Political Reasons, Not Economic Ones, Keep Corporate Welfare Agency Alive

'Transparency' sidesteps real issue (but still worth pursuing)

Here’s a question: Why should lawmakers bother trying to inject transparency into the operations of the Michigan Economic Development Corporation? Wouldn’t it make more sense to apply their efforts to just dumping the MEDC altogether? Given the obstacles, the answer may be “probably not.”

As Michigan’s corporate welfare arm, the agency spends the public’s money to entice businesses to start operations in the state, or pay firms already located here not to move elsewhere. The primary goal is to create jobs. Yet according to state audits and independent studies, the MEDC's success rate for creating the number of jobs it claims in news releases about new deals is 19 percent at best.

But even then, much of this is a guessing game, because “transparency” as practiced by MEDC largely means little or none at all.

Calling for the agency's shutdown is laudable and justified. It should happen more. But the chances that Gov. Rick Snyder and the Legislature would throw the agency onto the scrap heap are very slim. Thus the calls for meaningful transparency, which may seem like reaching for low hanging fruit. By comparison, pressing for total elimination would be like trying to uproot the whole tree.

Establishing real transparency standards could be of enduring value, even if the agency is eventually shut down. That's because, in the political world, bad ideas tend to resurface almost on a regular cycle. When it comes to government programs, even death need not be a permanent condition; a terminated agency could easily be resurrected later, so standards established now could still do some good years down the road.

Realistically, it would take Snyder’s cooperation to dismantle the MEDC, and even after reining in many of the operation’s worst excesses, he clearly doesn’t want to get rid of it. While a majority of House Republicans might support such a move, there is no reason to believe they would try to do it over the objections of a Republican governor. Their counterparts in the Senate seem even more friendly to the agency, and virtually all current Democratic lawmakers favor keeping it around.

All of this explains why it makes sense to focus on transparency. If the agency is going to exist, at the very least it should be transparent. That means disclosing which businesses are getting public dollars and how much they are getting. It also means not just disclosing how many jobs each deal produces but also scrupulously tracking how many it retains and for how long. Finally, transparency ought to include bright, clear and timely disclosure of failed projects.

Anyone who has discussed MEDC with numerous lawmakers knows that many will publicly as well as privately defend both the agency and its stated mission. This suggests they have already calculated that significant portions of their constituents will accept the arguments used to support the agency. It is not as if they’re afraid to take a stance on the issue.

For Republicans, the case for keeping an economic development agency is based on the apparent conversion of former Gov. John Engler, who after first shunning corporate welfare schemes, reversed course and embraced them. Time and time again, the argument from pro-agency Republicans is that Engler discovered that handing out special deals was necessary to compete against other states for jobs.

They also say that federal court rulings have eroded the Equal Protection Clause of the U.S. Constitution as a protection against other states’ intrusions into the private sector, a variation of the “unilateral disarmament” defense. Republicans who support the MEDC claim that while special deals should be considered unconstitutional, the courts don’t agree, so we’re stuck: Either cut special deals or watch jobs scurry away to other states.

Meanwhile, most Democrats seem predisposed to support the MEDC based on their party’s preference for government activism over free enterprise and open competition.

The backdrop for all this is the simple and unavoidable reality that government tinkering through economic development agencies just doesn’t work. In terms of job creation, the returns are minuscule and out of proportion to the cost to taxpayers. In terms of success rates, all this spending has produced many more losers than winners — even among companies that are offered the subsidies and tax breaks.

Any private sector investor with a similar record would have gone bankrupt long ago. But that’s of little concern to government officials and politicians. After all, it isn’t their money that’s being spent, and the source of future funding, aka the taxpayers, is seemingly limitless.

Perhaps the most compelling rationale for an economic development agency is the one that no politician ever admits to: In the short-term, most projects are politically beneficial to the politicians who support them. Beyond that, there’s little need to investigate the issue further.

In review, there are political arguments against discarding the MEDC that are persuasive to politicians, if not economists. By contrast, virtually no politician or government official would publicly argue against transparency. That fact alone marks MEDC transparency as a viable and potentially reachable goal.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.