Calls to Expand Michigan’s Economic Development Programs Fall Short

Is there taxpayer blood in the water? It’s hard not to ask because a number of groups in Michigan are circling for a bite. Venture capitalists have chewed up the money they received under the 21st Century Jobs Fund and are asking for more. Downtown Detroit investor Dan Gilbert is reportedly testing the waters for new forms of taxpayer support. And new legislation has been introduced to restart tax credits for research and development expenses.

The pitch for more economic development spending doesn’t even promise to add jobs and improve the economy. But taxpayers should ask, "What good is an economic development program that does not make the case that it will develop the economy?" Any growth pledged from these projects needs to be measured against the state’s overall actual performance. In other words, these programs need to demonstrate that they can by themselves have a meaningful and statistically relevant impact on Michigan’s economy.

When it comes to actual economic growth, Michigan is doing well. It leads the country in reducing its unemployment rate during this recovery; personal income is growing at top-tier levels. The state also is a leader in economic output growth. All of this comes at a time when the people in charge of our economic development agencies are saying that Michigan’s economy is uncompetitive and needs more taxpayer subsidies.

During Michigan’s one-state recession, from 2000 to 2007, Michigan’s economic development programs were “competitive” even when its economy was not. Even this year, we are paying for the profligate promises the state made back then, and the job returns from that spending remain oversold. For example, only 2.3 percent of the deals from the Michigan Economic Growth Authority, the program that used to be the state’s main economic development tool, met or exceeded job estimates. Even then, this accounting does not measure all the economic costs of taking money from taxpayers and giving it away to select companies.

While the state government has cut back on new economic development spending, it still adds up to a nontrivial amount of state spending. The most recent budget contains $167.9 million in economic development programs — about $44 per household in Michigan — and that does not include the costs of administering them. Proponents of these new programs aren’t trying to argue that this money is ineffective and should be repurposed. They just want new programs and new favors.

It might be worth considering proposals for more economic development spending if their advocates could quantitatively show that they can actually influence the economic well-being of the state. And that it is the best possible use of state spending, given all other alternatives. And that the economy will be better off than if we just left the money in taxpayers’ own hands to spend or invest as they saw fit. And that all this can be demonstrated empirically. Instead, proponents seem to be arguing that Michigan ought to be as profligate as other states, without evidence that this profligacy is effective. Lawmakers should be skeptical.