Just two weeks after one of the firms benefiting from a $100 million state electric car battery subsidy deal announced layoffs of 125 Michigan workers (A123 Corporation), the state Senate has authorized a $50 million deal for another electric car project (Who Voted "Yes" and Who Voted "No"). The latest combination of cash grants and tax breaks would go to a firm called Townsend Ventures, which wants to use the former Ford Motors Wixom plant to make systems related to electric cars and batteries, including the “development and installation of a cost effective, national, electric vehicle recharging system.”

This would be the second time the Legislature has authorized huge subsidies for an alternative energy scheme using this particular plant. In 2009, $100 million was approved for a deal that fell through earlier this year, a joint venture involving firms calling themselves "Xtreme Power" and "Clairvoyant Energy."  

Under the latest deal, Townsend Ventures would have to create 750 jobs in the re-used plant to get the full $50 million in capital improvement subsidy/tax breaks. The credits would be awarded over a four-year period and assuming these targets are met, Michigan taxpayers would be responsible for providing Townsend with special favors that cost $66,667 for each job created.

The firm is also involved in another battery car project that was awarded a state tax break/subsidy deal worth more than $80 million, plus $161 million in federal "stimulus" money.

In addition to risking yet more state taxpayer dollars on an industry that despite billions in state and federal subsidies shows few signs of catching on (GM just announced that production of its “Volt” electric car will fall 38 percent short of this year’s planned output of 10,000 units), the Senate’s vote also undermines a commitment made by Gov. Rick Snyder to scale back the level of state corporate welfare and to stop using the tax code to distribute this taxpayer largesse.

Rather than a transparent cash handout using funds from Gov. Snyder’s new “economic gardening” program, the $50 million for Townsend would be delivered as a “refundable” tax credit, with the firm collecting a secret combination of tax breaks and cash handouts by filing under the soon-to-be extinct Michigan Business Tax. (Some firms that previously had been granted similar deals will continue filing under the old tax until those agreements expire.)

Under the previous state corporate welfare regime, government secrecy prevented residents from learning how much from such credits was granted in the form of cash handouts and how much through reductions in a firm's tax liability. Given that few if any of the recipient battery and alternative energy firms had much profit or even much sales revenue (also taxable under the old MBT), it’s likely that investors in these deals benefited from large checks handed out by the state.

Over the past five years the Michigan Legislature has authorized more than half a billion dollars worth of such deals for electric car battery makers, solar cell plants and similar projects. In addition to the A123 operation a second electric car battery assembly plant owned by the Korean firm LG Chem is now operating in Holland.

This state money is in addition to federal subsidies. The Washington Post reports that A123 has received $380 million in government support, and currently employs just 690 Michigan workers rather than the 3,000 predicted by President Obama and the company. LG Chem was given $151 million in federal "stimulus" money.

There’s an old story about an accountant, a mathematician and an economist being asked by a job interviewer, “What does 2 + 2 equal?” The accountant and mathematician both correctly answer “four,” but the economist responds, “What do you want it to equal?”

Alas, the joke reveals a sad truth, that economists — especially ones paid for their work by government — have often been guilty of tailoring research to satisfy the self-serving demands of their political masters. A case study of such expediency triumphing over a search for the truth may be currently underway here, and it involves the Michigan Economic Development Corporation. Here’s the scoop:

In September, the MEDC issued a request for proposals from private economic consultant firms for a project titled “Incentive Study.” It wanted to hire an outside firm to produce a document telling policymakers how much the Michigan government (and/or MEDC) should spend to “be competitive with other states” and lower unemployment to the national average or below. One option to do this, of course, is to use MEDC’s preferred tools of discriminatory financial incentives. Here’s part of what the agency requested:

“Review, critique, and/or validate the MEDC’s method of defining an optimal level of investment in an incentive program.”

Note the presumption that the “optimum” level is anything other than zero. A more valid inquiry might instead ask, “Does handing out special ‘incentives’ to particular firms at all increase a state’s competitiveness and reduce unemployment on balance?” Studies done in Michigan and elsewhere suggest the answer could be “no.” The MEDC has little incentive to ask that question, however, given that such activities are its only reason to exist.

It gets worse, because the agency seems to actually want their contractor to justify a particular amount of spending on these activities — $291.5 million — unless it could devise a more persuasive methodology to justify an alternative figure: As the RFP put it, “Make recommendations to adjust the proposed methodology.”

While the RFP didn’t explicitly require that any “adjustments” result in a similar or higher spending level, the handwriting on the wall is that the agency really wants a marketing tool to persuade state legislators to expand the $100 million Gov. Rick Snyder prefers for such activities. In other words, the implicit message was, to win the contract you better be willing to play ball with the MEDC bureaucracy’s agenda.

Where did MEDC get that magic number of $291.5 million? It was crafted using the agency’s standard “black box” economic modeling software, a so-called “input-output” model called REMI. Although economists have strongly criticized the use of such models for purposes like this, MEDC used it anyway to estimate what one direct job costs to “create” using the failed Michigan Economic Growth Authority selective tax break and cash subsidy scheme it has managed since 1995.

Put simply, the agency used a software program to develop its own figure of $2,133 spent by a failed economic development program to create a single “direct” job. It then multiplied that by the number of new jobs that would be required to lower Michigan’s unemployment rate below the five-year national average (6.8 percent), and presto, out popped a dollar amount nearly triple what the governor says he wants to spend on MEDC programs.

Worse, the MEDC is presuming that the MEGA program really did create net new jobs. Two Mackinac Center studies (in 2005 and 2009) found a jobs impact that ranged from zero net new jobs to a negative response. That is, the program may have destroyed jobs. To date the MEDC has not bothered to refute either study’s findings despite being encouraged by the study’s authors to try and do so.

The MEDC appears to be preparing a PR campaign and it is starting by hiring some outside consultant to go along, providing econo-babble backup to justify a questionable methodology to skeptical legislators, unless it could provide an even better technique. Meaning — nudge nudge, wink wink — one that would generate a similar or higher spending “recommendation.” Lest the reader think that this author is just cynical and presumptuous consider that I am hardly the only observer to make such connections.

In a 2006 academic paper titled, “Economic Impact Studies: Instruments for Political Shenanigans?” scholar John L. Crompton wrote:

Most economic impact studies are commissioned to legitimize a political position rather than to search for economic truth. Often the result is mischievous procedures that produce large numbers that study sponsors seek to support a predetermined position.

And from a 1993 paper by Edwin Mills,  “The Misuse of Regional Economic Models”:

[T]o justify increased spending, government officials must identify some publicly desired goal to be accomplished by government spending. Creation of new jobs is among the best such goals that can be found. ... [T]hey must make it plausible that government can accomplish the goal in a way that the private sector cannot. This is where REMI is so valuable. It is a complex computer model that lay people cannot understand or evaluate, and it has important scientific merits. Thus, the frequent government claims that the best scientific model available shows that x thousand jobs will be created by the project helps to carry the day. 

Moreover, the MEDC-authored RFP argues in its “background statement and objectives” that companies have come to expect incentives and cites “Area Development Magazine’s 2010 Annual Corporate Survey” as apparent evidence that they are necessary. The survey of CEOs ranked incentives as “5^th most important site location decision factor…”

First, that’s down from the No. 1 position in their 2003 issue so we wonder if the survey doesn’t make the case against targeted tax incentives. Second, it really doesn’t matter because this survey is self-selecting. It surveys those who subscribe to its magazine.

If I called up people who give money to the Mackinac Center and asked them, “do you like the Mackinac Center?” do you think they would respond positively? I first addressed this subject in the 2005 Mackinac Center study: MEGA: A Retrospective Assessment, which showed that MEGA had no net positive impact on job creation over time.

The MEDC's contract for its study — apparently worth $80,000 — was awarded to AngelouEconomics of Austin, Texas, and is a pretty big deal. The story has already been covered by Amy Lane of Crain’s Detroit Business and Rick Haglund on Mlive.com.

Aside from the words in the MEDC’s RFP, evidence that it is playing the PR game described is seen in its staffer’s comments on the proposals from three consultants who responded, obtained through a Freedom of Information Act request. Among other things, these suggest MEDC really wasn’t interested in alternative methodologies.

One reviewer admired the winning bidder’s ability to “articulate understanding of MEDC’s need,” saying, how the Angelou Economics proposal was “on point; in agreement” and that it “gives us what we need.” A losing bidder was dinged because he “understands, but wants to modify and redirect” the methodology. (See all scores and comments here.)

As mentioned, Gov. Snyder and the Legislature have put the state’s “economic development” apparatus on a diet, and forced the MEDC to reform some of more notorious abuses, such as trumpeting of impossible-to-prove “spin-off” job claims in its job creation press releases. Apparently the agency has also been directed (or has volunteered) to scale-back the government secrecy, since so far under the current administration it has been much more responsive to requests for information.

The recent incentive study RFP at least suggests, however, that self-promotion and bureaucratic empire building just may be a part of the MEDC’s genetic structure. When it comes to self-promotion and Michigan’s department of corporate welfare, the bottom line appears to be, “Meet the new boss, same as the old boss.”