"The economy needs help from the government. The state should engage outside experts to pick winning technologies to subsidize in order to bring more jobs to Michigan." This is the battle cry from Lansing as Gov. Jennifer Granholm campaigns for her "Jobs Tomorrow" proposal, which would sell $2 billion in state bonds to provide money for state investment, guided by scientific experts, in cutting-edge research and development in Michigan.
Students of history will immediately ask the key question, What is the track record of government investment in industries, job creation and economic development? The answer is that such experiments form a long train of disasters.
When Michigan first joined the union in 1837, its political leaders believed that the state’s northern location was too far from the western trail through Ohio, Indiana and Illinois. To lure industry, Gov. Stevens T. Mason and the Michigan Legislature sold $5 million in bonds in an approach somewhat similar to what Gov. Granholm is proposing with Jobs Tomorrow. The purpose of the bonds was to build "high-tech" industries of the era — railroads and canals to detour businesses and people northward to Michigan.
In keeping with political and expert opinion, the bonds were sold, and experts surveyed routes for one major canal and two railroads. The canal cost $350,000 and earned $90.32 in tolls before it was abandoned. Then came the railroads; the state ran out of money before completing either one. What’s more, both railroads were so shoddily constructed that trains were barely safe on them.
At that point, Michigan quit having politicians guide industrial improvements. The state sold both railroads to private investors, and in less than three years, they had both railroads rebuilt and running smoothly across the state. Michigan voters celebrated this event by changing the state Constitution in 1850 so that state government could "not subscribe to, or be interested in, the stock of any company, association or corporation."
Gov. Granholm’s proposal recalls the state’s early railroad fiasco. She wants independent experts from the American Association for the Advancement of Science to help find winning technology investments for the state. She even wants to amend the constitutional provisions stemming from the state Constitution of 1850 in order to allow the state to hold equity in some of these new businesses.
There are three reasons why Michigan’s $2 billion in 2005 would probably go the way of Michigan’s $5 million in the 1830s. First, there are inherent problems with economic projects shaped by politicians and "experts," who use other peoples’ money, rather than their own, as entrepreneurs and investors do. Politicians have every incentive today, as they did in the 1830s, to use economic development projects to gain votes, since governors and legislators can win elections when they bring outside industries to their districts or to the regions that support them.
Second, the so-called experts often have a hidden agenda. The impartiality of the AAAS has been questioned: Patrick J. Michaels, senior fellow in environmental studies at the Washington, D.C.-based Cato Institute, has argued that Science magazine, a publication of the AAAS, summarily rejects articles that question the idea that global warming will be large and that it will require a major public policy response. Experts who have no direct financial stake in the investments they recommend have every incentive to promote ideas that fit their conception of how the world should work, rather than how it actually does work.
Third, even when experts put aside their personal agendas, they are notoriously poor at picking winners and losers. This bad record goes beyond the canals and railroads they selected for Michigan in the 1830s: They almost did it again with the auto industry. One hundred years ago, many of them picked horses and carriages over cars. The president of the Michigan Savings Bank in 1903 refused to back Ford Motor Company, because, "The horse is here to stay, but the automobile is only a novelty — a fad." Six years later, after Ford scraped up the private capital to build his first Model T, the experts at Scientific American concluded, "The automobile has practically reached the limits of its development. …"
"If not Jobs Tomorrow," some ask, "What is your alternative?" The best answer is this: "Tax cuts, deregulation and a good business environment to attract private capital." Jobs Tomorrow, like its railroad predecessor, is likely to be a burden on Michigan taxpayers, making the state less competitive than ever in attracting the Henry Fords of the 21st Century.
Dr. Burton W. Folsom Jr. is professor of history at Hillsdale College and senior fellow in economic education with 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.