Kmart Property is MEGA Reminder Not to Extend Subsidy Program

I testified last week in the state Senate in opposition to the extension of a corporate subsidy program known by the misleading title of “Good Jobs for Michigan.” Such programs are unnecessary, unfair and expensive. The GJFM is a derivative of the state’s failed and now defunct Michigan Economic Growth Authority — or, MEGA — program. The GJFM program should be allowed to sunset before it, like MEGA itself, costs taxpayers billions in subsidies and with little to show for it.

In Monday’s Detroit Free Press, a story about the vacant Troy property that once hosted Kmart Corp., reminded me of why subsidy programs often fail. No matter how smart or well-intentioned state bureaucrats are, they’re not smarter than the marketplace. The article, by John Gallagher, notes that attempts to find a new tenant in the past 13 years have failed. This was true despite an apparent tax credit offer from the state to incentivize its redevelopment in 2007.

There’s a larger incentive history here, however, and it should be instructive for lawmakers: Kmart itself was offered and accepted MEGA incentive deals and still failed to perform as advertised. Another was reportedly offered to prevent the company from leaving Michigan. These deals (and a large body of research) demonstrate that state bureaucrats cannot consistently pick winners from losers in the marketplace in a way that generates more jobs and wealth than these corporate handout programs cost.

For Kmart’s second MEGA deal, in 2000, the state’s consultants predicted that the incentive deal would generate exactly 753 jobs through 2013. The tally would be split, 450 direct jobs by the company and another 303 through “spin-off” employment, they said.

The claims demonstrating this kind of exactitude are striking when you consider that the company filed for bankruptcy just 17 months later. Why trust the state with its claims of job creation 13 years out when it can’t see failure looming less than two years ahead? The company ultimately moved to Illinois.

In addition to these anecdotes, five rigorous studies have been published about the MEGA program and four of them found the program to be a net negative.

All of this background is important because the Good Jobs for Michigan program is basically modeled after the failed MEGA. It’s old wine in new skin. At least 12 major portions of language in the 2017 GJFM proposal were in MEGA’s statutes. The MEGA law too was sold as a tailored program to be used sparingly. It too contained a sunset provision, one that was later erased.

Over time MEGA was expanded dramatically, especially during the state’s “lost decade” of economic decline, when lawmakers helped Gov. Granholm make corporate incentives the centerpiece of her economic development strategy. Today, the state is still on the hook for more than $6 billion in old promises and with little to show for what’s already been paid out.

The recent coverage of the old Kmart failure reminds us of many bad incentive choices made by state officials in the past. These programs need to stop and any savings that might accrue from eliminating them and their related administration dedicated to some higher and more productive priority.