Michigan Budget Battle Pits Startups Against Road Infrastructure

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“There was a huge focus put on entrepreneurship in Michigan 10 years ago,” said Gerry Roston, CEO of Civionics and the executive-in-residence at TechTown, a startup incubator affiliated with Wayne State University in Detroit. “Investments were made. Early on, [the state] spent money inefficiently, but we were still learning. Lately, we’ve spent money very efficiently, and the metrics are good, but we’re still in junior high in terms of the ecosystem’s maturity. We’re trying to train a generation of people to think about starting a business, which is a long-term process.”

But the majority of Michigan’s residents aren’t involved in the entrepreneurial ecosystem, and they often have a hard time grasping the importance of the MEDC’s programs. Conservative voters in Michigan are allergic to taxes, and many seem to resent the idea of their tax dollars going to support small businesses that they don’t personally run or benefit from. Meanwhile, the state’s pothole-pocked roads continued to disintegrate as lawmakers spent Snyder’s entire term fighting over how to pay to fix them, and the idea of making huge cuts to the MEDC’s budget to solve the funding shortfall gained traction. Then, this past spring, a last-ditch proposal to raise the state’s sales tax to fix the roads went down in flames as 80 percent of voters rejected it. The current battle over the MEDC, its budget, and its priorities began in earnest.

Gerry Roston

Gerry Roston

The majority of the startup community has been squarely behind the department. “The issue is consistency,” Roston explained. “When an entrepreneur is starting a business, they look at the ecosystem to see what resources are available. Entrepreneurs know these programs are out there, and they plan around them because these things help them grow. The MEDC is not picking winners and losers, but supporting the ecosystem, which is what we’re trying to develop. We have to think about the whole process of state-supported entrepreneur training like we do K-12 education. The state doesn’t fund K-12 education and expect an immediate return. Silicon Valley didn’t happen overnight; it took decades of evolution and growth.”

Corporate Welfare?

Conservative activists have repeatedly attacked the MEDC and accused it of lavishing corporate welfare on favored companies and industries. Often leading the charge is the Mackinac Center for Public Policy based in Midland, MI. The Mackinac Center is a technically nonpartisan think tank that pushes policies favoring a free-market approach, though a 2014 article in Salon characterized it as a “Movement Conservative think tank” that is one of the largest and most influential state-level operations of its kind. (The Mackinac Center’s former vice president, Joseph Overton, is credited with coming up with the concept of the Overton Window, a political strategy that works by affecting public perception so that ideas previously thought of as radical begin to seem acceptable over time.)

Michael LaFaive is director of the Mackinac Center’s Morley Fiscal Policy Initiative, and he’s an outspoken critic of the MEDC. He said his research shows that state-directed economic development programs like the kind the MEDC supports are “ineffective at best, and counterproductive at worst.” Rather than fostering economic growth, he sees them as a hindrance. He doesn’t want to see a cut to the MEDC’s budget—he wants to see the department eliminated completely.

LaFaive interprets tax dollars going toward programs that assist entrepreneurs and startups as a transfer of wealth. “If you need to have politicians take money from your neighbors and give it to you, perhaps you shouldn’t be in business,” he said. “Whatever tools are created really have done nothing to improve Michigan’s well-being. The market created jobs and opportunities for millennia. The notion that you need a state department to create opportunity is simply fatuous nonsense. A fair field with no favors is the best way—Berry Gordy didn’t need a subsidy to start Motown.”

In a 2014 post on the Mackinac Center’s website titled “There is No Good Reason the MEDC Should Exist,” LaFaive wrote, “To put it bluntly, the Michigan Economic Development Corp. presided over what was arguably the most significant decline in the state’s economic fortunes in its history. From 2000 through 2009, when the MEDC and its programs were in full flower, Michigan was the only state in the union with a negative economic growth rate, as measured by state Gross Domestic Product.”

While that may be true, to pin it all on the MEDC seems questionable. For one, it ignores global economic forces and the decline of Michigan’s auto industry, which was itself brought on by a number of factors, including the passage of the North American Free Trade Agreement during the Clinton administration. Many of the MEDC’s programs were put in place because state leaders saw the auto-dependent economy tanking, and diversification was considered critical to getting Michigan back on track.

In response to LaFaive’s comments, Jen Nelson, the MEDC’s chief operating officer, wrote in an e-mail: “Since the 21st Century Job Fund started to provide entrepreneurship and innovation assistance either directly to companies or through [service providers], Michigan has assisted more than a thousand companies. We feel confident the programs have created thousands of direct jobs and generated significant direct wages and benefits.”

Others with experience at the organization weighed in, as well. Michael Psarouthakis served in various business acceleration roles at the MEDC until 2012, and he’s since gone on to be the assistant director of the University of Michigan’s Venture Center, which is housed in the university’s office of technology transfer. Psarouthakis said an obsession with return-on-investment figures is a short-sighted way to evaluate the effectiveness of the MEDC’s programs.

“It’s hard for a report to capture the benefits not tied directly to a specific program,” he said. For instance, when Google wanted to open up an office in Ann Arbor a few years ago, it received support from the MEDC in the form of tax credits tied to investment and job creation. What a report on that specific project or accompanying tax credits might miss, he suggested, are the trickle-down benefits to the community at large when an entity like Google moves in.

“Now, there are something like 2,000 companies in a two-block area instead of a few hundred,” he said. “Google is an anchor for what turned out to be tremendous growth in Ann Arbor’s IT sector. Did it happen because of the MEDC? It’s hard to directly attribute, but why else would it happen? It’s very nuanced, but if you want to create more IT jobs, Google as an anchor brings in more people, talent, traffic, and customers. It’s hard to define and measure that impact accurately.”

Battle in the House

The MEDC enjoyed relative periods of calm when the Democrats controlled the state House of Representatives from 2007-2010. But as the voice of the legislature’s Tea Party contingent came to the forefront over the past few years, the MEDC found itself in the crosshairs of the budget debate.

Meanwhile, there was trouble brewing with the state’s aging infrastructure. Everyone agrees we need to repair our roads, but nobody wants to pay for it. The legislature’s conservative leadership thwarted early attempts at modest gas tax increases, and in May, Proposal 1, which would have raised $1.3 billion for roads by increasing taxes, including raising the state sales tax to 7 percent from 6 percent, was shot down by voters—the Detroit Free Press called it the most one-sided loss ever for a proposed amendment to the state’s 1963 constitution. Voters sent a clear message to the state that increasing the sales tax to fund road repairs was off the table.

After the defeat of Proposal 1, Republican lawmakers almost immediately introduced House Bills 4607 and 4608, which would raise $1 billion for infrastructure projects in part by diverting $185 million from state economic development coffers, which amounts to roughly half of the MEDC’s budget. That loss would likely affect funding for some of the MEDC’s programs deemed most crucial by business and entrepreneurial leaders in Michigan.

Supporters from around the state traveled to the Capitol in May to testify on behalf of the MEDC’s programs for more than three hours before the House Committee on Roads and Economic Development. Frank Ervin, director of governmental affairs for tier-one auto supplier Magna International, told the committee that the bills threatened “to irreparably harm Michigan’s ability to compete for new manufacturing projects.” Business Leaders for Michigan, an advocacy group made up of C-level executives from the state’s largest companies and universities, said drastic cuts to the MEDC’s budget would be a step in the wrong direction. Steve Arwood, who took on the job of executive director of the MEDC in January, called the bills a “raid on our jobs and prosperity” in light of the fact that Michigan’s economy was better than it had been in 15 years, thanks to a healthier domestic auto industry, a friendlier corporate tax environment, and a revitalized Detroit that was partially the result of an influx of young entrepreneurs and tech professionals.

As the bills were being debated, Gov. Snyder remained fairly quiet. The general consensus was that he was licking his wounds after the sweeping rejection of Proposal 1, legislation he toured the state championing, and at odds with state GOP leaders about how to go forward. At a business conference in May, Snyder said he didn’t think it was a good idea to take money out of the MEDC’s budget to pay for road funding, but that was about all he said. Earlier in his administration, he eliminated the Michigan Economic Growth Authority, the state body tasked with awarding tax credits like the ones Google received, and gutted the program that granted tax credits to the film industry—but many believed he was still in support of the majority of the MEDC’s programs. … Next Page »

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