“Milking the Cow” of State Development Departments (General Article)

Writer Jonathan Rauch has coined the phrase “parasite economy” to describe the way lawyers, lobbyists and other special interest advocates descend on governments in search of special favors. Government “economic development” offices are magnets for this activity, and they make Rauch’s description look increasingly apt.

The primary function of the state-run Michigan Economic Development Corporation is to distribute tax credits, abatements, cash subsidies and other incentives to select businesses in order to promote job creation and retention. These incentives can prove very worthwhile for the recipients, as one international business consultant, Ernst and Young, has been quick to appreciate. Indeed, the company formally trains businesspeople on ways to increase their profits by securing government aid.

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As reported by the John Locke Foundation’s Carolina Journal, representatives of Ernst and Young in March 2004 lectured a group of business representatives gathered in Georgia at the State Government Affairs Council about how to “Turn Your State Government Relations Department from Money Pit into a Cash Cow.” The PowerPoint® presentation given at the meeting explained strategies for securing tax incentives and other government aid from state and local economic development offices. Slides detailed how a firm should package its proposals: Instead of using terms like “corporate welfare,” company spokespeople were to highlight “what is in it for government” by emphasizing the economic and fiscal benefits their particular company could bring to a state.

The most notable part of the presentation, however, was the advice to a company to communicate a “‘but for’ threat.” This means that a company should explain to an economic development office that it will not move into the office’s area “but for” the incentives the development officials can provide.

The same “but for” concern is often cited by the Michigan Economic Growth Authority, which operates under the auspices of the MEDC and offers targeted tax incentives to corporations that are picked by its politically appointed board. Yet state and local economic development agencies can have no objective way of assessing if the purported “‘but for’ threat” is genuine. Instead they must rely on the promises of executives in front of whom they have dangled millions of dollars in incentives, and who may have been trained to treat government agencies as “cash cows.”

Since 1995, when MEGA was created, there have been fewer than 215 MEGA deals made. An analysis of MEGA official meeting minutes indicates that Ernst and Young consultants attended at least 10 meetings on behalf of clients attempting to win MEGA deals between 1999 and 2003.

At half of these meetings, the Ernst and Young representative who attended was a former director of international and national business development at the Michigan Jobs Commission, the MEDC’s predecessor agency. This type of close relationship is not uncommon. Government executives frequently leave their jobs to become consultants and lobbyists with an insider’s knowledge of how to obtain government help from their former agency.

All of this lobbying pressure can have real and harmful consequences. In 1999 Harold Brumm, an economist for the federal government’s General Accounting Office, attempted to measure the effects on state economic growth of “rent-seeking” – an economist’s term for the additional “rents” that special interests can collect when they solicit favors from the government. To measure rent-seeking, Brumm used data on government employment, lawyers, and lobbyists.

Brumm found that from 1985 to 1994, the growth rate of real per-capita gross state product was “negatively correlated” with three things: “the initial level of real GSP per capita, the burden of state tax structure, and — most notably — the level of rent-seeking activity in the state.” Brumm continued, “An implication of this finding is that a state government which promulgates policies that foster sustained artificial rent-seeking does so at considerable expense to its economic growth.”

Ernst and Young is by no means the sole culprit here: It is the government’s intervention in the marketplace that creates the opportunity for private companies to take advantage of public funds. As long as government entities try to influence economic forces, they will continually foster a “parasite economy” and sap the vitality of economies everywhere. Michigan should reduce these harmful effects by eliminating the MEDC and its programs, so that firms compete on a fair field, and without favors, instead.


Michael LaFaive is director of fiscal policy for the Mackinac Center for Public Policy.