The Failing Business of Business Favors

What would you say you do around here?

The state government spends a lot of money trying to create jobs in Michigan. There are dozens of programs in place with over $100 million in annual appropriations, and billions of tax dollars have been pledged to the purpose. Despite all of this spending, though, the programs don’t work and are rarely held accountable when they fail.

These business subsidies are not designed to improve the economy as a whole, but rather to chase a handful of business projects that are looking for state favors. If the project meets the state’s criteria, it gets the favor, often subject to negotiation with state administrators. Supporters argue that the favors are necessary because these kinds of projects shop around other states for further support.

The supporters want these projects to be important, and say that they would not happen without their work. Both the presumption of their importance and the presumption that incentives are required are doubtful.

The importance of these projects can be evaluated by looking at the recent job creation picture. There are 207,000 private sector jobs created in Michigan every three months and 192,000 jobs lost. Only a handful of those new jobs can be in firms that get state deals. Forget for a moment that the state has a poor record of turning job announcements into real jobs, the scope of state deals is simply not large enough to influence these figures.

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The claim that these projects will not happen without state assistance also has problems, the obvious one being that it’s a claim that is impossible to prove. It would be interesting if the state rejected a handful of deals to see what happens, but that is not likely to occur. We’re left with the rare instances where evidence does appear, something we explored in our 2005 study, showing a number of projects that did happen or likely were going to happen without state money.

But there are also some academic papers on the issue. At a Michigan House tax policy committee, economist Tim Bartik of the Upjohn Institute pointed out that 94 percent of the business projects he studied would happen without special deals. His work doesn’t apply to all incentives everywhere, but it ought to raise concerns about what actually will happen without special business deals.

Are the projects that benefit from state deals important? If these are your projects, then, yes, they are important to you. But what is good for you isn’t necessarily good for the state. And there ought to be a strong burden of proof necessary to claim that they are.

State-favored deals don’t meet that burden. Even so, some business interests and their allies are pitching two new programs to lawmakers in hopes of getting more and different favors. Proponents argue that we need these to compete with other states and that the numbers for these projects don’t work without state money.

Michigan already has a number of incentive programs, and Bartik’s report puts Michigan slightly above the national average when it comes to doling out favors. The Citizens Research Council has a 160-page report on all of Michigan’s programs. Apparently, they are failing in their promise to develop the economy, since lawmakers say that they need new ones to compete with other states.

The issue is that these projects do not develop the economy: They develop examples. Economic development is about data; the state’s job creation activities are about anecdotes. And unfortunately, the anecdotes are not symbols of real growth. The state was developing heaps of examples from 2000 to 2009, but was also shedding more jobs and production than any other state.

Perhaps that explains why the state does not require that economic development programs actually develop the economy. They can concentrate benefits to particular firms, but lawmakers do not require them to demonstrate their effectiveness. Administrators even get away with sketchy reporting on their activities.

There is a large amount of pressure being applied on lawmakers to pass these new favors, even though the evidence they will help the state is flimsy. But the political pressure is about granting favors, not about using real ways to improve the state economy.

Related Articles:

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Why Government Fails at Economic Development

Michigan Needs to Rethink How it Does Economic Development

New Subsidies More about Political Development than Economic Development

In the Battle for Jobs, Subsidy Programs Shoot Blanks

A Plea for Skepticism about the MEDC: An Open Letter