Mackinac Center Manifesto on Economic Development

What Role Should Government Play?

The term "economic development" may well be the most overused and the least understood concept in public policy discussion today.  And yet, by all concerned it is generally regarded as something in which Americans in general have historically excelled. 

In recent decades, economic development has come to mean something other than the largely spontaneous, private sector-driven phenomenon of this country's first century and a half.  These days, the concept conjures up thoughts of an activist public sector directing resources, subsidizing specific firms, granting selective tax abatements, and making public "investments" in actual functioning companies.

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What Michigan—and the nation, for that matter—needs is a soul-searching re-examination of the notion of economic development.  Is growth-by-subsidy or special favor what the people of Michigan really want and need?

It is important to understand that none of the following conditions or circumstances define, describe, or promote genuine economic development: 

  1. Government-imposed barriers that raise the cost of starting or conducting a private enterprise.

  2. Displacement of private investment with public consumption spending. 

  3. Disruption of the free movement of capital and labor.

  4. Simple redistribution of resources from one location to another, particularly when that is accomplished by coercive and political means rather than voluntary investment with one's own resources.

One consequence of expanding the scope of government to include involvement in virtually every aspect of modern life has been for government to fail at focusing on doing a few things right.  That includes those areas traditionally and universally thought of as promoting economic development: building and maintaining roads, assisting education, and administering a low-cost legal system.   We chronically suffer "crises" in those core functions even as some encourage governments to get involved in "creating" jobs, a function that the market has happily provided, and well, for centuries.

Furthermore, much of what governments have done in the name of economic development has suffered from these inherent deficiencies:

  1. The knowledge problem.  Identified by Nobel laureate F. A. Hayek, this refers to the utter inability of public sector planners to secure the information necessary to construct rational plans that utilize resources wisely and meet real consumer demand.  Officials just don't have the expertise to "pick economic winners and losers" in the marketplace.

  2. Short-term, politicized decisions.  Often, economic development programs turn out to be little more than thinly disguised boondoggles promoted by incumbent officeholders for political benefit. 

  3. Redistribution, with little if any positive, net benefit.  A thief may seem to advance economic development where he spends his loot, but there's no net benefit to the larger society.  The business he "stimulated" comes entirely at the expense of those areas and businesses which would have been patronized by the people from whom the money was stolen. 

  4. "Favor seeking" encourages political entrepreneurship.  By creating programs whereby political appointees pick which companies get state goodies and which do not, the state politicizes job creation by forcing market entrepreneurs to become political entrepreneurs and seek out favors simply out of fear that their competitors are doing the same.  Economist Harold Brumm has found that this favor seeking harms the overall rate of state economic growth—that is, it likely destroys more jobs than any government programs "create."

Michigan doesn't need exotic programs or quixotic central-planning ministers to encourage economic development in Michigan.  It just needs to focus on the following:

  1. Reducing tax and regulatory burdens across the board.

  2. Refraining from doling out selective favors and subsidies.

  3. Rolling back the influence of  "state and local economic development" bureaucracies.

  4. Pursuing legal reforms that would reduce abuse of the judicial system by frivolous lawsuits.

  5. Improving the state's transportation and education infrastructure.

  6. Ending policies that drive people and businesses from the inner cities and other policies that subsidize sprawl to the suburbs.

  7. Joining the 22 other high-growth states that have voluntary unionism laws by adopting one for Michigan. 

Economic development is not what happens when governments take charge of the marketplace, bestow special privileges and handouts, or build vast bureaucracies with a know-it-all attitude.  It's what happens when government performs its own limited, core functions extremely well and otherwise leaves the rest of us alone.