Just over six years ago Gov. Rick Snyder signed a law creating the Michigan Business Development Program. This initiative replaced the Michigan Economic Growth Authority, a multibillion-dollar subsidy program that failed on several levels. We have studied the development program and found it has performed no better than the MEGA program it replaced. It should be shut down before it wastes any more taxpayer money.
The development program gives subsidies, loans and other handouts to certain businesses if they meet job creation or other criteria laid out in official agreements. It is run by the Michigan Strategic Fund with help from the Michigan Economic Development Corporation.
By our count, the program approved 319 deals from March 2012 through September 2016. The deals were worth just over $300 million but only $157 million was disbursed during that time. The participating companies are located in 43 Michigan counties.
We wanted to measure the employment impact on counties in which these projects were located and did so by creating a statistical model designed to isolate their influence. It used quarterly employment data from the Census Bureau from 2012 through 2016 and information published by the MSF and MEDC.
We found that for every $500,000 in subsidies disbursed by the state through the development program, employment in the affected counties fell by about 600 jobs through the first 10 quarters, or 2.5 years, of our data set. That is, the program may have a slightly negative impact on employment.
The results do not surprise us. Much of the academic research, as well as that performed outside of universities, suggests that incentive programs are largely ineffective and unnecessary. A 2017 article by Timothy Bartik of the Kalamazoo, Michigan-based Upjohn Institute, for example, argued that the state and local incentives he studied in most U.S. states may make the difference in just 6 percent of location decisions. “The other 94 percent of the time,” Bartik wrote, “the state would have experienced similar growth without the incentive.”
His is not the only work that raises questions about incentive programs. Other researchers have studied programs similar to the MBDP in other states and none found particularly flattering results.
We used the tools of econometric scholarship to analyze the development program. But you don’t have to use a sophisticated statistical tool to question its effectiveness. Roughly every third deal it set up through fiscal year 2016 has been or is currently in some form of default or was dismissed altogether. Not all defaults or dismissals were necessarily a shortcoming in the company’s performance, but many appear to be.
The official report to the Legislature that details this program for fiscal 2016 lists nine dismissals or “revocations” for that year. Eight of them indicate that the company receiving the subsidy had failed to meet some milestone or stipulation in the agreement it had with the state.
The dismissal rate might even be higher if the MSF wasn’t so willing to amend agreements in a way that lowered the thresholds required for a company to be deemed successful. The MSF granted 38 amendments in fiscal year 2016, and 28 of them appear to lower the bar. To its credit, the MSF often lowered the subsidy amount when it lowered the performance standard.
When Snyder was a first-time candidate for office, his campaign released a document titled, “Rick for Michigan: Reform The Michigan Economic Development Corporation.” It read in part: “Incentive programs that do not add value to economic development or aren’t worth the cost should be discontinued.” We agree, and the MBDP fits that description. Snyder created this program in his first year in office; he should shut it down in his last.
Our research shows that the development program is ineffective and expensive, too. Lawmakers should transfer the money it spends to something of higher value, such as sound infrastructure investments or across-the-board personal income tax cuts.
Michael LaFaive is senior director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a Midland, Michigan-based research Institute. Michael Hicks is director of the Center for Business and Economic Research and professor of economics at Ball State University and an adjunct scholar with the Mackinac Center.