Economic Development's Dismal Record in Michigan

Newspapers this summer carried headlines about Michigan factory job losses for the month of June. According to the papers, 10,000 manufacturing jobs were eliminated during that single 30-day period.

Since state “economic development” officials are quick to assume credit when the numbers are good, it’s entirely legitimate to raise questions about their policies now, when the numbers are bad. The result isn’t pretty.

Economic development programs have been around for years, but they really took off under Gov. John Engler, who raised the Michigan Jobs Commission to department-level status in 1995. The commission then gave birth in 1999 to the Michigan Economic Development Corporation, a quasi-governmental body that now oversees the state’s development agenda.

State officials claim that the MEDC “creates” and “saves” jobs through a variety of targeted “incentives” — tax credits, abatements or job-training subsidies — for select businesses and depressed areas. Most scholarly research casts doubt on the truth of these claims, in Michigan and elsewhere. While a firm can hardly be faulted for accepting favors when they are offered, it’s not necessarily true that what’s good for a few translates into the best policy for everybody.

Consider the following trends, which are drawn from the most recent available data, and which Lansing’s programs had the chance to influence:

• Between December 1995 and December 2003, Michigan finished 51st among the 50 states and the District of Columbia in employment growth, with a total of just 1.4 percent new jobs created.

• Between 1995 and 2001, Michigan dropped from 23rd to 30th among the 50 states in per-capita gross state product.

• Between 1995 and 2003, Michigan finished 49th among the 50 states and the District of Columbia in per-capita income growth.

Per-capita gross state product and per-capita income are the two most commonly used barometers of a state’s economic health, so Michigan clearly is not faring well. More recently, between 2001 and the fall of 2003, 23 percent of all the jobs lost in the United States were lost in Michigan, according to Michigan’s nonpartisan Senate Fiscal Agency.

Some will try to rationalize the state’s alarming performance by claiming that the damage would have been worse if not for state officials’ yeoman efforts. But it’s hard to see how it could have been worse. From fiscal 1999 (the year the MEDC spun off as an independent entity) to fiscal 2003, the state of Michigan spent $290.7 million in general fund monies to support a bureaucracy and programs meant to create and retain jobs in Michigan. That is $290 million that Michigan’s taxpayers could not use to invest in, and spend on, Michigan business products themselves.

No matter how smart state officials are, they cannot survey the entire state’s economy, grasp all of its nuance and detail (mostly held in the minds of millions of individuals), and accurately pick winners and losers. And when they give something positive to one firm, they almost never consider the negative implications for its competitors. How many potential newcomers, for example, are discouraged from starting a sporting goods store because the state has given a multi-million-dollar incentive package to a giant company like Cabela’s?

What is the alternative to these discriminatory state development programs? It is the fair field, no-special-favors approach. It is what we used to call “free enterprise.” Government should concentrate on broad policy, such as across-the-board tax, regulatory and labor reforms. It would have a full-time job if it just fixed its schools, its roads and its courts. If it ensured that unions were voluntary and not compulsory, it would do more to stimulate economic development than any Lansing bureaucracy could ever hope to achieve.

Broad-based policies do pay off. Studies show that states that have the lowest tax and regulatory burdens or the freest labor markets have the best sustained economic performance. With Michigan’s per-capita state-and-local tax burden still above the national average, we have considerable progress to make on that front. It is especially ironic that many of the politicians eager to dole out selective favors are the same ones who support higher taxes, favor new regulatory bureaucracies, turn a blind eye to union coercion or oppose choice-based reforms that would improve the schools.

Whether jobs in the private sector grow or shrink, state agencies hang around. It’s time we ask why.

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.