Tuesday, December 29, 2009

Bureaucrats Should Not be Picking Winners and Losers in Our Free Market Economy

Everyone wants to reduce the near 15% unemployment in Michigan, so everyone is for “creating jobs”. But how to do so? Nobody except the most liberal folks think raising taxes to create public employment jobs makes sense. That just destroys as many jobs as it creates, at best. But what about spending tax dollars to subsidize some private companies that the bureaucrats think are worthy? Hmmm.

Well, that is what the Michigan Economic Development Corporation (the quasi-public agency that administers state economic development programs) through the Michigan Economic Growth Authority does by granting “tax credits” to encourage businesses to stay in or relocate to Michigan. Is this good policy?

In this philosophical debate on how best to create jobs, I come down on the side of creating a better business climate for all businesses in Michigan, encouraging all businesses to flourish, to harness the entrepreneurial spirit and innovativeness that made Michigan the envy of the world years ago. I simply do not believe that bureaucrats in Lansing can pick the winners better than the best minds in business and finance who are risking their own money and careers with their investment choices.

The businesses who don’t get the tax credits but who compete with those that do also don’t think that granting tax credits to some, but not all competing companies, is such a hot idea. For example, after 29 years as a nationally known niche business, Karl Pohrt closed his Ann Arbor bookstore Shaman Drum. Pohrt said he couldn’t compete with Walden Books (a subsidiary of Borders) after Walden Books was approved for $7 million in tax credits from the state of Michigan’s Michigan Economic Growth Authority since 1995 for bringing it headquarters to Ann Arbor.

“I think the idea of an agency picking winners and losers without making that a public decision, seems to me to be profoundly anti-Democratic,” Pohrt said. “It opposes the idea of the free market if they are underwriting certain companies. … “ Small business owner says larger companies getting tax breaks means “you don’t stand a chance” Reportingmichigan.org, Oct. 20, 2009

Another example is Cabela’s receiving tax credits to locate their store in Dundee, while Jay’s Sporting Goods in Clare didn’t. Now, living in Legislative District 55 where the Cabela’s store is located, and knowing that it has become one of the state’s largest tourist attractions, makes it seem like an exceptionally good idea. But, does it come down to principle or does it matter whose ox is being gored or being fed? As a matter of principle, Cabela’s should not have received a competitive advantage over Jay’s Sporting Goods.

Further, the Mackinac Center for Public Policy recently questioned the effectiveness of the program in its study report “The Michigan Economic Development Corporation: A Review and Analysis”. The Mackinac Center is a research and educational institute headquartered in Midland, Michigan, noted for its conservative positions on policy matters. The report says:

“[W]e describe the organization of the MEDC, enumerate its many programs and review the performance of several of them - such as the Michigan film incentive, the state's now-defunct Broadband Development Authority and the Michigan Economic Growth Authority. MEGA is the MEDC's flagship tax credit vehicle for "creating" jobs. We also describe the ongoing tax money used to support the MEDC.

MEGA is a 14-year-old authority that offers state business-tax credits to select companies that plan to invest in business facilities in Michigan and create or retain jobs here. In order to claim the tax credits, companies must provide a minimum number of jobs as detailed by state law. The MEDC also frequently arranges for MEGA recipients to receive additional incentives, such as state education tax abatements, job training subsidies or local property tax abatements. Some of these incentives may be awarded immediately, regardless of whether the business has created jobs at the facility.

The authors inspected credits awarded from 1995 to the end of 2004 and found that while MEGA deals were expected to produce 61,043 jobs, only 17,971 were ultimately created. Hence, the actual job count was just 29 percent of the expected total. [Note, however that if the firms getting the incentives only create 30 percent of the jobs they planned on, then they will only get 30 percent (or less because frequently there is a trigger minimum) of the incentives they were originally offered.]

The program has offered more than $3.3 billion in Michigan business tax credits since its inception.

This study makes a number of recommendations regarding this expensive and counterproductive program. Some of them are listed below:
  • Eliminate the Michigan Economic Development Corp. This department has, by all indications, failed to create new and retain existing jobs for Michigan workers. Killing it and the programs it administers outright would conceivably and directly save tens of millions of dollars that could be used to balance the budget without raising taxes.
  • Short of outright elimination of the MEDC, state lawmakers should eliminate the Michigan Economic Growth Authority and Michigan film incentive programs.
  • Mandate a full performance audit of each MEDC program. In addition, the Office of the Auditor General should provide a tally of "direct jobs promised" vs. "direct jobs delivered" by year, using independent sources wherever possible, for each program reviewed.
  • Require that MEGA use only direct jobs "created" as a measure of a program's success or failure. The MEDC and other state agencies should be prohibited from using hypothetical assertions of spin-off jobs.
  • Completely eliminate the "refundable" part of the film incentive tax credit. Tax credits against actual business tax liability are a better tack than disbursing cash from the state Treasury.
  • In many instances, the tax credits are used to induce businesses to come to Michigan instead of competing states. The state has approved about $5 billion in tax credits to about 530 projects from April 1995 to August 2009.
  • Those companies stated they would have directly created 136,700 jobs.” PDF Complete Document

The Mackinac Center’s recommendations warrant careful consideration. In this battle of philosophies about creating jobs, it appears the Mackinac Center is right both in principle and in practicality.

Saturday, December 26, 2009

"Cool It" Changes the Climate Change Debate

“Cool It: The Skeptical Environmentalist’s Guide to Global Warming” by Bjorn Lomborg (2008) is a debate changing book about climate change. He takes an entirely different approach from arguing whether global warming is real and whether mankind’s activities are a cause of the warming (although his starting point is “Yes” to both questions).

Bjorn’s approach is different because he asks, “Even if global warming is real and man is causing it, is focusing on reducing CO2 emissions the best way to improve the lot of mankind?”

He posits that even if we take the most aggressive measures to reduce emissions, the impact would be modest at best, although it may “feel good”. Further, he debunks many of the exaggerations made by the promoters of the hysteria about climate control, including claims about melting glaciers, rising sea levels, penguins in danger, polar bears becoming extinct, more extreme weather, rivers flooding, a new Ice Age over Europe, malaria in Vermont, more starvation, and water shortages. He decries the politicizing of science and the ignoring of solutions other then reducing carbon emissions.

Bjorn lists many of the claimed benefits of containing/reducing carbon emissions, and contrasts the costs of that approach with alternative approaches to facing the problems of rising sea levels, rising temperature, providing clean drinking water to impoverished nations, etc. The costs are significantly and dramatically less implementing these more direct methods and the benefits are generated now, rather than at some distant point in the future.

This clear headed cost-benefit approach to the climate change debate comes from an economist’s perspective, looking at the “opportunity costs” of trying to control carbon emissions. Because we can’t do everything we would like to do, we must prioritize what we do, and controlling carbon emissions does not come close to the top of the priority list once the politics and hysteria are swept away.

I highly recommend this book to anyone interested in the climate change debate.