Industrial Policy

MEGA Stumble?

Cross-posted from the Mackinac Center for Public Policy Oct. 28, 2008.

This morning it was reported that Whirlpool Corp. will cut 5,000 jobs from its 73,000 worldwide workforce. Some 300 of the jobs are expected to be lost from two of the firm’s operations (Whirlpool Technologies, LLC) in the southwest Michigan towns of Benton Harbor and St. Joseph, according to a company spokeswoman.

Both of these facilities were the beneficiaries of Michigan Economic Growth Authority tax break deals in 2001, and  represent what  supporters of the Michigan Economic Development Corporation (which oversees MEGA) would call “success stories." Today's news is more evidence that such claims should always be taken with large measure of salt.

MEGA is a state business tax credit incentive program designed to generate economic development in Michigan. Tax breaks and other targeted incentives are granted to companies in exchange for their willingness to “create” or “retain” jobs here.

In 2001 Whirlpool was offered benefits for the Benton Harbor and St. Joseph facilities worth nearly $21.8 million over 17 years. In return, the firm promised to create 385 new jobs. The nominal value of these tax breaks was $3,328 per job per year, but the figure is misleading because it is an average. Many of the incentives — such as $1 million for job training — were available up front, while the average measures incentives per job through 2017.

The jobs claims themselves may also be misleading. Naturally, the MEDC claims that the jobs created by the recipients of such deals would not have happened “but for” the discriminatory tax treatment. But there is no way for the government to know whether a firm didn’t intend to create those jobs anyway, and businesses have become quite savvy about how to game the system to their advantage.  State officials claim to understand the nature of these incentives, but hand them out with great naiveté.

Now Whirlpool is set to eliminate 300 jobs from the facilities that benefited from the 2001 deal. The company won’t say whether these lost jobs are directly related to the 385 created after entering MEGA agreements, but in net terms it hardly matters: Jobs promised earlier in return for tax breaks not available to other businesses are canceled out by jobs lost today.

Incidentally, Whirlpool can’t be blamed for taking advantage of MEGA and related tax break programs offered by the state. The firm would be failing its fiduciary duty to shareholders if it did not. The culpability falls upon the politicians who created these programs in the first place, in spite of mountains of evidence that they are not effective at generating net economic growth.

For example, a 2005 study of MEGA by this author and Mackinac Center adjunct scholar Michael Hicks applied a sophisticated statistical model to the full MEGA record and found that the program had no impact on Michigan employment, the unemployment rate or per-capita personal income. The consensus of economic literature supports the conclusion that such programs don’t work to improve a state’s economy.

They do work well for the bureaucrats who run them and the legislators who attend the ribbon cutting ceremonies when the deals are announced. The latter get to pretend to be “doing something” to improve the economy, while they avoid upsetting entrenched special interests with real improvements to the state’s business climate. If they really wanted improve the economy here legislators would eliminate the uncompetitive Michigan Business Tax and replace it with spending cuts, enact a right-to-work law, and overhaul the state’s oppressive regulatory climate.

Creative Charlatanry 2.0

Cross-Posted from the Mackinac Center for Public Policy at www.mackinac.org.

Cities must attract the new "creative class" with hip neighborhoods, an arts scene, and a gay-friendly atmosphere - or they will go the way of Detroit. - Richard Florida, author of "Rise of the Creative Class," Salon, 2006.

Detroit this week played host to "Creative Cities Summit 2.0," a conference based on the premise that urban development can be made to happen by harnessing the alleged economic prowess of America's "creative class," the definition of which encompasses occupations as diverse as engineering and filmmaking.

Among the attendees was the high priest of this concept Professor Richard Florida, whose 2002 book "The Rise of the Creative Class" popularized the notion that attracting this creative class is the key to making cities new economic powerhouses.

Here's the most important thing about the concept: It's nonsense that not only isn't supported by the facts, it's contradicted by them. That's the conclusion of Steven Malanga of the New York-based Manhattan Institute, who has examined the record behind many of Richard Florida's specific assertions.

Most damning, the cities Professor Florida deemed to be "creative" in his first book could not be shown to actually have had more vibrant economies than cities that didn't qualify as creative. Malanga found that from 1983 to 2003, his creative cities underperformed the national economy in job growth, and were even more soundly trounced by un-cool cities he described as "stuck in paradigms of old economic development." They only looked good in one narrow time range - just prior to the bursting of the 1990s Internet stock bubble.

Despite that, Professor Florida has parlayed this concept into a "creative" cottage industry for himself, authoring three books on the subject, writing a syndicated column, operating a consulting firm and collecting speaking fees. This month alone he is scheduled to talk about the creative class in locales as varied as Detroit and Tuscany, Italy.

Unfortunately, many governments and certain government-friendly private associations have embraced the fad. The head of one of those associations, Doug Rothwell of Detroit Renaissance, said that areas implementing the concept would be converted into "epicenter(s) of the creative movement, with its powerful economic impact, that is helping us to rethink and redesign our cities."

Gov. Jennifer Granholm is another believer. Through 2006 the "Cool Cities" program she's championed had handed $4.4 million in state "catalyst grants" to 28 Michigan cities. Detroit - America's poorest big city according to Census data - on 10 different occasions received grants totaling $1 million, and yet both the cool and un-cool alike continue to flee.

Given its empirical record, why is the creative class concept so popular with politicians and bureaucrats? Steven Malanga concluded that it allows government officials to avoid the difficult tasks of reducing business costs and regulatory burdens -"eat your vegetables" approaches that powerful special interests like government employee unions find yucky - and instead just hand out the "candy" of increased spending on things like bike paths, loft housing subsidies and other features that allegedly attract the cool and creative.

Malanga's observations are backed up by other scholarly research. A 2006 article by economist Todd M. Gabe in the peer-reviewed academic journal "Growth and Change" used a "shift-share" analysis of so-called "creative occupations" to test whether pulling a large creative class of people into a city or regional orbit may facilitate economic development and growth. Shift-share analysis is a popular technique for locating sources of employment decline or growth.

Gabe found that the performance of "creative" economies "varied widely across the U.S." and that "an initial strong presence in the creative economy is not a prerequisite for future growth." Variables that may encourage growth in the creative sector may change so quickly from being cool to un-cool that "occupational targeting" may defy planning.

Common sense informs us that while people have many motivations, simple economic self interest is right up there with the most powerful of them. Over time, nations, states and cities enjoy sustained growth and prosperity when they provide a reasonable cost of living, a business climate that doesn't chase away job-providing investors and entrepreneurs, public safety, and the protection of property rights. In the absence of these no amount of trendy bike paths, loft apartments, street performers and the rest are sufficient to attract the middle class families that history shows are the lifeblood of any prosperous and thriving polity.

Here is more information by Mackinac Center scholars about cool cities:

How to Make Cities "Cool"

Trying Too Hard to Be Cool

The Price of Cool

MEGA PR Requires Rejoinders

Following is a letter I e-mailed to a television station on Oct. 15, 2008.

Station Manager
WLNS-TV
 P.O. Box 40226
Lansing, MI 48901

Dear Station Manager:

I am writing in response to an item posted on your Web site (“More Jobs Coming to Area,” Oct. 15) that uncritically repeats the claim in a Michigan Economic Development Corporation press release that  discriminatory tax breaks granted to several particular firms will result in 7,500 net new jobs for Michigan. The MEDC’s track record for picking winners and losers in the marketplace is poor, and the state has been in a wholesale growth retreat literally since the MEDC’s creation in 1999.

In 2005 a colleague and I produced an exhaustive 123-page review of the state’s premier tax incentive program, the Michigan Economic Growth Authority, and found it had been a complete failure. The study included a peer-reviewed statistical model that found MEGA did not improve employment, the unemployment rate or per-capita personal income during its first nine years.

To date, the MEDC has not to our knowledge refuted a single fact in the study — a point that should deeply embarrass the state’s economic development mandarins. Moreover, a review of state documents found that of the 127 MEGA site locations that should have had fully employed facilities through 2004, only 56 claimed to have any net new employment and only 10 could be shown to have “created” the number of jobs they promised in the time frame set forth by the firm and the state. Moreover, several of the companies subsequently left the state or cut employment or went belly up altogether.. Plastech is a good example. It’s mentioned in your article because another company got state assistance at a former Plastech location. But Plastech itself is one of the MEGA “winners” that turned out to be a big loser in the marketplace, having gone out of business this year.

Gov. Jennifer Granholm even praised the Plastech deal in a press release, probably just like the one you received yesterday, saying, “Michigan’s leadership in attracting new businesses and expanding our existing manufacturing sector continues today with Plastech’s commitment to the future of our state. My administration wants to make Michigan a magnet for economic growth — Plastech’s expansion is evidence that we're making it happen.”

The bottom line is that the economic development apparatus that sends you self-aggrandizing press releases is a jobs announcement program, not a jobs creation one. The 7,500 new jobs allegedly coming to the state probably won’t appear, but that is of little consequence for the MEDC, as few will remember their promises and MEDC officials face no accountability if they’re wrong.

American Greetings Says Hello to More Incentives

Cross-posted from the Mackinac Center for Public Policy at www.mackinac.org.

Last summer, American Greetings Corp. revealed it was considering the possibility of consolidating the operations of its plants in Kalamazoo and Greenville, Tenn. The announcement generated a mixture of anxiety and excitement in both locations at the prospect of either losing or gaining hundreds of jobs. However, on Oct. 1 the company announced that neither plant would close. What explains this seeming change of heart?

Consider for a moment the almost reflexive response of local and state officials to the threat of plant closings or the potential for new job providers: They offer special tax breaks and perhaps even outright subsidies.

Consider also that corporate managers aren't idiots; they can predict this Pavlovian response as well as anyone.

Given the way these events transpired, a cynic might question whether American Greetings announced its plans to consolidate with the hopes of achieving just this outcome.

If so, the executives who devised the plan should get a bonus. Predictably, both Michigan and Tennessee eagerly assembled generous special incentive packages and aren't ashamed to admit it. A spokesperson for American Greetings told this author that "the contents of the proposals are fairly detailed and American Greetings is currently working with appropriate officials in each location on these offers."

American Greetings is an old hand at this game (which it didn't invent and shouldn't necessarily be blamed for playing). In January 2000, a press release from Michigan's favor-granting bureaucracy boasted how the firm would expand its Kalamazoo facility as a result of Michigan Economic Growth Authority tax breaks. It quoted Barry Broome of "Southwest Michigan First" saying, "The MEGA program has brought the kind of leadership and decisive action that will make SMF and the Kalamazoo area a hotbed for job creation."

The package assembled then under MEGA auspices granted American Greetings more than $2.4 million in Single Business Tax credits, $400,000 in job training subsidies and nearly $2.5 million in local property tax abatements. The SBT credits were promised through 2010 and the abatements for six to 12 years. In return, by 2002 the state was supposed to get 200 new jobs created directly by the company and 144 additional "spin-off" jobs by 2010 as a result of the expansion.

Michigan Economic Development Corporation documents obtained by the Mackinac Center indicate that American Greetings averaged only 85 new jobs for tax year 2002 and the year-end figure was a mere 60, far short of the 200 promised. Total tax credits earned for tax year 2002 were valued at $346,560. It appears from the same data that after 2002 the company neither requested nor received job creation credits, suggesting that it had failed to meet certain stipulations of the MEGA agreement.[1]

This is not uncommon. An exhaustive analysis of the MEGA program that I performed with my colleague Michael Hicks in 2005 found that from 1995 through 2004, 127 MEGA deals should have produced fully employed facilities. Only about 56 of those had claimed credits, suggesting that most MEGA firms had not met their job promises. Of the 56 companies that met this threshold only 10 showed they had created the number of jobs promised in the time frame promised.

A peer-reviewed statistical model in this study measured MEGA's true economic influence based on actual empirical evidence - not puffy press releases. After other factors were accounted for, the program could not be shown to have improved Michigan's per-capita personal income, employment or the unemployment rate.

If benefits to Michigan's economy matter first, then legislators should promptly kill the MEGA program and replace it with a broad-based overhaul of the state's tax, labor law and regulatory climates. Short of that, they might at least consider new legislation introduced by Sen. Nancy Cassis to make MEGA's performance more transparent.

Real transparency would require MEDC bureaucrats to issue a press release every time a MEGA "winner" fails to produce the jobs they said it would. Such sunshine would strip away most of the value politicians derive from these discriminatory tax favor programs. The endless, self-aggrandizing press releases boasting of their job-creating prowess would be shown for what they are: empty political puffery, not serious and effective public policy.

Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

---

[1] The summary document produced by the state to track MEGA credits awarded and jobs created was discontinued in April. The Center has made numerous attempts to acquire its replacement but has been repeatedly told it remains a work in progress.

The Scene and the Unseen

Cross-posted from the Mackinac Center for Public Policy at www.mackinac.org.

Tom Long of The Detroit News is a terrific movie reviewer - my favorite - but his Oct. 9 column lends too much credence to those who contend that the state's film incentive boondoggle is a worthwhile expenditure of taxpayer dollars.

Long's piece is titled "Michigan's movie role pays off." If the words "for some" were added to the end it might be true, in the same sense that bank robbery pays off - for the robber. The analogy doesn't quite hold, though, because in this instance those absconding with the loot were invited into the vault by the bank's employees.

State officials, desperate to look like they're "doing something" about Michigan's economic slide, are throwing every kind of discriminatory tax credit, abatement and subsidy they can at selected businesses and industries. The latest is what amounts to outright cash subsidies to filmmakers in the form of refundable tax credits; if the credit exceeds the producer's tax liability, the state sends him a check for the difference. Some $148 million in credits have already been approved, and currently there's no limit on how high that could go.

Here's part of what Long wrote about the program: "Dan Gearig, owner of Ciao Catering, which has worked on a number of films, is also a big supporter. ‘And I'm not the only one making money,' said Gearig. ‘My produce guy, my meat guy, the linen people are having a field day. There's definitely a trickle effect going on.'"

To be fair, Long also quoted economist Gary Wolfram - an adjunct scholar with the Mackinac Center - giving an opposing view, but overall the column still fell short of recognizing a classic economic development blunder: Acting on the basis of what's "seen" in a program while ignoring the unseen, and so getting a skewed picture of its real effect. In this instance what's seen is the loot spread around by those film producers. Naturally, the beneficiaries think the Hollywood handouts are a fine thing. What's unseen is the effect on the people from whom the loot was taken. In the bank robbery analogy it's the depositors. In this case it's Michigan taxpayers.

Government has nothing to give to one person that it doesn't first take from someone else. Any benefits enjoyed by the caterer Long cites are at least offset by revenue lifted from other Michigan taxpayers - including businesses - to pay for the film subsidies. Worse, the Michigan Film Office bureaucrats don't work for free, and neither do the legislators who debated the film legislation and voted for or against its passage. Calculate in the share they "take off the top" and an honest accounting of the program is likely to show just one result: A net loss for the state.

Also of note is a sidebar in The News describing how the program works: "Filmmakers submit an initial script, the Michigan Film Office judges whether it is appropriate for the state." Is this what art subsidy supporters really want? Requiring artists to prostrate themselves before government apparatchiks who will judge the "appropriateness" of their work? History suggests that politics, bureaucracy and art make poor bedfellows - great works of art aren't born of backroom deals.

State Works at Cross Purposes

(Cross-posted from Mackinac Center for Public Policy)

“Michigan Works!" is a quasi-governmental entity funded by state and federal tax dollars whose function is essentially to compete with private employment agencies. The agency’s backers justify this by pointing to its mission of serving Michigan's “workforce development system,” helping “local employers” and presumably fostering job growth in Michigan.

However, today (Oct. 8) the Traverse City Michigan Works! office will play host to a particular employer whose identity calls all that into question. You see, this employer is a consortium of business interests called the Drive for Five that operates under the direction of the Columbus, Neb., Chamber of Commerce. Backed by that state’s workforce development apparatus, its mission is to recruit workers to fill jobs created by economic growth in Nebraska — not Michigan. (Watch a television news story at http://www.tv7-4.com/news/video.aspx?id=204132 while the link remains live.)

They're likely to do it, too. In fact, they’re so confident that some in the group even brought portable drug testing kits to get that hiring step out of the way, according to a spokesperson for the group.

This is not the first time the Drive for Five team has been in Michigan. In May they occupied the Michigan Works! office in Cadillac for a day to recruit skilled tradesmen including electricians, machine operators “and many more,” and even posted fliers at Michigan Works! advertising as much. Reportedly 35 prospects were interviewed then, and 21 of these had relocated to Nebraska by July.

What's going on here? The various economic development programs run by the Michigan Economic Development Corporation are supposedly trying to grow Michigan's economy. However, the state-funded Michigan Works! offices are providing resources to help our workers find jobs in another state. At the very least these agencies are working at cross purposes.

Indeed, one of the refrains of the current administration has been that Michigan needs to spend more on government-funded job training programs because a shortage of “skilled workers” is handicapping our future growth. Gov. Jennifer Granholm has lobbied to earmark $40 million in state tax dollars to a “No Worker Left Behind” jobs training program. The entire “workforce development,” line item in last year’s Department of Labor and Economic Growth budget authorized spending $161.2 million, mostly in federal money.

Legislators asked to provide further funds to this expensive program might question whether these tax dollars are actually helping to undermine economic growth in this state rather than enhance it.

The questions shouldn’t stop there, however. Michigan Works! agencies provide many of the same job recruitment and placement services as private job service/staffing firms, and so directly compete with tax-paying businesses here. They make no bones about it, either: In 2002 the Mackinac Center chronicled how Douglas Stites of the Michigan Works! agency in Lansing met with local staffing services companies to tell them that this government-funded entity would be doing direct outreach to these firms’ existing customers.

Other organs of the state’s economic development apparatus have repeated the pattern by recruiting out-of-state firms to come in and compete with longstanding Michigan firms like Jay’s Sporting Goods and Koegel Meats.

The state has even “competed” with itself in the job service area, or at least provided duplicative and overlapping programs. A few years ago MEDC ran an Internet jobs board called “Career Site” similar to the private Monster.com. At the same time the Michigan Department of Career Development, now subsumed in DLEG, ran its own Internet jobs board called “Michigan Talent Bank.” MEDC even bragged that it would “grab” jobs from the Talent Bank site for its own.

We all certainly wish the best for individuals struggling in Michigan’s declining economy, even if they have to go elsewhere to find a good job. The pain of their leaving is made worse by the knowledge that if the state had been working to improve the business climate here instead of making it worse, these emigrants could probably find good jobs right at home. Seeing a Michigan state agency supporting the effort to relocate our residents just rubs salt in the wound. Somehow we never imagined that “leave no worker behind” meant in Michigan.

Collecting the Rent, Part II

In my previous post I briefly explained the concept behind rent seeking and provided specific and general examples of how former government employees are often hired by special interest groups and paid to acquire special favors for their new employer from the very agencies for whom they had previously worked.

My favorite Michigan-specific example involves the former director of international and national business development for Michigan Jobs Commission (predecessor agency of the Michigan Economic Development Corporation). After leaving the state this former bureaucrat was hired by Ernst and Young to steer their clients through the process of obtaining economic development incentives. State records show that at half of Michigan Economic Growth Authority meetings held in 1999 and 2003 this individual represented Ernst & Young clients seeking tax favors.

In 2004 my colleagues at the John Locke Foundation uncovered and publicized an Ernst & Young PowerPoint that taught would-be rent seekers at a conference in Atlanta how to “turn your state government relations department from money pit into a cash cow.” The PowerPoint went on to detail precisely how the government relations departments of businesses should acquire and keep tax incentives and other government goodies.

Now imagine this scenario being played out a thousand times by consultants across the country and even outside the economic development arena, and you begin to get an idea of why it's so difficult to make government smaller, despite the frequently-expressed wishes of an electorate to do so.

One solution to the problem is to have less government for special interests to lobby. The state of Michigan should begin by eliminating departments and programs with a rich history of failure, such as the Michigan Economic Development Corporation and the Michigan Economic Growth Authority.