Come for the Politics, Stay for the Pathologies

Saturday, September 5, 2009

The Michigan Death Spiral: Tax and Spend More

Today’s Wall Street Journal ran an op-ed called “The Michigan Experience.” It tracks Michigan’s industrial policy over more than a decade. During this time the rest of the state’s taxpayers financed subsidies for businesses - selected by bureaucratic state agencies - with the goal of creating and retaining jobs. So did it work? The answer is not only no, but no to the 10th power.

The short story: over the past 14 years Michigan has spent $3.3 billion in tax credits through the Michigan Economic Development Corporation (MEDC) and another $1.6 billion in other outlays to create and retain jobs.

Here’s the punch line based on an exhaustive study done by the Mackinac Center for Public Policy:

In Michigan these programs were responsible for 0.25% of all new jobs created in the last decade, according to the study. Meanwhile, in 2007 Michigan raised business taxes by $1.4 billion on other firms to pay for many of Ms. Granholm's favored companies.

And please note, that’s 0.25%, lest you thought it a typo. The concept of creating jobs by “incenting” businesses to build or relocate is on it’s face dangerous. For starters, bureaucracies are not as efficient at allocating scarce capital as private enterprise, if for no other reason (and there are multiple) because rate of return on investment is seldom a key criteria for government.

These programs are really nothing more than corporate welfare, providing subsidies to state selected businesses at the expense of others. Like social welfare, they are not self-funding. Legislatures seem incapable of grasping the fact that someone has to pay for all this, and it’s always the same people: the rest of us. And when you create a welfare program, corporate or social, it doesn’t take long for people to figure out how to game the system.

Case in point: last July I reported in “Michigan Math” that the MEDC in conjunction with the Michigan Economic Growth Authority granted $47 million to Quicken Corp. to relocate (not build, just relocate) to downtown Detroit – from Livonia. Michigan. We’re paying for a 25 mile move. Ostensibly to create jobs in the state. And then the MEDC whined that they had spent up their allocation for the year, and wouldn’t be able to do any more good works for the people of Michigan. Tax payers heaved a sigh of relief.

We sit with a $2.8 deficit for the next fiscal year (Starting October 1), and furloughs and “closing corporate tax loopholes” i.e. raising taxes, are the only serious proposals on the table. Although the Democratic chairman has advanced some of the most anti-business proposals ever seen in the state. I pointed out just a few days ago in “Spending Our Way to Prosperity” that Michigan’s business tax rates range, depending on what index you use, from mediocre to dismal. And still, our legislators can’t figure out why the state is in such dismal shape, nor what to do about it. Maybe the WSJ op-ed piece should be required reading;

Despite all the giveaways, Michigan was recently ranked as having the third most antibusiness climate among states, in a survey of executives by CEO magazine. If Michigan had simply cut taxes for every business, as Mr. Engler did in the 1990s when the state briefly led the nation in new jobs, it's a good bet unemployment would be lower.

Now the Michigan experiment - writ large - is being repeated in Washington. A trillion dollars in stimulus funding aimed at “creating or retaining jobs?” Folks, it just doesn’t work that way. Not in Michigan, not in California, not anywhere. The Journal piece wrapped up with a reference to Jennifer Granholm, Michigan’s Democratic governor:

When Ms. Granholm gave her state of the state address earlier this year, she crowed about the similarities between the Michigan and Obama Administration strategies of using tax subsidies to aid favored businesses. "President Obama's priorities are nearly identical to ours," she declared, and we can only hope the results won't be.

We give our elected representatives the power to tax and spend. And yet most of them couldn’t pass an Economics 101 exam if you gave them the answers. It’s bad enough they lie to us, but to not even understand what they’re lying about is unforgivable.