Wednesday, August 18, 2010

Why Focus on Improving the Environment for Small Business Job Providers?

There are two competing philosophies regarding economic development:
  • Empower the bureaucrats in Lansing to pick the winners from the losers, subsidize the expected winners with tax credits and hope they create jobs.

  • Improve the environment for all businesses, encourage innovation and entrepreneurship and hope jobs are created and revive the economy.

First, it probably goes without saying that creating jobs and reviving the economy is the most critical issue Michigan faces. If we can get the economy going again:

  • State tax revenues will rise, making balancing the budget much less painful.
  • The budget priorities, such as education and public safety will more easily be funded.
  • Home foreclosures will fall. Home values will stabilize.
  • The severe budget problems facing local governments will subside so as to allow funding of critical public services such as plowing snow, fixing roads, and police and fire protection.
  • Kids will be able to find jobs here and stay in the state, making not only them happy, but thrilling the parents and grandparents who want to maintain close contact with their family.

Creating jobs is the key to solving many, many issues.

Bureaucrats Fail. I don’t favor the first method, as studies have proven that the bureaucrats simply are not that good at predicting business success. Only 29 jobs have been created for every 100 announced with great fanfare with the granting of the tax credit by MEGA, and at enormous cost per job. In short, this method is great for publicity for the politicians and bureaucrats, not so good for the workers. See The Michigan Economic Development Corporation: A Review and Analysis

Startups Are the Key to Job Creation. Small business creates well over the majority of new jobs. (64% by one report, but a higher percentage by other reporters) Further, the Kaufman Foundation Research Series: Firm Formation and Economic Growth, “The Importance of Startups in Job Creation and Job Destruction”, July, 2010, says: “[W]ithout startups, there would be no net job growth in the U.S. economy.” Startups create most new net jobs in the United States, and the job creation is less dependent on the business cycle, whereas existing firms’ employment varies dramatically with economic expansion and contractions.

“Policymakers tend to reflect common media stereotypes about job changes in the economy, which is to say a focus on the very large aggregate picture (such as the national or state unemployment rate) or on news of very large layoffs by individual companies. That attention is almost certainly misplaced. Nationwide measures are a blunt tool for analysis, and net employment growth reveals little that policy can affect.

Similarly, the common zero-sum attempts to incentivize firm relocation are oblivious to the important pattern of gross job creation revealed by the [study]. States and cities with job creation policies aimed at luring larger, older employers can’t help but fail, not just because they are zero-sum, but because they are not based in realistic models of employment growth. Job growth is driven, essentially entirely, by startup firms that develop organically. To be sure, Survivors create zero to 7 million net jobs (half of which are at establishment births), while Deaths account for a net loss of 4 million to 8 million jobs, which are large flows for the context of the steady job creation of 3 million startup jobs. But, in terms of the life cycle of job growth, policymakers should appreciate the astoundingly large effect of job creation in the first year of a firm’s life. In other words, the [study] indicates that effective policy to promote employment growth must include a central consideration for startup firms.” Page 6.

Ranking 48th Out of 50 States Will Not Revive the Michigan Economy. Michigan ranks very low in terms of attractiveness for businesses to locate here. Whether we wish to encourage outsiders to come locate here of grow organically, we need to make it as easy and attractive as possible to establish themselves here. Otherwise, why shouldn’t they go where it is more favorable?

What Causes Michigan to be “Unattractive”? What can be done? There is no one cause, but the Michigan Business Tax with its 22% surcharge does not help. Neither does the labor climate, with Michigan’s reputation for strong unions, particularly when there are other state’s without the same adversarial labor-management attitudes. The uncertainty about our current and future tax structure is also a deterrent, as uncertainty increases risk for investments and discourages lenders from making loans to emerging enterprises.

If I had to pick one group of ideas proposed by any one group about what to do to improve the environment for creating jobs, it would be the Business Leaders for Michigan, with its Michigan Turnaround Plan: (in great measure along the lines of Rick Snyder's Reinvent Michigan: Rick's 10-Point Plan). See a more extended discussion on my website at

I must admit that this set of ideas is no “quick fix”. It will not be easy and it will not be quick. Anyone who suggests his or her method will be quick and easy is just trying to sell you on smoke and mirrors, similar to “hope and change”. But, we can do better. We can revive Michigan.

The bottom line is that we are not helpless or hopeless. And, as Edward Everett Hale is credited as saying,

"I am only one, but I am one. I cannot do everything, but I can do something. What I can do, I should do and, with the help of God, I will do."

This apples equally well to all who seek to serve this great state of Michigan in getting it back on its feet. That is what I am committed to doing.

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