The state Legislature has jumped headlong into yet another
economic development scheme. This one authorizes $1 billion in grant and loan
subsidies for research in and commercialization of unproven "cutting edge"
technologies, in the hope of creating new jobs and wealth in Michigan, among
With this move, today’s political establishment joins a sad
tradition: Every governor since Kim Sigler in the 1940s has introduced his or
her own targeted economic development plan(s) for diversifying Michigan’s
economy. That Michigan is still not sufficiently diversified following decades
of government economic adventurism should speak volumes to policymakers.
lessons of history appear lost on officials of every stripe. History,
economic theory and experience suggest that there are better ways for government
to encourage economic growth and development.
This latest episode began in February, when Gov. Jennifer
Granholm called for the state to borrow $2 billion over 10 years to finance a "21st
Century Jobs Initiative" in hopes (once again) of diversifying Michigan’s
economy. The idea was to invest the money in advanced automotive engineering and
other high-tech industries to generate economic growth and development.
Senate Republicans countered with a similar, but smaller,
$1 billion debt plan. Unlike the governor’s proposal, this proposal did not
specifically authorize state government to take ownership positions in private,
for-profit companies. However, Republicans in the House put forward a response
that did include such equity positions, and their version (
House Bill 5047) has
been adopted by the Senate as well.
Patrick J. Wright, senior legal analyst with the Mackinac
Center for Public Policy, noted that this violates the spirit of Michigan’s
prohibition on direct state ownership in private companies and stocks (except
for state employee pension funds). "In the 2002 primary election, voters
accepted a legislatively-initiated constitutional amendment to allow any
‘permanent fund’ to hold equities," Wright said. "Voters were told that this
would allow more effective management of the state’s natural resources trust
fund, state park endowment fund and veteran’s trust fund. But few if any voters
realized that another consequence would be to provide future legislatures with a
means to circumvent a 154-year-old prohibition against state ownership
of private companies for 'economic development' purposes."
The $1 billion fund in the current proposal would come from
"securitizing" (or selling) a portion of revenue annually received by the state
as part of its 1998 legal settlement with tobacco companies. "Securitization"
means the state exchanges future revenue streams for a lump sum of money today.
Last year the state received about $274 million as part of the agreement.
The $1 billion would be used to make investments in areas
deemed by officials and "experts" on a government "Strategic Economic Investment
and Commercialization Board" to have a "high probability of creating jobs in
Michigan." Some of these include life science, advanced automotive work in
manufacturing and related materials technology, as well as alternative energy
research and "medical informatics."
There are at least five major shortcomings with this latest
First, there is nothing new under the economic development
state constitution today prohibits direct investments in companies (save for
pensions and trusts) precisely because Michigan’s first governor floated $5
million in bonds to pay for economic development schemes that failed miserably.
Gov. Granholm’s plan called for issuing bonds and using at least some of the
money for taking equity stakes in companies. The Republican alternative does the
Second, economic theory, logic and evidence suggest that,
at best, the state’s investments in particular products, processes or industries
will be a wash. Government has nothing to give anyone that it doesn’t first take
from someone else. Productive returns on investment will only occur if officials
can pick winners from a myriad of investment opportunities. The state’s history
of picking winners and losers in the marketplace is not encouraging.
Here’s an example: The Michigan Economic Development
Corporation is a quasi-public institution that has taken equity positions in
public corporations. Unelected officials at the MEDC are using state resources
purchase equity in corporations and make other investments. According to an
audit of the MEDC published in June 2005, MEDC officials have, through September
30, 2004, an investment portfolio worth $9 million less than the investments’
This suggests at least two problems. First, it is another
example of unelected officials making investment decisions for the state and
choosing poorly. Second, the MEDC is a public agency and, thus, its direct
investments in corporations may be a violation of the Michigan Constitution. The
MEDC will no doubt argue that it is quasi-public and maintains a "corporate"
side which makes its investments legal.
That position is debatable. The MEDC is supported by tax
dollars, responds to Freedom of Information Act requests and claims to adhere to
the state constitution.
The state’s track record on picking winners and losers in
the marketplace is simply not good enough to justify placing $1 billion into the
hands of unelected political appointees to "invest" as they see fit — be it in
equities, other investments, or in entire industries by providing grants and
loans to research areas, universities, nonprofits and corporations it deems
worthy. Consider a few examples of dubious government "investments" gone wrong.
comprehensive analysis of Michigan’s highest profile economic development
program, the Michigan Economic Growth Authority, showed that state promises of
job creation have not materialized. The MEGA program authorizes an unelected
board to hand out incentive packages to companies that promise to create "x"
number of jobs.
A 2005 Mackinac Center analysis showed that of the 127 MEGA
deals that were supposed to have created all of their direct jobs through 2004,
only 10 created the number of direct jobs originally projected by state
officials. After 10 years, the program has had no impact on net employment in
the state. What makes legislators think this new program will be any different?
Of course, this is just one failure among many, but one
must wonder if legislators ever heard of others, such as the state’s $20 million
Optical Imaging Systems/Flat Panel debacle involving the University of Michigan,
Vixen Motors or
Autoworld, the now-defunct automobile theme park that was supposed to bring
jobs and prosperity to Flint.
The third shortcoming of the plan is that the
securitization program is basically redundant. Former Gov. James Blanchard’s
Research Excellence Fund is practically a smaller, 1980s version of the
Granholm/Republican programs. Both programs were designed to facilitate research
in the hope of commercializing discoveries produced in universities and
The Research Excellence Fund’s creation was promoted by
Blanchard in a 1985 press release which claimed:
The function of state government
is to act as a facilitator in encouraging more interaction between higher
education institutions and the private sector. Closer ties between the two can
result in increased business and job creation. The Research Excellence Fund will
make targeted investments in the existing strengths of our colleges and
universities in those fields which hold the most potential for future economic
benefit for all of Michigan.
But did it? Between fiscal 1986 and fiscal 1990 alone, the
state appropriated $130 million for REF in the hope that its research would
generate patents and products that could be commercialized and, thus, generate
jobs, wealth and employment in the state. The program was discreetly rolled into
the basic appropriation of university monies in former Gov. John Engler’s first
budget. Engler was never a fan of the Research Excellence Fund.
One has to wonder how many legislators today have even
heard of this program, let alone know if it lived up to its expectations.
Indeed, if REF was such a job-creating engine, proponents of this plan would be
using it as evidence for expanding the initial program. But they can’t. Consider
just two of the ways state appropriations were used then to invest in research
to facilitate job creation.
According to The Detroit News writer Mark Hornbeck, the
study reported that such projects made "people feel more positive about the
downtown." One has to wonder how they felt watching Autoworld get razed by
The list of research grants is long, but not necessarily
distinguished. At the very least, REF failed for its ability to rigorously
measure and report its costs and benefits. It likely failed to drive real job
growth, too. After all, if REF-related research was creating scores of net new
jobs wouldn’t scholars and proponents of such programs be touting its successes?
Legislation to securitize tobacco revenues demands scrutiny
of the new program’s success, but even a commitment to do so could prove to be
little more than window dressing to distract critics. In the 1985 press release
announcing REF, the "proposed administrator of the fund," James Naftaly, assured
[E]ach of the public four-year colleges and
universities will be eligible to receive a portion of the fund, however, there
will be a rigorous review process prior to grant approval, including evaluation
by well-known scientific experts and an economic analysis.
The Mackinac Center for Public
Policy expended a great deal of effort last summer attempting to locate anything
approaching independent evaluations of past REF grants by scientific experts and
corresponding economic analyses. While such materials may exist, this author is
beginning to doubt whether any comprehensive, independent appraisal of REF
grants were ever made.
The state itself was reportedly set to spend $50,000 in
1991 on a single evaluation to measure the REF program’s success, or lack
thereof, but it remains a ghost study. If a study was done its findings have
been lost, as neither the state Department of Management and Budget, which
oversaw REF, or the state library and archives, is aware of its existence.
In addition, when the state Legislature passed "Renaissance
Zone" legislation in 1996, it included a "report by state research university"
mandate that the program be analyzed to measure its effectiveness. But since
that time it appears the state has simply ignored its own law. A search by this
author turned up no such studies.
Fourth, the Clean Michigan Initiative was promoted as an
environmental stewardship program, and in 1998 voters authorized the sale of
$675 million in bonds. Much of the money was spent on questionable environmental
improvement work such as building swimming pools, roller rinks, tennis courts,
ice arenas, "and even renovation of a dairy barn and construction of a
fish-cleaning station," according to Diane S. Katz, the Mackinac Center author
study on CMI. Giving state government a mandate to spend, even on what
appears to be carefully monitored programs, can produce highly questionable
Fifth, state initiatives to "create" jobs are a distraction
from the fundamentals. Every moment legislators spend trying to concoct yet
another program to diversify and improve Michigan’s economy consumes time and
energy better spent on fixing the Great Lakes State’s
basic economic infrastructure.
Lastly, can any "investment" made by the state come without
political strings of some sort? The legislation passed by the House two weeks
ago appears to contain some highly questionable political spending. It mandates
that $26 million of the tobacco revenues generated from securitization be
redirected to the Michigan Forest Finance Authority. The Authority is a legal
mechanism the state of Michigan uses to contract for timber-cutting rights on
state lands and appears to have nothing to do with creating "competitive edge
technologies," as the legislation is sold as doing. The final Senate version of
the legislation, passed Oct. 19, maintained this expenditure and also included
$2 million for the promotion of movie production in the state.
The language allowing the appropriation for the Michigan
Forest Finance Authority was included in an amendment sponsored by Tom Casperson,
an Escanaba Republican with constituents who may benefit from a forest industry
subsidy. Casperson is widely seen as vulnerable in the next election as a result
of his votes to close two Upper Peninsula prisons and to cut funding for
Northern Michigan University. Republican leadership has been looking for a way
to buttress his standing and this just may be one way to bring Casperson
Consider a report from the Oct. 6 edition of the Michigan
Information and Research Service:
. . . Action on the bill also gave evidence to the
desire of both caucuses to use the funding to insulate otherwise vulnerable and
targeted members. Recall that the House leadership had requested that Granholm
give Rep. Tom Casperson (R-Escanaba) credit for saving the police posts? (See
MIRS, Sept. 22, 2005).
Only four members of the state
Senate voted against the legislation. One of those members, small business owner
Laura Toy of Livonia, was quoted in the Oct. 19 edition of MIRS as saying, "We
are better served by removing obstacles than engineering a gigantic program
where government pretends to know more than the market."
Her observation is backed by a
great deal of compelling evidence. One frequently cited study alone should give
Lansing’s central planners pause. It is by General Accounting Office economist
Harold Brumm, published independent of the GAO by the Cato Institute’s Cato
Journal. The study, entitled "Rent Seeking and Economic Growth: Evidence from
the States," evaluted the cost imposed on state economies by favor seekers. Rent
seeking is a fancy way of saying people and institutions seek higher returns by
getting government favors, or "rents," than they would otherwise earn without
Brumm collected and analyzed
data from the 48 contiguous states and found that "rent-seeking activity retards
economic growth, because it merely redistributes wealth; rent seekers (unlike
profit seekers in a competitive market) do not create wealth." Brumm actually
found a correlation between the growth rate of per capita gross state product,
adjusted for inflation, a state’s tax burden and how much rent seeking occurs in
each state — and the correlation was negative. That is, the more rent seeking,
the slower the real rate of economic growth.
By appropriating $1 billion
for redistribution ($400 million in 2006), the state Legislature is ringing the
equivalent of a rent seeker dinner bell while yelling "come and get it" to every
institution or person with the influence to get something for nothing. As
Brumm’s research suggests, this could actually slow, rather than accelerate,
Michigan’s real rate of economic growth.
Instead of securitizing tobacco revenue for the purpose of
letting government bureaucrats attempt to pick winners and losers in the
marketplace, officials should work to eliminate or lower the tax burden for
all job providers, pass legislation that would make Michigan’s labor climate
less hostile, roll back onerous regulations and improve state schools. Only
fundamental changes to Michigan’s economic landscape will generate the type of
dramatic growth that will be necessary to stave off more bad news for Michigan’s
Michael D. LaFaive is director of fiscal policy for 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.