Crony capitalists on the move in Michigan

James Hohman

There have been a number of recent calls for more crony capitalism in Michigan, each promising to develop the economy. But these plans ultimately fall short of justifying their existence, and for a simple reason:

The state’s economy is far too complex and far too dynamic for any one of these economic development schemes to make a measurable and meaningful difference.

The vibrancy of Michigan’s economy is underappreciated: There are hundreds of thousands of jobs created and lost every quarter, all without the aid of politicians or taxpayer-funded economic development programs. In the last quarter of 2015, Michigan created 218,548 private sector jobs and lost 192,282. That is a turnover of more than 1 out of every 17 jobs every three months.

The state’s economic development programs offer select businesses favors in exchange for jobs. The state acts like a hunter, attempting to bag whatever project comes its way. “Shoot anything that flies, claim anything that falls,” is how one economist summarized the approach. But the state really doesn’t need economic hunters, because most jobs are created without any help from these targeted incentive programs.

Every month the state announces new incentives awarded to businesses and developers to create jobs, and uses its annual $217 million budget to do it. Even if all the job announcements came to fruition (most usually don’t), this represents a miniscule portion of the total job creation — just 1 percent in the most recent quarter.

Although targeted programs fail to nudge the economy in one direction or another, broad-based policies can encourage or discourage certain types of activities throughout the economy. These policies set the rules that all companies must abide by. They do things like require firms to register with the state, tax them, regulate what types of buildings they can use, and loads more. And these policies can be made more or less burdensome.

There are plenty of policies that can make the state more attractive to start and expand a business. The state needs to continue to remove occupational barriers to entry. Around 21 percent of all jobs require workers to get a license from the state. There are other ways to protect people from harmful practitioners without licensure regimes and ways to do it without blocking people from the market.

The state needs to let more people find their gifts and provide services valued by their neighbors, and de-licensing occupations will help.

Michigan can be a more attractive place by lowering its taxes. Economists have long pointed at the disincentive of state income taxes. Most people can think of something that would help themselves if they were able to keep a little more of their cash. Reducing taxes is a challenge for politicians, because Michigan has a balanced budget requirement, meaning that the state would need to spend less in order to lower taxes, at least over the short-term.

Outside of the $217 million being spent on the state’s economic development apparatus, pension underfunding is an important place to look for savings. If the state had not underfunded pensions in its school employment system, it would be saving $1.5 billion a year, enough to bring the state income tax down from 4.25 percent to 3.6 percent by itself. The state needs to pay for its promises to retirees, and converting to a system that cannot be underfunded — like a 401(k) plan — can generate savings for taxpayers and school districts alike.

Michigan has done a lot to improve its business climate over the past five years. Yet it still participates in the hunting game, and there have been calls to expand it. A true economic development program, however, looks for broad-based improvements that will affect many businesses instead of enticing a few select entities with taxpayer money.

James Hohman is the assistant director of fiscal policy at the Mackinac Center for Public Policy.