Industrial Policy

The Tennessee Waltz

The Detroit Free Press featured an article August 19 (“Ex-Kilpatrick aide faces corruption probe”) about a wide-ranging and  ongoing investigation in Detroit by the Federal Bureau of Investigation that apparently involves “informants and scrutiny of several multimillion-dollar deals such as the Synagro Technologies sludge removal contract,” not to mention secret videotaping.

Two items in this story caught my attention. The first was the apparent connection to the “Asian Village,” a development that was supposed to contribute to Detroit’s revitalization, rebirth, or renaissance. The village went belly up within in a year.  In the Detroit probe federal agents had been looking for records involving a businessman’s firm that had ties to the Asian Village.

As I write this I do not know if there were government funds or favors involved at all with the Asian Village, and this brings me to my first point. Government development officials are not the only people who make poor investment choices. It can and does happen in the private sector too. The difference of course is that investors are risking their own money and not that of a stranger. Moreover, when it becomes evident that a project is failing it is easier to change the development’s direction. For instance, the investors can pull the plug on the project.

The second item that caught my attention was the use of “undercover videotaping” in its probe. This reminded me of a 2005 development-related corruption story humorously dubbed “Operation Tennessee Waltz,” that also involves a videotape.  

According to the online encyclopedia Wikipedia, Operation Tennessee Waltz involved a fake company called “E-Cycle” whose fictional officers asked lawmakers to push legislation designed specifically to benefit their company.  Of the 10 people arrested, seven were state lawmakers who “agreed to do so if they were to be paid for their introduction of legislation.” You can watch the video of ringleader John Ford taking a bribe by watching the imbedded video, below. Money changes hands at about the 3:55 mark.

Imagine how often the opportunity exists for politicians across the globe to exchange favors under the guise of creating jobs or facilitating development of some sort for cash or other gifts.  States run scores and scores of programs designed to encourage cozy relationships between business and government. This, one would think, would increase the likelihood that one side will try to game that system to illegally or unethically advance their self-interest and do so under the very public illusion that it facilitates economic development and creates jobs for people desperate to acquire them.

It doesn’t have to be economic development legislation that makes such corruption easy, either. It could be any subject. That is why it is so important to strictly limit what government can and should do. Moreover, even a government with strictly limited powers should try to conduct its business with the greatest transparency possible.

The Fatal Conceit: An Introduction

The idea behind the “Fatal Conceit” of central planning is the notion that the world is simply too complex for any group of industrial or other planners to survey a city, state, nation or world; grasp it in all of its nuance and detail; and then organize it by force in a way that would be better for everyone than the alternative of life sans planning.  Consider an illustration of just how difficult it is to acquire and process the type of information that one must have to outperform — even outthink — the marketplace as a whole.

How many ways can you arrange just three items such as the playing cards you see below? The answer is six and involves a simple factorial problem (3 x 2 x 1 = 6.) 

But how many ways can you arrange just 20 items? Again, it is a factorial problem of only (20!). But when numbers grow exponentially a seemingly small difference becomes large. Twenty factorial grows to more than 2 quintillion, or more than all of the seconds that comprise 75 billion years. Yet central planners of every stripe are potentially dealing with millions factorial. How is it conceivably possible that central planners could determine everything from the right industry to business to marketing scheme, financing, and geographic location in which to "invest" public dollars in a way that would improve society in a way that would be superior to leaving everyone alone? (For a more detailed explanation, see the study "MEGA: A Retrospective Assessment" at http://www.mackinac.org/article.aspx?ID=7054.)

There are some legitimate rebuttals that city planners like those featured in the Detroit video could offer in response, but explaining those and each conceivable rejoinder to them goes beyond the scope of this blog entry.

 

Planning for Detroit?

In 1965 then Detroit mayor James Cavanagh narrated a bit of propaganda in the way of a film entitled “Detroit: A City on the Move.”  Between the third and sixth minute of the film the mayor confidently announces that Detroit’s future was bright “as a direct result of considered planning,” and that “a new concept of urban efficiency …” was being developed. Indeed, he reports that “reflected here is planning with a purpose,” and that “Detroit is rebuilding to a master plan of beauty and public service.” It was not to be.  Watch the truncated video, below, left.

Today, Detroit has roughly half the population it had only 40 years ago. The city’s decline — indeed, its fall —is so obvious even international news organizations sometimes cover its economic or social oddities. For example, The British Broadcasting Corp. last month reported that charitable farming was taking root in Detroit to help fight poverty. That is, the city is experiencing a “rural sprawl” of sorts, employing land to grow crops where houses and commerce once flourished.  This week the U.S. Census Bureau reported that Detroit was America’s poorest city, with 33.6 percent of its 2004 population living below the federal poverty line.

I seriously doubt if the city’s planners in 1965 could have envisioned the commercial building and housing collapse that has occurred in the city. This is exactly my point. No matter how talented government planners are they simply don’t have the ability to divine the future needs and wants of millions of people with any great accuracy, and attempting to do so often wastes the precious resources of those whose lives planners wish to improve.  (See my next entry, entitled “The Fatal Conceit, An Introduction," for more on this topic.)

Even if they could do so, might they not also risk being thwarted by the same government that employs them when it imposes crushing tax burdens on people and job providers; hyper regulates the simplest of market processes, and provides basic services in the shoddiest of fashions?

Circus Poodle of the State

Last June I was in Lansing on business when I bumped into a state legislator I have known for many years. Our exchange got me thinking about economic development programs and personal liberty.

He asked me what I thought of the possibility of a new and special program of state incentives that would be given only to a specific industry.  I told him it was a bad idea and explained that the there exists a great deal of empirical evidence to suggest that such programs just don’t work. His response shocked me:

“So you don’t think we should use the tax system to get people to do what we want them to do?" he said.

I responded with a rhetorical question: “Am I am man or a circus poodle made to jump through state government hoops in order to collect a biscuit that belonged to me in the first place?” Naturally, the biscuit represents the incentive (tax credit, abatement or subsidy perhaps) that the government dangles in front of people and job providers in the hope they may use it in a way that pleases Lansing (or other) politicians. He had no answer.

Every time the state grows it necessarily makes the rest of us smaller. Why? These programs are not costless. At a minimum they require a bureaucracy to oversee them, and most government employees are not working gratis. The money used to fund these programs is taken from those of us that would like to fund our own personal development programs. If we could keep more of our own money we could start or expand a business, save or invest, or anything else that strikes a free man’s fancy.

Incentives for the Beautiful People

 

Michigan policymakers and pundits continue to be atwitter over Hollywood movie productions — and perhaps even a Warner Brothers’ Pictures studio — locating in Michigan. The new interest in the Great Lake State as a movie-making hub comes courtesy of the latest incentive program signed into law by the governor.

 

The refundable tax credit is good for up to 42 percent of production expenditures in a “qualified production in a core community…” In other words, if the value of the credit exceeds a studio’s tax liability, the Michigan treasury will write the film company a check. This is a robbing of Peter to pay filmmaking Paul. At best, the state is only shifting wealth from one group of people to another—and the latter may, to reference director Woody Allen, “take the money and run.”

 

One report suggests that the incentives may cost the state treasury more than $100 million before the end of the year.

 

There are four major shortcomings of this and other government development programs. First, it doesn’t create new wealth; at best it just moves it around. Second, it costs money to operate government bureaucracies to oversee these types of programs — a cost that probably kills jobs too. Third, who is to say that state officials know if their mix of incentives and industry is better for Michigan than just cutting taxes for everyone and staying out of the way? Lastly, it’s unfair. Michigan businesses of every stripe have been paying their taxes for decades. Now Lansing politicians want to give their tax dollars to Hollywood’s biggest stars, among others.

 

For a clever take on the new incentive package, watch the 4:00 minute video produced by the Michigan Chamber of Commerce in Lansing, below.

A Sporting Chance?

 The Michigan Economic Development Corporation yesterday issued two press releases detailing efforts that will “bring 3,981 jobs.” Not so fast. There are many reasons the state’s job claims are basically fatuous, but here’s a big one.

One of the projects involves a Cabela’s Retail, Inc., an outdoor sporting goods superstore. My colleague, professor Michael Hicks of Ball State University (pictured, left), has studied the economic impact of big box retailers for years, including Cabela’s. He examined the entry of Cabela’s stores into six counties in six different states from 1998 to 2003. His conclusion?

The opening of a Cabela’s outlet created no consistent impact on employment in the counties in which they were located, nor the surrounding counties. His study has been published in the peer reviewed, “Journal of Regional Analysis and Policy.” For a PDF copy of his study follow this link: http://www.jrap-journal.org/pastvolumes/2000/v37/F37-2-4.pdf.

This is not Cabela’s first store in Michigan. In 2000 — and with state assistance — Cabela’s opened in Dundee Michigan.  All of this expansion sounds great if you are an investor in Cabela’s, but what about existing outdoor retailers that may be crowded out of business by Cabela’s and their state and local incentives? There is a fairness issue here. Do they get a sporting chance at tax and other business cost relief? Probably not.

Arlene Yost, the co-founder of the popular, 40-year old Michigan fixture, Jay’s Sporting Goods, has said of the state’s interference “it sometimes makes you wonder who you are working for.” For more on this story, see my article, A Tale of Two Sporting Goods Stores, written for Michigan Privatization Report, at http://www.mackinac.org/article.aspx?ID=4475.

'Autoworld North': Stillborn?

 

The state of Michigan may refuse to subsidize the creation of an amusement park in Grayling for the for-profit Axiom Entertainment, according to the August 15 edition of Gongwer, a Lansing, Mich.-based political newsletter.   

The director of the DNR, which was set to sell the company state land, laid out deadlines for the firm to either put financing together or lose the opportunity to purchase the property it required for the park. But this deal reportedly involves more than the sale of state land. In their article “Taken for a Ride” James Hohman and Diane Katz cite a Bay City Times report that the company was looking for $25 million in infrastructure assistance from Lansing.

The planned park would not have been the first to receive government assistance in Michigan. The first was “Autoworld,” the automobile themed amusement park that opened in 1984 and went belly up in less than two years of operation.

Autoworld was razed in 1997. You can see the video of the implosion, below.

The basic idea behind Autoworld was to create jobs in Flint, which had been hit hard by a downturn in the automobile industry. The general idea behind supporting a private amusement park with state resources — then and now — is the same: jobs, jobs, jobs. Indeed, Lansing politicians are so desperate to create the appearance of doing something about Michigan’s economic woes that “jobs” appear to have replaced “the children” as their rhetorical shield of choice. “We have to subsidize the park,” a Lansing pol might say, “it’s about jobs.”

The first thing public officials must recognize is that government has nothing to give anyone that it does not first take from someone else. Robbing Peter to pay Amusement Park Paul doesn’t create net new jobs, at best, it just shifts them around. What it does create are job announcements, which for politicians is the next best thing.