."

Among Midwestern states, the war is intense. Ohio, Illinois, Indiana and Wisconsin all have aggressive policies that use public money to attract new factories. Michigan joined the war in early 1995 when Governor Engler, a longstanding critic of such policies, decided that our state had to compete tit-for-tat with other states' development programs. We now have MEGA (the Michigan Economic Growth Authority), which grants long-term tax abatements for select firms, as well as a disturbing number of subsidy programs administered by the Jobs Commission.

And it isn't just states, by the way, that are engaged in this war. Cities are too. Amarillo, Texas wins the prize for coming up with the most brazen approach to economic development incentives. In 1993, Amarillo officials sent checks for $8 million apiece to 1,300 companies around the country. All that a company had to do to cash it was commit to "creating" 700 new jobs in Amarillo.

Incentive packages have become increasingly generous in spite of dubious results. Indeed, a 1989 report from the Council of State Governments stated emphatically, "[A] comprehensive review of past studies reveals no statistical evidence that business incentives actually create jobs. . . . They are not the primary or sole influence on business location decision-making and . . . they do not have a primary effect on state employment growth."

Andrew Cline of the John Locke Foundation in North Carolina agrees. "To date," writes Cline, "not one incentives proponent has been able to demonstrate that government incentives create a net benefit for the general public. It's just robbing Peter to pay Paul." His colleague and fellow economist John Hood poignantly adds, "[C]reating jobs is not the goal of these programs. The goals of these programs are to create job announcements."

Clear away all the hoopla and fanfare, the photogenic ribbon-cuttings, the boastful press releases and the glossy brochures touting state programs, and one finds a lot less bang for the bucks than first meets the eye. Ohio's ambitious incentive programs, for example, assisted 400 companies in 1994. Impressive? Not when 400 translates into less than two-tenths of one percent of all the companies in the state.

Even the Jobs Commission claimed that MEGA's first full year "created" a total of just 20,950 jobs. With Michigan's workforce at 4.7 million people, 20,950 jobs is statistically insignificant, and many of them would have been created here anyway, without MEGA. Likewise, subsidies to Michigan businesses that export goods are said to be necessary for the state's economic health, yet more than 99 percent of exporting companies in our state get no export subsidies at all.

Incentive programs usually bestow discretionary powers upon the boards and commissions that hand out the benefits. That arbitrariness means that those with great political influence are favored to receive the benefits, while small firms or those with little influence are disadvantaged. Some businesspeople in Michigan argue that this is not a problem with the current administration in Lansing because it's fair and friendly to all firms. But what happens when a future administration, perhaps with very different political leanings and economic perspectives, inherits a catalogue of favors to distribute?

Firms that do not seek subsidies, or do not qualify for them, must compete against those who do, raising a question of fundamental fairness. Is it right, for instance, that an unsubsidized mom-and-pop bookstore must compete against Border's, the giant bookseller which recently received not only a sizable MEGA tax credit but more than $600,000 in job training subsidies from the state of Michigan too?

The fact is that companies usually make their location decisions first in private, based on more important factors than government handouts. They then hold out for the best incentive deals they can get from anxious state officials, playing one off against the other. The factors that usually weigh most heavily in location decisions are general business climate conditions, transportation, the quality of a community's labor force and education system, crime rates and utility costs. In a 1992 report from the National Governor's Association, Jay Kayne writes, "According to many business executives, 'It is not so much what the state does for us. We are more concerned about what a state might do to us.'"

Michigan's stunning economic rebound owes much more to the Engler policies of tax cuts and government reform than it owes to the more recent programs of direct business incentives. That's why the best economic strategy for the state now would be to pursue even more broad-based tax cuts and government reforms. At the same time, we should abandon arbitrary and discriminatory incentive programs and press for a national solution to the counterproductive Economic War Between the States.