“Milking the Cow” of State Development Departments (Viewpoint on Public Issues)

An earlier version of this essay was posted to the Web site of the Mackinac Center in August 2004.

Journalist Jonathan Rauch has coined the phrase “parasite economy” to describe the way lawyers, lobbyists and other special interest advocates descend on governments in search of special favors. Government economic development offices are magnets for this activity, and they make Rauch’s description look increasingly apt.

The primary function of the state-run Michigan Economic Development Corporation is to distribute tax credits, abatements, cash subsidies and other incentives to select businesses in order to promote job creation and retention. A firm can hardly be faulted for accepting tax credits or other incentives when they are offered. But we cannot lose sight of the fact that selective favors discriminate against those who do not receive them and distract policymakers from the broader business-climate reforms that would benefit everybody.

Targeted incentives can prove very worthwhile for the recipients, as one international business consultant, Ernst & Young, has been quick to appreciate. Indeed, the company formally trains businesspeople in ways to increase their profits by securing government aid.

As reported by the John Locke Foundation’s Carolina Journal, representatives of Ernst & Young in March 2004 lectured a group of business representatives gathered in Georgia at the State Government Affairs Council about how to “turn your state government relations department from money pit into a cash cow.” The presentation explained strategies for securing tax incentives and other government aid from state and local economic development offices. Slides detailed how a firm should package its proposals so as to increase its chances of receiving subsidies.

The most notable part of the presentation, however, was the advice that a company should communicate a “‘but for’ threat.” This means that a company should explain to an economic development office that it will not move into or expand in a state “but for” the incentives the development officials can provide.

The same “but for” concern is often cited by the Michigan Economic Growth Authority, which operates under the auspices of the Michigan Economic Development Corporation and offers targeted tax incentives to corporations that are picked by its appointed board. Yet state and local economic development agencies can have no objective way of assessing if the purported “‘but for’ threat” is genuine. Instead, they must rely on the promises of business executives to whom they are offering millions of dollars in incentives.

About 215 MEGA deals have been made since MEGA was created in 1995. An analysis of official meeting minutes indicates that Ernst & Young consultants attended at least 10 meetings on behalf of clients attempting to win MEGA deals between 1999 and 2003.

At half of these meetings, the Ernst & Young representative who attended was a former director of international and national business development at the Michigan Jobs Commission (the predecessor agency to the Michigan Economic Development Corporation). This type of close relationship is not uncommon. Government officials frequently leave their jobs to become consultants or lobbyists with an insider’s knowledge of how to obtain government help.

All of this lobbying pressure can have real and harmful consequences. Economist Harold Brumm of the federal government’s General Accounting Office found that from 1985 to 1994, the growth rate of real per-capita gross state product was “negatively correlated” with three things: “the initial level of real GSP per capita, the burden of state tax structure and — most notably — the level of rent-seeking activity (chasing government favors) in the state.” Brumm continued, “An implication of this finding is that a state government which promulgates policies that foster sustained artificial rent‑seeking does so at considerable expense to its economic growth.”

Furthermore, it’s the nature of government programs that one tends to breed another. The latest of many examples: State Rep. Chris Kolb of Ann Arbor has introduced legislation to authorize subsidies from the Michigan Strategic Fund for “microenterprise businesses,” defined as new or existing businesses with five or fewer employees, including startup, home-based, and self-employed individuals. The subsidies could be loans or grants of up to $15,000. The bill would establish a state “Center on Microenterprise Development Policies,” and a state “Microenterprise Development Advisory Board,” appointed by the governor to determine which firms would get subsidies and which would not.

Michigan’s legislators need to reassess where all this is headed. Do we want an economy directed by market forces, or by special dispensations from government?

Michael D. LaFaive is director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.