Where Does Economic Development Come From?

When the now-defunct theme park in Flint known as AutoWorld opened in 1984, taxpayers had good reason to cross their fingers and hope for the best. Half of the $70 million it took to build and stock the facility came from federal, state and city governments.

After the 1985 season, however, the investment went sour and AutoWorld bit the dust. Until a private foundation came through with a generous bail-out, Flint taxpayers were burdened with a $1.1 million-a-year bond interest obligation through the year 2005, but that's just for starters. If Flint's government-subsidized white elephants were real animals, the city could open the world's biggest zoo.

The Michigan Strategic Fund, operated within the state's Department of Commerce, provides direct loans and grants for businesses around the state. Early last year, word came from the director of the Fund that two-thirds of its loans were either delinquent or in deep trouble.

The Urban Land Assembly Fund is another state government-to-business transfer program which loans money to finance economic development and create jobs. Of nearly $3 million it loaned prior to 1988, roughly 38 percent was written off-- in actual default or verging on default.

A new program called "The Growth Margin" has been inaugurated by the Commerce Department in recent weeks. It will hand-pick 550 Michigan firms presently experiencing rapid growth and subsidize them with management consulting services which program advocates boast will cost these firms about half what they would have to pay in the private sector.

Despite a 1988 report from state auditors that was highly critical of the track record of state economic programs, little has changed in Lansing. It seems almost a monthly habit now that some new program is created by state government to reallocate resources, spend more tax money, and intervene in the marketplace. The governing wisdom in Lansing all too often appears to be, "If it moves, tax it, regulate it, or subsidize it; if it doesn't move, subsidize it anyway."

Local governments are increasingly doing the same sorts of things. Their tools include selective tax abatements, grants from Lansing or Washington, the use of eminent domain powers, and the creation of a range of subsidized entities which often compete directly with private firms. It's one reason why Michigan's state and local tax burden is higher than all of its Great Lakes neighbors and above the average for the nation as a whole, according to a 1989 Citizens Research Council report. And that tax burden is a major reason why unemployment remains stubbornly high here.

All these things come under the heading of promoting "economic development," perhaps the most overused and least understood concept in the public lexicon these days. Economic development is something Americans should know a lot about because historically, we have excelled in it. We built a broad-based standard of living that became the envy of the world. But we have forgotten that we did it by way of a largely unplanned strategy that seems alien to the "tax and subsidize" approach of recent years.

We used to think of economic development as something which happened when people were left alone to pursue their own productive enterprises, free of undue interference. Free markets, "a fair field and no favor"--those were our guideposts. Jobs were created--more here and at higher wages than anywhere else--when profit-seeking entrepreneurs rushed to meet demand by producing supply. We regarded it as a full-time job for governments if all they did was to act as nightwatchmen and referees, keeping the peace and enforcing some basic groundrules.

Today, "economic development" means governments in the saddle--directing the economy, picking the winners and the losers, subsidizing the inefficient and the unproductive, redistributing income, hatching schemes and bureaucracies--all designed to "do good" with other people's money and property. This strategy has produced little good and left in its wake an overburdened private sector, a politicized economy with built-in rigidities that stifle the kind of flexibility necessary to compete in world markets.

We have forgotten that nobody spends somebody else's money as carefully as he spends his own, and that governments have nothing to give anybody except what they first take from somebody, minus a hefty brokerage fee. And before we go much further down this road, we should remind ourselves that governments which become big enough to give us everything we want are also big enough to take away everything we`ve got.

What Michigan sorely needs right now is a searching self-examination--a meaningful public debate over what constitutes genuine economic development. Is growth-by-subsidy what we really want? Will more public sector intervention simply displace private sector initiative? Should governments be confined to specific functions, or should we think of them as Caesar and Santa Claus all wrapped up into one, doing to and for people whatever strikes some planner's fancy?

At a time when Eastern Europeans are rushing to embrace what Americans once thought economic development really was, maybe we owe it to ourselves to ask why we shouldn't be doing the same.