The MEDC routinely publishes press releases that announce the number of jobs that will allegedly be created as a result of subsidies offered by the MBDP. For example, on May 23, 2012, the MEDC announced in a press release that four MBDP deals had been approved by the MSF and claimed the companies — Center Manufacturing, Huntington Foam, LLC, MedDirect, Inc. and Muskegon Castings Corp. — would create a total of 465 jobs and as much as $15.7 million in new investments. The headline reads: “Four Michigan Businesses Receive State Support to Expand, Add Jobs.”
The MSF-MEDC 2016 annual report to the Legislature says that $156.7 million in grants and loans and “other economic assistance” were disbursed to MBDP companies. Because of these subsidies the annual report credits the MBDP with 17,913 “actual new jobs created” throughout the life of the program.
Reporting this data is required by law and includes an analysis using a software model called REMI that attempts to measure the dynamic effect that such investments and new employment will create going forward.[*] For example, in the 2016 annual report, the introduction of the MBDP states:
The aggregated projected return on investment to the state of Michigan for the projects approved for FY 2016 is 10.0. This means that for every $1 invested, there is a projected return of $10.00. The formula is based on the anticipated amount of overall cash flow to the state through new personal income generated by the projects.”
In other words, the state is claiming that for every dollar it offers up to these companies, its coffers receive $10 in return. The short methodology described in the annual report indicates that it uses “projected personal income generated through direct jobs created by the companies, indirect jobs as a result of the projects and projected capital investments.”[†]
One significant issue about the forecasts is that each deal’s impact is calculated in such a way where it would be all but impossible to show a negative return on investment. This is so because the REMI estimates are made with the presumption that the expected job creation will become a reality and that no jobs would be created and no investment would be made without the subsidy.
For example, Adient US, LLC’s REMI input assumption worksheet presumes a certain level of job creation (115) at a certain pay scale with fringe benefits. But we have repeatedly pointed out, program administrators’ cannot prove that these jobs and larger investment would not have been created anyway, without taxpayer subsidies.
It is worth noting here that the MSF-MEDC aggregate projected return on investment is calculated simply by adding up the total ROI projected on each deal and dividing by the number of deals made during the period. This is important for placing annual state projections of the MBDP’s alleged success in its annual reports in perspective.
In sum, the state is basically inputting optimistic project results into the REMI model. The result is an optimistic output for each deal. These results are then summed up and averaged for the year-end report to the Legislature.
There are other reasons to consider suspect claims of job creation made by the state through the MBDP. These are listed and explained below.
1. Neither the MSF nor the MEDC can prove that the company was not going to locate or expand in Michigan without their incentives.
This is a paramount presumption to any claims of success made by the state. It is naïve to assume that every company would not have located to or expanded in Michigan and created jobs if it were not for the MBDP. Yet in the agencies press releases and job and investment accounting for its annual report to the Legislature this seems to be the presumption.
In a brief explanation of the program online, the MEDC writes that the subsidies and loans are for “highly competitive projects in Michigan.” Program administrators seem to suggest that they can ferret out the most competitive and best of these and then subsidize them to the advantage of Michigan’s economy. There are reasons to doubt such a viewpoint.
In early 2017 the Kalamazoo-based W.E. Upjohn Institute for Employment Research published a multistate economic development incentive database and related analysis. The database contains information from 1990 to 2015 and includes incentives such as property tax abatements and different types of tax credits (jobs, investment and research and development) as well as some job training programs.
The author of the analysis, Timothy Bartik, wrote in a summary that, of all the incentives in their database, it appears that only about 6 percent were effective at actually changing the behaviour of firms. In other words, 94 percent of expansions would likely have happened anyway without the state dangling targeted incentives in front of companies. Bartik writes:
Incentive differences do not appear to have large effects on state economic growth by industry. The database suggests incentive effects toward the low end of prior estimates: the average incentive package, 1.4 percent of value added, might tip the location decision of 6 percent of incented businesses — the other 94 percent of the time, the state would have experienced similar growth without the incentive.[‡]
If that same rate of successfully incentivized companies applied to the MBDP than $147.6 million of the $157 million expended in corporate subsidies through fiscal 2016 was essentially wasted. Even then, the value of winning expansions and new jobs from the 6 percent of deals may still not be a net plus from the state when you consider the opportunity cost of doing so. Opportunity cost is the value of the next best alternative use of the money the state spent providing these incentives.
In addition to modeling each MBDP deal, the state should use the REMI model to demonstrate some type of counterfactual. For instance, how many jobs would be created if the state dedicated $300 million to personal or corporate income tax cuts, infrastructure investments or some other basket of public goods purchased at taxpayer expense? A well-designed counterfactual scenario or two may place the alleged ROI of the MBDP in a different perspective.
2. The REMI model’s output is at best only as good as its input.
Because the state makes projected estimates of the ROI for individual deals and the overall program, any deal that fails outright, or is even modified after a forecast is made, would have changed what the MSF-MEDC could have reported to the Legislature.
For example, if Adient was projected to create 115 jobs at a particular wage rate, but instead only created 70, or didn’t create any at all, the tally of projected ROI would change but not necessarily be reflected in the annual report to the Legislature.
It is unlikely all of the dismissals and amendments would have come at such a time as to be worked into the proper year for which the state’s annual projected ROI estimates were made. Given these facts it is probable, even highly likely, that the program’s ROI as estimated by state is overstated and perhaps by a wide margin. Also, legislative reports to date make no mention of modifications to REMI input based on amendments or revocations.
According to the state’s last three annual reports, 34 MBDP projects were revoked through September 2016.[§] Moreover, many program deals were modified in such a way as to reduce the grant size, job creation targets or other mandates. Reduced investments and hires would reduce the purported projected values of these deals.
3. REMI forecasts for similar programs in the past proved to significantly inflate the ROI of those programs’ spending.
Even when used responsibly and with good input data, the REMI forecasts will not necessarily produce forecasts that are accurate. The MEDC has repeatedly claimed success for programs that proved to be nothing of the sort and did so on the basis of REMI analyses. Consider some examples.
The state of Michigan paid consultants for years from the University of Michigan to use REMI to measure the effectiveness of the Michigan Economic Growth Authority program. This program approved deals from 1995 to 2011 and these published REMI analyses showed positive impacts, frequently large ones.
Each MEGA deal typically came with an “Economic Effects” memo that pointed to the number of jobs and wealth that would allegedly be created as a direct result of the refundable tax credit deal struck by the state and some company. Yet the program and its job creation prowess turned out to be a failure by several measures.
There have since been five rigorous studies of the now-defunct MEGA program done by independent scholars. Four of them suggest the program had a zero to negative impact. One, published in Economic Development Quarterly academic journal, showed a range of possible outcomes and was largely positive. It was performed by running simulations using the REMI model.
Two of the studies were published by the Mackinac Center for Public Policy in 2005 and 2009. The first was titled “MEGA: A Retrospective Assessment” and the second “Michigan Economic Development Corporation: A Review and Analysis.” The third was published in 2010 by the Anderson Economic Group of Lansing and titled “Effectiveness of Michigan’s Key Business Tax Incentives.”
The fourth study was published in The American Review of Public Administration journal in 2013 by Michigan State University scholar Laura Reese and was titled “If All You Have is a Hammer: Finding Economic Development Policies that Matter.”
The fifth — and only study with a positive showing for the MEGA program — was performed by the W.E. Upjohn Institute out of Kalamazoo and published in 2014. This study, titled “Simulating the Effects of the Tax Credit Program of the Michigan Economic Growth Authority on Job Creation and Fiscal Benefits,” found the program “appears to have had large effects on job creation relative to its net fiscal costs.”
Why might the individual projected and aggregate sum of the MEGA projects not square remotely with that of academic and most other scholars? The simplest explanation is that REMI forecasts are just that: forecasts. They rely on economic assumptions that not only could be wrong, but also rely on underlying economic conditions that may start changing the moment a REMI user finishes an estimate.
[*] MCL § 125.2009(5)(e). The REMI software is a popular program with governments and their consultant contractors. It has been used to forecast the purported successes of the closed Michigan Economic Growth Authority and Michigan film incentive programs.
[†] The software program, REMI, was also used for reports predating fiscal 2016 and the agency’s reported projected ROI’s for every dollar spent of $10.35 (2015); $8.72 (2014) and $7.60 (2013).
[‡] It is worth noting here that the Bartik summary, cited above, also argues that higher benefits to incentives than he cites may be achieved by incenting high-technology or high-wage industries. He also writes that “incentives are more effective if they are more up front.” This is a characteristic of the MBDP, as the subsidies can be earned in relatively short order. Timothy J. Bartik, “Better Incentives Data Can Inform Both Research and Policy” (W.E. Upjohn Institute for Employment Research, April 2017), 2, https://perma.cc/9AGW-N6AL.
[§] The total may actually be 33 as the MSF-MEDC fiscal 2014 and 2015 reports both show “Cataphora, Inc.,” as having been revoked. “MSF/MEDC Annual Report to the Legislature, FY 2016” (Michigan Economic Development Corporation, March 15, 2017), 15, https://perma.cc/RR37-R6D9; “MSF/MEDC Annual Report to the Legislature, FY 2015” (Michigan Economic Development Corporation, Feb. 16, 2016), 10–11, https://perma.cc/7BDE-XKNC; “MSF/MEDC Annual Report to the Legislature, FY 2014” (Michigan Economic Development Corporation, 2015), 12, https://perma.cc/3P4A-GYN4.