Guest column: Audit should prompt scrutiny of MEDC’s fundamental purpose

By Gary Wolfram/Hillsdale College

A recent Auditor General’s report found that the Michigan Economic Development Corporation has failed to establish a comprehensive method to properly evaluate the effectiveness of one of its major programs: Renaissance Zones.

From the inception of the Renaissance Zone program in fiscal year 1995-96 through fiscal year 2009-10, the MEDC abated $820 million in taxes. Taxpayers should expect their government to effectively analyze the effectiveness of a program of this size.

MEDC claims that 12,632 new jobs were created in Renaissance Zones over the period in study. The Auditor General pointed out that MEDC did not adequately check whether the number of jobs reported by firms was correct, but even if that were the true number, each new job cost $65,000 in reduced tax revenues for state and local governments.

Surely this is worth extensive examination by the MEDC and the legislative oversight committee.

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Gary Wolfram is William Simon Professor of Economics at Hillsdale College and author of “A Capitalist Manifesto: Understanding the Market Economy and Defending Liberty.”

The Auditor General’s report brings up a more important point regarding the very existence of MEDC. The Mackinac Center for Public Policy has long argued, correctly, that lowering taxes for all producers is a more effective economic development tool than using government to decide which firms will pay lower taxes or to provide special programs for certain areas. As Mackinac’s Michael LaFaive put it in one of his articles:

“The job of the MEDC is to take money from a lot of people and businesses and give it (through one channel or another) to a few people and businesses under the guise of ‘creating jobs.’”

His point is that a major problem with economic development through government agencies like MEDC is that some businesses pay higher taxes than others simply because they have fewer connections or are located in an area that is not favored by the legislature or bureaucrats.

Not only has the MEDC not evaluated the effectiveness of at least one of its major programs, it has failed to provide legislators with basic information about some of its budget. Last session, Rep. Bob Genetski, R-Saugatuck and a member of the House Appropriations Committee, was unable to obtain details of MEDC’s Travel Michigan budget despite numerous requests.

The problems with MEDC go back for years and the complaints are bipartisan.

From another Mackinac Center report: “In 2000, state Rep. Joseph Rivet, D-Bay City, … argued that the MEDC should lose its state funding, telling the Lansing State Journal, ‘Every time we try to hold these guys at MEDC accountable to the taxpayers, they claim to be a private agency outside the realm of public scrutiny.’”

MEDC has not been run by incompetent people. Some of its CEOs and board members have been and are personal friends of mine. I know them to be talented, hard-working, honorable people. The problem is structural. Governmental programs that give tax benefits to some firms and not others must be political. It is the political process through which the benefits are put into place and distributed.

In the market process, firms succeed due to the ability of entrepreneurs to produce goods and services that consumers are willing to pay enough for to meet the cost of the resources used up in production. When government provides benefits to some firms and not others it redirects resources away from production towards obtaining the benefits handed out through the political process. This is both unfair and inefficient.

The Auditor General’s report will ultimately prove most useful if it sparks debate about whether the MEDC and all of its various programs should be scrapped in favor of reducing the taxes for all firms.