Literature Review and Analysis

The MEDC's performance and behavior is disappointing, and as we've noted above,[*] there are reasons to believe that the problem is not an artifact of poor corporate management, but rather a flaw inherent in targeted economic development programs like the MEDC's. This view is strengthened by the research literature on government economic development programs.[†]

A meta-review of economic development literature in 2004 by Alan Peters and Peter Fisher of the University of Iowa is probably the most comprehensive survey yet published. Their paper, "The Failures of Economic Development Incentives," appeared in the Journal of the American Planning Association and evaluated a wide body of other scholarly articles on economic development programs. These programs included targeted tax incentives, enterprise zones, tax-increment financing, industrial revenue bonds and "non-tax discretionary incentives."

As with many previous literature reviews, the findings were somewhat ambiguous, but on balance Fisher and Peters surmise that these programs are either ineffective, or the costs exceed the alleged benefits. They write:

The upshot of all of this is that on this most basic question of all — whether incentives induce significant new investment or jobs — we simply do not know the answer. Since these programs probably cost state and local governments about $40-50 billion a year, one would expect some clear and undisputed evidence of their success. This is not the case. In fact, there are very good reasons — theoretical, empirical, and practical — to believe that economic development incentives have little or no impact on firm location and investment decisions.[174]


The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering [policymakers'] expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.[175]

In October 2007, Gary Sands of Wayne State University and Laura Reese of Michigan State University released a paper for the Michigan Land Use Institute examining the performance of "Public Act 198" tax abatements, which are frequently part of the MEGA deals described earlier. Sands and Reese found that abatement data "fail to show a clear, consistent relationship between abatement activity and change in economic health" from 1980 through 2001.[176] In the first nine years of the MEGA program, more than $900 million in local property tax abatements — primarily Public Act 198 abatements — were offered as part of MEGA deals.[177]

There have been similar findings overseas. In 2008, Dafna Schwartz of Ben Gurion University of the Negev, Joseph Pelzman of George Washington University, and Michael Keren of Hebrew University of Jerusalem published in Economic Development Quarterly a study titled "The Ineffectiveness of Location Incentive Programs: Evidence from Puerto Rico and Israel." The authors concluded that the programs led to short-run gains in employment, but did not improve the fundamental economic situation in the areas targeted.[178] The Puerto Rico program they studied was repealed in the late 1990s because it was "arguably inefficient and probably ineffective for sustaining Puerto Rican economic growth."[179]

Job-training programs, too, have come under scrutiny. A July 6, 2009, New York Times article titled "Job Retraining May Fall Short of High Hopes" examined Gov. Granholm's No Worker Left Behind program and cited a December 2008 study that was released by the U.S. Department of Labor and produced under contract with IMPAQ International, a research consultant.[180] The study, "Workforce Investment Act Non-Experimental Net Impact Evaluation," reviewed Workforce Investment Act job-training programs for laid-off workers. The authors concluded that some of their research findings:

"... imply that program participants' earnings do not reach the level of earnings of comparable nonparticipants until more than two years after participation. Perhaps more important, the growth in earnings, relative to nonparticipants, slows at that point. As a result, these estimates imply that the gains from participation are, at best, very modest, even three to four years after entry. Overall, it appears possible that ultimate gains from participation are small or nonexistent. ...

"Where employment is taken as the outcome of interest, estimates of program impact are more supportive of the program. ...

"Overall, given the results of these specification tests, it is necessary to treat all these results with caution. Whereas the results clearly imply that lower earnings associated with program participation disappear within two years, it is less clear that there are net benefits associated with participation. Although positive program impacts - especially on employment - are consistent with these findings, substantial uncertainty remains."[181]

This sort of caution about the merits of a well-intended program is just as appropriate for job-training programs as it is for economic development programs. In both cases, administrators of the program may be inclined to exaggerate successes and downplay failures in an attempt to be perceived as effective at improving employment. In a paper titled "Why State and Local Economic Development Programs Cause So Little Economic Development," University of Michigan economist Margaret Dewar argued that too many analyses of government economic development programs fail to consider the programs' political nature:

"Economic development programs are not designed and implemented in ways that can achieve their goals, principally because of important political forces. Administrators must run a program to garner support of legislators, a governor, and opinion leaders for program survival. State and locally elected officials need economic development programs to deliver quick, visible projects in their efforts to solve their districts' economic problems, manage business climate politics, and achieve other aims. Achieving implicit goals means that programs only occasionally undertake activities likely to achieve explicit aims.[182]

She dubbed perspectives that include this political dimension the "political economy" view of economic development, while labeling as "technocratic"[183]analyses that assess economic development programs' ability to make better use of information, research and technology to improve the economy.[184]

Dewar concludes:

"The problem of making economic development programs work well is more intractable than the technocratic view suggests. The technocratic perspective argues that better analysis of alternative ways to achieve goals, better design of programs, and more information about how economies work and how economic development occurs can make programs succeed. The political economy perspective argues instead that the most common kinds of economic development programs cannot succeed for more than a short time. The programs are abolished if they observe technocratic criteria. If they serve aims that are not related to economic development, the programs survive longer - at least as long as the public story of their operation is maintained - but they have few economic development effects."[185]

In a 1995 study, then-Michigan State University assistant professor of political science Michael Mintrom and graduate student Lucinda Ramsey posited that politicians use incentive programs as a way to signal that the state is friendly to commerce and trade when more fundamental government policies may not be. The authors described this as a form of public "policy cheap talk,"[186] arguing:

[S]tate politicians use business incentives primarily to signal their commitment to supporting business in their states and, thus, to signal to the electorate that they are committed to job creation. Such policy signals would be sincere if they were reinforced by credible commitments to establishing or maintaining other policy settings that support a healthy business climate in the state. But securing systemic changes that would improve the business climate is typically extremely difficult, because of the range of political considerations involved, and the uncertainty this raises for securing desired outcomes. Meanwhile, policy signals such as direct financial incentives for business can be readily introduced.[‡],[187]

To prove the hypothesis that politicians use targeted incentive packages to announce, however inadequately, that they are friendly to business, Mintrom and Ramsey constructed a two-part empirical exercise to "explore the effects of direct financial incentives on state employment rates" and to "assess the effects of both internal state politics and the influence of policy diffusion among neighboring states."[188] Mintrom and Ramsey offered a number of caveats about their research, but conclude from the output of their modeling that the adoption of targeted incentive programs is in fact driven by political considerations more than sound policy, writing, "We question the implicit assumption made in much previous work that these policies are used in the sincere belief that they will improve the business climate, and, in turn, stimulate employment."[189]

They continue:

Are [politicians] really trying to attract new business development or are they engaging in maneuvers designed to please current state business interests and voters? The need for such questioning becomes even more acute when we find that, while these policies are often introduced to the chorus line of "jobs, jobs, jobs," there is little evidence to show that these direct financial incentives actually have any impact on state employment levels.[190]

In this light, it is probably no surprise that the MEDC fails to take seriously the problem of data collection, performance assessment and continuous quality improvement. Such an approach could actually conflict with the larger political ends of pursuing high-profile programs that allow policymakers to demonstrate publicly to voters and local businesses that they are laboring to create jobs and improve the economy.

Similarly, it is also probably no surprise that the agency's structure is itself nearly impenetrable. Recall again Graphic 4, the lengthy list of products and services the MEDC claims to offer. Even a seasoned policy analyst may not be familiar with a high percentage of those programs, what they do or where they are housed in state government. Determining their effectiveness could prove prohibitively difficult.

Yet the MEDC's Byzantine structure and lack of transparency may not bother many legislators if the MEDC continues to send positive public signals about policymakers' efforts to improve the economy. Indeed, clear organizational lines, transparency and accountability may hold little political appeal if they serve to undermine those positive signals.

[*] See "Exploring the Economic Findings on MEGA," for example.

[†] An exhaustive literature review is beyond the scope of this paper; there are mountains of studies on this topic, covering everything from the efficacy of tax credit programs to job training subsidies. Nevertheless, the studies discussed here are indicative of the reservations among economists about the economic value of economic development programs.

[‡] This observation suggests an interesting view of recent events. In October 2007, the Michigan Legislature passed a $1.4 billion tax hike, including a $600 million business tax surcharge on the new Michigan business tax. These taxes were generally unpopular in the Michigan business community. In March 2008, less than six months later, the Legislature adopted the Michigan Film Incentive.

[174] Alan Peters and Peter Fisher, "The Failures of Economic Development Incentives," Journal of the American Planning Association 70, no. 1 (2004): 32.

[175] Ibid.: 35-36.

[176] Gary Sands and Laura A. Reese, "Current Practices and Policy Recommendations Concerning Public Act 198 Industrial Facilities Tax Abatements," (Land Policy Institute, 2007), (accessed July 25, 2009).

[177] LaFaive and Hicks, "MEGA: A Retrospective Assessment," 20.

[178] Dafna Schwartz, Joseph Pelzman, and Michael Keren, "The Ineffectiveness of Location Incentive Programs: Evidence from Puerto Rico and Israel," Economic Development Quarterly 22, no. 2 (2008): 167.

[179] Ibid.: 177.

[180] Michael Luo, "Job Retraining May Fall Short of High Hopes," The New York Times, July 6, 2009.

[181] Carolyn K. Heinrich, Peter R. Mueser, and Kenneth R. Troske, "Workforce Investment Act Non-Experimental Net Impact Evaluation,"  (IMPAQ International, 2008).

[182] Margaret E. Dewar, "Why State and Local Economic Development Programs Cause So Little Economic Development," Economic Development Quarterly 12, no. 1 (1998): 68.

[183] Ibid.

[184] Ibid.

[185] Ibid.: 83.

[186] Michael Mintrom and Lucinda Ramsey, "State Policy Signaling and Firm-Level Employment Decisions," in Annual Meeting of the American Political Science Association (Chicago: Michigan State University, 1995), 1.

[187] Ibid., 3.

[188] Ibid., 3-4.

[189] Ibid., 25.

[190] Ibid., 26.