What happens when economic development ... doesn't work?

Interesting article in the Freep today. It points out that Michigan has shed about 700k jobs in a decade, while the MEDC has managed to create, or in more realistic terms, preserve, 43k jobs. Thats roughly 1 job created for every 16 lost. Understand that Michigan has been the home to the US auto industry, and in most cases, every other industry here has played, at best, a distant second fiddle to it from an economic and political clout view. Moreover, this is a heavily unionized state, which means that, when manufacturers seek to lessen the cost of labor, they have little choice but to build plants elsewhere. This has led to some, well, unintended consequences for the region and state. Remember, all of these are abandoned, and decaying. Remember that massive building Shia Lebouf was running through in the movie Transformers? That was the old railroad terminal here. More on this in a moment.

The problem is when the cost of labor is held high, or grows, the only way a manufacturer can increase their profit in a competitive market that doesn’t let them charge more for their product, is to lower their costs. Its a zero sum game. So unions playing the hand of demanding an ever growing slice of this zero sum game pie, have resulted in the US auto companies building cars in Mexico, and now China. Thanks to the political clout of the auto companies here, lots of tax incentives went their way as well.

I’ll argue that we haven’t really tried to diversify. Oh, sure, we have the 21st century fund, F.K.A. tri-corridor fund, F.K.A, Life Science Corridor fund. This was initially an effort started in the late 80s/early 90s to jumpstart life science company formation and investment in the state. Their vehicle? A $50M competitive fund which gave out loans to companies. Ok, I am wrong. In the first two go-arounds, they ‘invested’ about 5% in new companies (under $10M total) for an expenditure of something north of $100M. The purported benefit to the state was supposed to be creation of high value, high wage jobs. This largely has not happened. Even by the most optimistic, rose colored glasses wearing analysis. Our life science strategy was anchored by Pfizer. I was aghast in 2002, that the MEDC folks I had been trying to work with did not know that Pfizer was going to purchase Pharmacia who were located in Kalamazoo. Then while MEDC touted this as a wonderful development to increase jobs in the state, the governer touted this as a success story … Pfizer axed huge swaths of workers at Pharmacia. As if to add insult to injury, after Pfizer got a nice $70M tax credit to expand in Ann Arbor, they subsequently shuttered the facility and moved all those high wage, high value jobs out of the state, and laid off everyone there. There has been some minor success at recovery. But you can’t, even wearing those rose-colored glasses, interpret this as a win for Michigan. Basically what I am saying is that the MEDC has thus far, failed in its mission. Not by missing the mark and me being stuck in a binary succeed/fail mode. No. This is pretty much the definition of epic fail. The only economic group that I am aware of that has been stimulated … are bankruptcy lawyers. They are busy around these parts. Have been for a while. You see, the MEDC has been focused on where its political leadership has targeted it. Its not that the people there are bad, they aren’t. Its not that they don’t try, they do. Its that their targeting and focus is wrong, which is fundamentally a function of the political landscape.

Um … it is … I dunno … extreme wishful thinking that manufacturing is going to come back to a high manufacturing wage cost state. There is a reason why manufacturers, if they are building in the US (a rarity these days), are building in what are called “right to work” states which give workers the choice of whether or not they want to be represented by a union and pay union dues. Remarkably, most of the shops in these states don’t have unions. The wages there are definitely below what the union folks get. But there is work there. And there are worker protections, retirement support via 401ks, health coverage … You get the idea. All the things the union fought for during its hey day, are in fact in place. Just not the unions. Wages aren’t being driven to unaffordable levels through collective bargining. Here in Michigan, we don’t have such laws. The unions are a powerful political force. They won’t let these laws, which are frankly necessary for Michigan to pull out of its terminal nose dive, to be enacted. Back to the article. Katherine Yung did a good job in the analysis and research. Some of the quotes are spot on.

But incentives, when correctly setup, can work. And be a positive impact to the state.

Exactly. Instead of me sending taxes to the state, why don’t I hire another person, give them this money. The state will get payroll taxes. Sales taxes. Income taxes. Job creation. Everything the state needs. But the problem is, we are too small for them to take us seriously. No, seriously. Small companies, less than 50 people, are the job creation engine in the US. Most workers in the US work for small companies. Most of the hiring, and firing, occurs in small companies. So to get the maximum impact upon the economy, you want to focus upon what … big companies? No.

Its obvious to the casual reader what is broken here. The only question on fixing it is whether or not the state has the political will to change this to be specific to small business, and have them create 1-50 new jobs in the state. You lower the cost basis to start a business in the state, to sustain a business in the state, to grow a business in the state. All focused upon small business. Build a ramp from 50-100 to phase out or reduce the credits. Bring real venture and angel capital together. And you will get company and job creation going at a rapid rate. But this means you have to shrug off the political power of the unions and automakers. And commit to building small companies. Many many small companies. Lets have this be the Silicon Lakes/Plains, and not the rust belt. The latter has no future.