Why Do Michigan’s Failed Economic Programs Stick Around?

The Michigan Economic Growth Authority, which awards refundable tax credits to selected businesses, came under large amounts of scrutiny this year: audits showed missed expectations; studies indicated that it was responsible for little-to-negative economic activity, and scandals indicating that bureaucrats fail to vet applicants thoroughly. Yet, this economic incentive continues. It's hard for politicians to declare that a program is a failure when they have not defined success. A new governor and Legislature should review the state's economic development programs and clearly state what they expect the program to accomplish.

It's no secret that Michigan has struggled this decade - jobs are down, unemployment rates increased from 3.7 percent to in 2000 to 13.0 percent today, production levels have been stagnant. The state's economic problems have been deep and impacted nearly all of Michigan's industries, not just the state's auto companies. Every manufacturing industrial category in Michigan, whether food manufacturers, paper mills or machine shops, lost jobs, as did private-sector services.

The state's policy responses have yet to improve Michigan's situation. The broad problems in the economy are being addressed by targeted programs: incentives for specific industries, businesses and locations. The legislators who enacted these programs believe that they will improve Michigan, but policymakers rarely discuss whether they are capable of turning the state around, how to tell if they are working, or expectations on when these will have succeeded. In addition, policymakers should insist on objective analyses of the program's costs and benefits.

Recent discussions on the Michigan film incentive highlight the importance of performance measurements. A new report showed that the program costs the state $10 in taxes for every $1 in taxes generated by film activity, deflating a hope of film incentive supporters that the program would be a financial winner for the state. This information, however, was irrelevant to the administration, as Gov. Granholm responded that she never expected the incentive to make the state money.

Policymakers should voice their other expectations. Legislators stated that they expect a Michigan-based film industry, but two years after the incentive was passed, a studio has yet to be operational, let alone self-sustaining. While industry supporters argue that given enough time, film producers will stay in the state without the incentive, policymakers have not discussed when they think this will occur or how many of these permanent jobs are expected, even though they boast that they will be coming. Lansing has not even broached the subject of whether the incentive will be eliminated if the jobs fail to arrive.

The more important question, however, is to ask whether the state will turn around because of the program, which ought to be the primary policy goal of Michigan policy today. Instead of pointing at jobs in selected projects, the state needs to measure its success on improving public measures of economic well-being.

The state bureaucracy shrugs when presented with these issues. The Michigan Economic Development Corp., which administers the state's business incentives, has never declared any of its programs less than a stellar success and admonishes the Legislature and others any time there are threats to them.

When asked to talk about the successes of the programs, MEDC officials largely point to the activities - the number of companies attracted to the state, the millions of dollars pledged in investments, the number of jobs anticipated. It is also fond of economic impact studies that estimate secondary economic impacts while ignoring costs.

But they've failed to define success in meaningful terms. Economic growth is not hidden - there are monthly employment reports, annual production figures, personal income measures and poverty rates. These are the standards of success. Programs that fail to have measurable, obvious positive effects on these measures should be eliminated. If the programs are not able to influence the economy in any measurable way, or if their influence is impossible to test, then the programs are likely to be irrelevant.

It may take a long time for economic programs to have measurable effects, but those expectations should be explicit. Only once has an official put an expected time frame on a program's economic impacts: the famous "blown away" statement where Gov. Granholm expected obvious results from the 21st Century Jobs Fund programs in five years. Given the time, the state economy is in a much worse circumstance. Despite its failure to turn the state around, the state will spend $75 million on the program in fiscal 2011.

Bureaucrats cannot be expected to be objective judges of the success of the program they create, but they should be expected at least to administer them well. Setting expectations is something that is needed, and the new Legislature and governor have an opportunity to do so.