With the nation’s highest unemployment rate (currently above 15 percent), a distinction it has suffered for 43 consecutive months, Michigan’s economic travails have become well known. Less well known are the lengths the state’s political class has gone to avoid genuine business climate reform, substituting instead expanded “economic development” discriminatory tax breaks and subsidies.
A study by the Midland, Michigan-based Mackinac Center for Public Policy suggests these programs have had at best no impact on employment in the state.
The 81 page study, “The Michigan Economic Development Corporation: A Review and Analysis,” traces the department’s funding history and details how just nine line items in the state budget account for more than $150 million in official state spending each year. Another $30 million is automatically funneled to the bureaucracy each year from Indian casino revenues, with no legislative approval required.
In addition, just one program run by the MEDC—the Michigan film subsidy program—cost taxpayers about $48 million in 2008, but none of these costs show up in the appropriated line items of the department. This helps the sprawling MEDC appear far less costly to operate than it really is. Transparency (or lack thereof) is a consistent theme throughout the report.
The authors explain in detail how for years the MEDC has worked diligently to cut back the information it releases. The increasing secrecy is explained in part by the failure of these economic central planners in their mission of creating and retaining jobs. Reducing the amount and types of data available makes a review of their performance all the more challenging.
The core of the study involves a two-part analysis of the MEDC’s largest, most prolific and arguably most financially generous of its many jobs programs: The Michigan Economic Growth Authority. MEGA empowers a small group of political appointees to offer millions of dollars of business tax credits to corporations they select in return for promises to create or retain jobs. The MEDC typically arranges for other state incentives as part of every MEGA deal. From 1995 through 2008 MEGA offered $3.3 billion in tax credits in some 455 deals.
Over-Promising on Jobs
The first part of the Mackinac Center’s analysis includes a careful appraisal of the jobs promised between 1995 and 2004 versus how many were actually created through 2009. The Center found only 29 percent of direct jobs promised ever materialized. Moreover, even this number should be examined skeptically because MEGA cannot prove a particular company would have not have expanded or located in Michigan without the tax breaks.
To explore MEGA’s net impact, the Mackinac Center employed business economist Michael Hicks of Ball State University to perform a “shift-share” and statistical analysis of the program’s effect on manufacturing employment at the county level. The shift-share work helps separate out other variables that might influence job creation, such as trends in the national economy.
Hicks did identify an empirical link between MEGA and manufacturing employment, but it was negative. For every $1 million in tax credits given in a particular county, 95 manufacturing jobs in that county disappeared.
The report inspired favorable editorials in The Wall Street Journal, The Detroit News, and many more news outlets in Michigan. The MEDC’s response has been muted, with official statements that have either been misleading or blatantly erroneous.
In a Livingston Press article, for example, reporter Christopher Behnan wrote that an unnamed MEDC official attempted to rebut the Center’s findings, telling him “a University of Michigan report concluded that MEGA has generated more than $2.4 billion in state tax revenues,”
But no such report exists. The MEDC was simply repeating the total from dozens of individual forecasts made by university economists over the years when each MEGA deal was struck. This fits a longstanding MEDC pattern of playing fast and loose with job predictions.
One notable victory from the study came when the agency’s director, Greg Main, conceded it could be more open, in an interview with business news writer Rick Haglund: “[MEDC President] Main said he agrees with the center’s contention the MEDC should be required to release additional details about its programs. He said he supports legislation that would allow more information to be released without violating taxpayers’ privacy.”
In October the Michigan Legislature passed transparency legislation targeted at the MEDC and its work. Although it did not go nearly as far as Mackinac Center scholars had recommended, the new law will nevertheless render the agency more open.
Rep. Tom McMillin (R-Rochester Hills), a freshman legislator in the Michigan House, credits the Center for making the clear case for why more transparency is critical to understanding whether these so-called job claims are true or not.
“When the state decides to pick winners and losers, companies or industries, Mackinac Center makes it clear that transparency is critical to understanding whether, despite being unfair, they even work,” said McMillin.
Michael LaFaive ([email protected]) is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy.
“The Michigan Economic Development Corporation: A Review and Analysis,” Mackinac Center for Public Policy: http://www.mackinac.org/article.aspx?ID=10896