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 http://voiceforthepeople.net/issues.htm

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.

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.