The Mania of Central Planning
Thinking big is killing Michigan's economy.
Oct 12, 2009, Vol. 15, No. 04 • By ELI LEHRER
For all Young's infectious enthusiasm, his state doesn't seem resilient. By just about every measure, Michigan has America's worst economy. Unemployment stands at 15.2 percent. Since 2001 alone, 110,000 people have fled the state. Incomes have declined. In 1999, Michigan's per-capita production ranked 16th in the country. Today, it's tied for 34th.
In some ways, the causes of Michigan's precipitous decline are obvious: The state has lost lots of industrial jobs and has taxes, union politics, and regulations that make it unattractive for new businesses to locate there. But neither the deindustrialization that raises left-wing ire nor the taxes and spending bugbears of the right can fully explain the state's decline. Instead, Michigan's economic growth seems strangled by a state bureaucracy that favors bigness and overindulges in central planning.
Take deindustrialization. While the state has lost more than half a million manufacturing jobs, sectors not plausibly linked to manufacturing (mining, agriculture, and financial services) have also declined. Except for education and health services--a sector that grew nationally even in 2008's otherwise collapsing economy--Michigan shows an across the board, continuous, decade-long decline in each of the 11 major sectors of private employment that the Bureau of Labor Statistics tracks.
But if the left's arguments don't wash, the right's reflexive fallbacks can't explain everything either. Michigan's business tax climate isn't good but, according to the tax foundation, it has actually improved a bit in recent years. And while still mighty, union influence has declined in recent years. Aggressive government unions in states like California, New York, and Washington pack more political clout than the shrinking industrial unions in Michigan. Although a devastated economy, state spending limitations, and a Republican state senate gave her little choice, Democratic governor Jennifer Granholm has cut both taxes and even spending by some measures.
So why is Michigan's economy so bad? The answer may lie in a mania for big projects, big business, and central planning. In fact, if big projects made for a healthy economy, Michigan would be booming. Over the past three decades, Detroit has gained a Jetsons-like people mover in its downtown, three new sports stadiums, a Las Vegas-style casino district, and two huge new auto plants. The same "big-time" mania infects every corner of the state. In Midland, a struggling burg with a half-vacant downtown, signs at the tiny airport--which offers direct service to only five cities--announce plans for a 21st-century terminal with a glass front and wavy roof. Even ghost town-like Saginaw has a big sports arena. While planners have been thinking big, the small stuff has been neglected. During its big-ticket building spree, Detroit lost all of its major chain grocery stores, all but one of its first-run movie theaters, and all of its department stores (discount or otherwise).
The government-run Michigan Economic Development Corporation (MEDC) sits at the center of the mania for size and central planning. Since conservative darling governor John Engler created it in 1999, the MEDC has handed out $3.5 billion in subsidies to private business (almost all of them matched by additional local subsidies). Site Selection magazine, among others, persistently ranks the MEDC among the best such agencies in the country. It's likely, in fact, that Michigan gives out the biggest and most generous business subsidies of any state. In addition to the MEDC and its various grant programs, "Renaissance Zones," county-wide enterprise zones with industry-targeted tax incentives, exist in all but the most sparsely populated Michigan counties. Direct MEDC grants--offered only when local governments also kick in with their own funds--offer another boost to favored industries. Since 1995, MEDC and its predecessors have given direct state aid to at least 49 major projects around the state, most of them manufacturing plants owned by big companies.
Plenty of the industries and projects Michigan favors seem quite likely to divert resources from other, more productive pursuits. For example, so-called "growth" industries--a list that somehow includes "automotive engineering"--get the most help even when they aren't necessarily growing. Although the state's only arguable strength lies in a growing health care sector, only targeted "life sciences" firms (mostly drug makers) get the biggest handouts. Likewise, Michigan offers America's most generous tax credits for film production, but doesn't have a single full-scale film school to train people for a business that requires enormous technical knowledge. For all the talk about a Great Lakes Hollywood, the credit has mostly brought in forgettable productions like Buddy BeBop vs. the Living Dead.
Granholm has presided over some of this system's worst excesses, but she didn't invent it. Jack McHugh, a senior analyst at the Mackinac Center in Midland (responsible for chronicling many of the state's central planning failures), told me that the fault lies with both parties over several decades. "The legislature is politically incapable of doing genuine business climate reform," he says. Economic development subsidies, he says, are "a cover story the legislature can use while ignoring the real dysfunctions and the sources of those dysfunctions," namely, unions and a dysfunctional political class in both parties.
In fact, it may be possible to go even further: The state's desire to plan growth and invest in big projects has made a bad situation worse.
Eli Lehrer is a senior fellow at the Competitive Enterprise Institute.