Heaven help us all if he is right

[Grumpy]

http://online.wsj.com/article/SB1000...152010638.html

A central belief in Washington and most state capitals nowadays is that government should "invest" in certain businesses—"clean tech," say, or manufacturing—to drive job creation. We hope it all turns out better than it has in Michigan.

For the past 14 years, Lansing politicians have offered $3.3 billion in tax credits through the Michigan Economic Development Corporation and spent another $1.6 billion in outlays to create and retain jobs. The subsidies have ranged from tax breaks for Hollywood, to money for new industrial plants, to millions for TV ads starring Jeff Daniels and Tim Allen talking about business and tourism in the state.

It's one of the largest experiments in smokestack chasing in American history, but one thing it hasn't done is create jobs. An exhaustive new 100-page study by the Mackinac Center for Public Policy, a Michigan think tank, has reviewed where all the money has gone and what came of it. The study finds that for every 100 jobs that were promised with these tax credits over 14 years, only 29 arrived. Dare we call this cash for clunkers?

Economist Michael Hicks, a business school professor at Ball State, calculated the rate of return on the corporate tax credits. He found that for every $1 million in tax credits awarded, there were 95 lost manufacturing jobs in the counties where the companies were located—a result that is "strongly statistically significant." There was no gain in personal income in these counties. Perhaps more jobs would have been lost without the credits, but what is undeniably clear is that the businesses that got the government loot were not magnets for other employers.

Many of these handout programs were started in 1995 by former Republican Governor John Engler, who we criticized at the time in "A Governor's Gimmick." They have since been expanded 18 times under current Governor Jennifer Granholm. Two of the most celebrated initiatives were the Michigan 21st Century Jobs Fund and the Broadband Development Authority. Ms. Granholm's vision was that these grants and credits would create 500,000 jobs and $440 billion in new investment by 2010.

Liberals cheered this "progressive" alternative to tax cutting. But the jobs lured to Michigan were so few that the programs were killed in 2007. The broadband program's legacy was $14.5 million of bad loans eaten by taxpayers. Then State Senate Majority Leader Ken Sikkema, an original supporter of the telecom program, called it "one of the biggest flops in state government."

An even bigger flop might be the Michigan Film Office. The program provides movie producers a 42% tax credit for rolling the cameras in Michigan. But because the credits are "refundable," they are mostly cash subsidies to the film industry to make movies. The Michigan Senate Fiscal Agency recently found that "if a film production company spent $10.0 million in Michigan, the State will gain less than $700,000 in income and sales tax revenues but will pay out about $4 million to the production company." So in a state with the highest unemployment rate in the nation at 15%, taxpayers last year gave out $48 million in subsidies to Hollywood millionaires.

Why doesn't this kind of industrial policy work? One reason is that the subsidies have to be financed by somebody, which means raising taxes more broadly on the rest of the state. The subsidized businesses may bring a few jobs, but the overall employment and investment impact is miniscule at best.

In Michigan these programs were responsible for 0.25% of all new jobs created in the last decade, according to the study. Meanwhile, in 2007 Michigan raised business taxes by $1.4 billion on other firms to pay for many of Ms. Granholm's favored companies. Despite all the giveaways, Michigan was recently ranked as having the third most antibusiness climate among states, in a survey of executives by CEO magazine. If Michigan had simply cut taxes for every business, as Mr. Engler did in the 1990s when the state briefly led the nation in new jobs, it's a good bet unemployment would be lower.

When Ms. Granholm gave her state of the state address earlier this year, she crowed about the similarities between the Michigan and Obama Administration strategies of using tax subsidies to aid favored businesses. "President Obama's priorities are nearly identical to ours," she declared, and we can only hope the results won't be.