Michigan Incentive Policies Fooled by Job Turnover

State subsidized jobs are a fraction of the entire economy

Last month, the Michigan House Tax Policy committee heard testimony about the state’s economic incentive programs. The usual justification for giving selective favors to particular firms was trotted out: Other states will capture these projects if this state does not distribute taxpayer cash to companies and developers. Without special incentives, proponents argue, Michigan is doomed to fall behind.

Yet this rationale reveals a fundamental misunderstanding of how the economy works.

Monthly job reports suggest that Michigan’s economy grows or shrinks very slightly from month to month, but this data hides the massive amount of job creation and job loss that is continually occurring. Michigan employers created 192,391 jobs and lost 205,613 jobs in the third quarter of 2014, according to the federal Bureau of Labor Statistics. In other words, over just a three-month period Michigan added and lost more than 1 out of 20 jobs.

This churn includes 7,819 new business establishments opening, adding 30,636 jobs. It also includes 11,300 business establishments closing, a loss of 37,507 jobs. Expanding businesses added 161,755 jobs and contracting businesses shed 168,106 jobs.

Over that same three-month period Michigan’s main economic development program, the Michigan Business Development Program, entered 32 deals with individual companies, pledging $35.8 million in taxpayer dollars to create 5,477 jobs. Even if all of these jobs were created — and the MEDC does not have a good record on transforming announcements into jobs — it would account for just 2.8 percent of the actual job creation and none of the losses.

The contrast with the job churn numbers show that the state’s targeted business incentive programs are more about showmanship than about improving the state economy.

The rosy news releases about the fruits of these selective benefits also assume that none of the projects would have located here without the state’s subsidies. There was one time the state called off a deal — because the city of Novi refused to extend local tax benefits to a company the state was negotiating with — and the business still located in Michigan without the special treatment.

Even if the state were successful with its targeted efforts, landing these companies results in taxpayer costs, and those costs have economic impact as well. The Mackinac Center's 2009 study of the issue found negative results from the Michigan Economic Growth Authority program, since ended but considered the "flagship" of such efforts at the time.

Thus, the cost of chasing after special deals is larger than the benefits. The state is likely to obtain these kinds of investments without doling out selective favors, and even then, the incentivized projects do not have a large enough scope to improve the economy. Broad-based improvements to the state business climate are more effective at bringing that goal to fruition.