"A year from now, our success in transforming Michigan's economy and generating jobs for Michigan workers will make any legislator think twice about reducing that ‘job creation services' line item in the state budget." - Jim Epolito, CEO, Michigan Economic Development Corporation, October 2005.
Johnny Carson's beloved character "Carnac the Magnificent" inspired belly laughs across America for his preternatural ability to divine answers that would escape mere mortals.
Officials at the Michigan Economic Development Corporation, a 1999 creation of the Engler administration, attempt to do the same by picking "winners" from "losers" in the marketplace and showering the winners with economic incentives such as tax credits, abatements and cash subsidies. The MEDC's performance would be as laughable as Carnac's if the consequences weren't so serious.
The MEDC was designed to house and oversee state economic development programs and help keep and create jobs, yet it has presided over one of the steepest economic declines in Michigan history. Since 1999 our economic growth rank among the 50 states has dropped from 16th to 42nd; our average personal income is now 9.1 percent below the national average (worse than the Great Depression) and we have the highest unemployment rate in the nation at 8.9 percent. Our 2006-2007 growth rate is dead last in the nation. No causation is implied here - but would anyone actually suggest that had the MEDC and its myriad of programs never been created Michigan would actually be worse off?
In their scholarly literature review, Peter Fisher and Alan Peters estimate that state and local units of government spend about $48 billion a year on economic development incentives with no real impact. Michigan contributes to that figure and anecdotal and empirical evidence show state efforts have no real job creation influence either.
A 2005 econometric analysis of the MEGA program found that it had no impact on employment, per-capita personal income or the employment rate. To the Center's knowledge, the MEDC has yet to refute a single point of fact in the 121-page study, yet this program and others rolls on. Two Center scholars have written a critique of the MEGA program from a different perspective. It hasn't been released yet, but it too underscores how bad at picking winners and losers in the marketplace MEGA really is.
There are many reasons to suspect the shortcomings of such programs, but the biggest hindrance is probably the knowledge needed to centrally plan the state's economic well being in a way that would be superior to just leaving businesses and people alone.
Consider a simple illustration as to how difficult it is to pick winners and losers in the marketplace. How many ways can you arrange three cards? It is a factorial problem (3 x 2 x 1 = 6). How many ways can you arrange just 20 cards? The answer is roughly equivalent to all of the seconds that would pass over 75 billion years. Yet attempting to divine industrial and personal economic preferences potentially contains millions of factorials.
In his book, "Searching for Alpha: The Quest for Exceptional Investment Performance," author Ben Warwick notes that "Of the 45 largest stock funds, only one has beaten the Standard and Poor's 500 index ... and that fund outperformed by a scant 0.60 percent per year."
In other words, even the best stock pickers risking private capital struggle to outperform the basket of stocks representing the market. Given such a record then, why suppose the plans of politicians and their lieutenants to spin new jobs and industries from whole cloth are anything more than fantasies created by a political class accustomed to keeping their own jobs by redistributing other peoples' hard-earned money?
When state jobs officials are wrong they don't face direct consequences for their actions. That is why they can get away with whopper predictions like the one Jim Epolito made in 2005 and still keep their jobs. Talk is cheap. Development programs are not. It is time to eliminate the MEDC in favor of broad-based policy changes such as eliminating the Michigan Business Tax or passing a right-to-work law.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative 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.