Blowing the Budget on Subsidies

The Red Wings want a new stadium and, despite Detroit's bankruptcy, the governor is in favor of a taxpayer subsidy for the $650 million project,

“This is a catalyst project,” Governor Rick Snyder said, according to Crain’s Detroit Business. “This is going to be where the Red Wings are. Who doesn't get fired up in Detroit about the Red Wings? Come on now, the people that are criticizing are people from outside of Michigan. This is something that is important to all of us.”

There are plenty of reasons to criticize massive government subsidies of sporting arenas, including the fact that sports owners tend to be extraordinarily rich people who can afford their own arenas - and if they're not, there's probably a richer person who will be happy to acquire the team. The subsidies have created an unhealthy market in which a team's value can be increased by tens or hundreds of millions of dollars to the owner based upon the taxpayer subsidy for a stadium. From Crain's,

Detroit's Downtown Development Authority intends to use $284.5 million in property taxes captured within its 615-acre downtown district to pay off the bonds issued by the state to build the 18,000-seat arena west of Woodward Avenue and I-75.

The remainder of the district costs, or $365.5 million, will be picked up by Olympia Development of Michigan, the property development arm of Mike and Marian Ilitch's $2 billion Detroit business empire that includes the Red Wings, Detroit Tigers and Little Caesars pizza chain.

Snynder also defends the project on the basis that it will "create 2,900 direct construction jobs" and "another 1,480 [ancillayr] construction jobs." The subsidy works out to $65,000 per job - and recall, we're talking about temporary jobs. Really, you can't justify this probject on "job creation". The American Prospect notes that some shady land deals have already been detected, with people on the inside maneuvering to profiteer.

An obscure new owner took over three low-income apartment buildings in the area targeted for development this spring. This mysterious landlord gave residents 30 days to leave. A Detroit News expose led to an extended eviction deadline, and then no eviction at all—but not until after many residents had already left. Following the press conference on the arena, the newspaper wrote that, “Since 2012, The Detroit News has reported on a series of mysterious land deals in the Cass Corridor—mainly involving blighted properties. Although it was widely speculated that the property was being amassed for an arena project, the deals have been cloaked in secrecy, with sellers signing confidentiality agreements and buyers not revealing themselves through public documents. The buyers in the land deals, (it was) revealed Wednesday, have been ‘a mix’ of city and Ilitch Holdings.” (Illitch Holdings is affiliated with Olympia Development).

Obviously, work needs to be done to keep that sort of thing to a minimum. It's painful to see Ilitch's fingerprints on that deal, through his companies, given that he's already the primary beneficiary of this subsidy of the new sports arena.

This isn't the worst example of government subsidy that I've seen. Detroit needs something to help drive investment and to bring more people to the city. But for the state as a whole, and Detroit's not the only troubled area, the governor's arguments also applies to subsidies to the film industry. The movie subsidies that were initiated toward the end of the Granholm Adminisration brought a lot of money, energy and excitement to local communties, created a number of temporary jobs, had the prospect of creating some permanent jobs, and seemed to be doing at least as good of a job of promoting Michigan's attractions than the much ballyhooed "Pure Michigan" ad campaign. The Governor's cuts of subsidies to the film industry, and subsequent equivocating over how much to extend, have dramatically reduced the interest of the film industry in Michigan while creating a climate of uncertainty that is likely to cause the industry to choose other states with more consistent, reliable approaches to the industry. The larger subsidies of the Granholm era seemed poised to help establish permanent movie facilities and jobs in the state, while Snyder's approach undermined local ventures and thus has resulted in at best temporary jobs with the remaining subsidies largely flowing out of the state. It may have been possible to reduce the Granholm-era subsidies while retaining the local benefit, but that opportunity seems to have passed.

As with sports teams, whether we like it or not, significant subsidies are part of how the movie game is played. I don't mind people taking the philosophical stance that you shouldn't subsidize the entertainment industry - and even less the profitable entertainment ventures that could and would continue to operate without subsidies - or, for that matter, profitable companies that want huge tax breaks and subsidies to open a new factory, server farm, headquarters, or other facility in your state. But once you decide you're going to offer subsidies, it makes sense to try to apply a consistent, predictable approach to those subsidies - both in terms of who will qualify and how much you will budget for subsidies in any given year.

Michigan's Legislature vs. That Democracy Thing

One of Gov. Snyder's comments that caught my attention was, in essence, "I supported cramming a 'right to work' law through the legislature to punish unions for trying to put collective bargaining rights into the state constitution."

When asked about right to work, Snyder said he was never working on the legislation and it was not a top priority of his. He said he asked proponents of Proposition 2 not to continue their efforts and warned them right to work could be an issue if their ballot initiative failed.

“But when it comes down to it, if it’s controversial, you hired me to make decisions, and I’m not going to walk away from an issue that’s on the table,” he said.

“It was my view that it was clear, that this was the right thing. It’s about workers rights, it’s about standing up for workers… but we’ve made that decision so let’s put the issue behind us and move on to the next issues we have to work on.”

Obvious reactions include the obvious: Reducing the rights of workers is pretty close to the opposite of "standing up for workers" and, if you're going to tout the notion of running government like a business, making dramatic policy changes that you would not otherwise support in order to punish an outside group is about as far from what you would want a business (or a government) to do as you can get. But the greatest concern is the means by which Snyder helped cram the law through the legislature:

As virtually everyone knows, a bill making Michigan a Right-to-Work state was rammed through the legislature in a single day during a so-called lame-duck session last December.

Not only were there were no committee hearings and no real debate: The Capitol Building in Lansing was closed to the public for what were said to be “safety reasons.”

The way in which this bill was passed has sparked a great deal of outrage, not all of it from groups automatically opposed to right to work legislation. The law, by the way, outlaws the so-called union shop, and means no worker can be forced to join or pay a fee to be represented by a union, in any public or private industry....

The aim of Michigan’s Open Meetings Act is simple: To protect our right to know what government is doing by opening to full public view the processes by which both elected and non-elected officials make decisions for the people.

After all, we elected them, and they work for us. Korobkin says that didn’t happen here. He told me, as other people have, that the public galleries were deliberately packed that day with assistants to Republican officeholders to squeeze out the general public. The ACLU also says closing the Capitol building was outrageous.

Indeed, nobody can ever remember this happening on any other piece of legislation.

If you like democracy, you have to dislike the process that the legislature and governor followed.

Rick Snyder's Missing "C"

Gov. Snyder believes that the state needs to make an effort to attract talented workers to Michigan:

"There are three 'Cs' that are critically important. Collaboration, creation and connection. Collaboration is about working with the private sector to say 'what are your needs today and tomorrow?' The second 'C' is about creating talent, that's the education sector, about giving people the tools to be successful. Finally, connecting those tools."

First and foremost, in terms of attracting and keeping talent, Snyder is missing the most important "C" - compensation. Instead he substitutes determining the needs of the private sector - which I expect translates roughly into, "Getting whatever workers we need for the lowest possible compensation," the opposite of what attracts and retains talented workers. He draws on Econ 101, picturing the job of government as changing the point at which the supply curve (workers) crosses the demand curve (what employers want) - but doesn't really explain what he would do to change the point at which the two lines intersect beyond mentioning a state-run jobs bulletin board. I'm no economist, but here's a nice refresher course on supply, demand and market equilibrium, and the importance of price in eliminating a market shortfall.

Snyder comments on the jobs board, "we have over 60,000 open jobs... and these are good jobs". Not that it's a scientific test, but here's what I just found on that board:

Asparagus Harvester
Todd Greiner Farms Packing, Llc

Job Code Number: 4015674

Job Description: Involves hand-harvesting the asparagus crop while riding a self-propelled personnel carrier. Employer needs 5-7 workers per group. Asparagus harvest will begin around May 1st, and will continue through approximately mid-to-late June. Hours vary between 45-55 hours per week (based on weather and other occurrences beyond employers control). Wages: Piece rate= $0.14 p/lb. for processing and $0.16 p/lb for fresh market. Employer guarantees Michigan minimum wage or $7.40 p/hr. Some licensed housing is available depending on group size. No bonus.

Here's the thing: I didn't go searching through the jobs board for the worst job listed at the worst pay.¹ That job was featured on the front page of the website, the very first job listing under the heading "Featured Jobs".

Other featured jobs include driving a truck for an apple orchard, working as a quality inspector (high school diploma or GED required) with no corresponding job listed through the opportunities section of the company's website, working contracts through a staffing company that sends workers to companies throughout the nation, working as a project manner for a technology company that has a broken job search function on its own website.... I ran a few searches, attempting to filter for the better jobs, but didn't see much that hinted at Michigan's future, let alone a large number of job openings that are unlikely to be filled if the employer is willing to pay the compensation the market demands.

Snyder came out of Gateway computers, so he should have a pretty good sense that even with the best "account management" or "collaboration", no government can save a company from itself. No doubt, Gateway could have used better talent in its later years - but in management, not on the assembly line. Snyder continued to serve on the Gateway board during its final decade of decline, prior to its acquisition by Acer, and briefly served as interim CEO during that period, so he should have a pretty good idea of what a poor job even talented, motivated managers and bean counters can do in terms of anticipating a company's future needs and turning around a declining company. When we talk about running government like a business I'm not sure what business we have in mind, but it's not Gateway.

It's also fair to ask, what can the state actually do in terms of boosting the education sector. Under Synder's tenure the primary "education" focus of the legislature has appeared to be, "How to weaken teacher's unions, reduce their compensation and benefits, and boost for-profit charter schools," which to me doesn't appear to reflect deep concern for the quality of public education. State colleges continue to feel a budget squeeze. If I look at his actions, the governor appears to share the philosophy of the state legislature. How will Michigan's present education policies create talent and, to the extent that it does, why would that talent want to stay in the state? Even if they can find a job on the job search board, many talented graduates going to do what Snyder did - chase the best job, even if it means moving to another state.

Snynder has not fully unveiled his plans, but he did say this:

“We have a number of action items that we’re still putting together and will be rolled out soon. Particularly we’re looking at working within regions at talent connection and making sure that skilled trades are an emphasis.”

That suggests to me that Snyder seeks Michigan's future as involving lower-paid factory jobs. That interpretation seems consistent with the actions of Snyder and the legislature, from its treatment of schools and teachers to the legislative shenanigans behind making Michigan a "right to work" state, but it's the sort of emphasis that seems likely to keep Michigan's most talented graduates looking for jobs in other states, and will keep the best-paying jobs in those other states.
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1. Before you accuse me of cherry picking, I'll note - that job is listed as well, and it also guarantees no more than minimum wage. If you want me to cherry pick, we need to move up to the type of salary John McCain once suggested.

Who Wants to Provide a Full-Throated Defense of Labor Unions?

Harold Meyerson repeats the common belief that Michigan's rushed-through anti-union law was meant to punish unions for daring to attempt to protect collective bargaining through a constitutional amendment:

In Wisconsin, a union-initiated effort to recall Republican governor Scott Walker, who had pushed through the legislature a law stripping public-sector unions of collective-bargaining rights, failed badly at the polls. In Michigan, after voters (in the same election in which they gave Obama a clear victory) decisively rejected a union-initiated ballot measure that would have enshrined collective-bargaining rights in the state constitution, the Republican legislature passed, and Republican governor Rick Snyder signed, a right-to-work law in the cradle of American industrial unionism. What makes these defeats more bitter was that both involved unforced errors—actually, the same unforced error—on labor’s part. On the evidence of polling, many union leaders and political directors believed from the start that the Wisconsin recall and the Michigan ballot measure were fights that could not be won, but their cautions went unheeded by well-intentioned unionists in both states. It’s not clear that Snyder, who had previously disavowed any interest in enacting a right-to-work law, would have changed his mind had the measure not been put on the ballot and defeated, but its defeat certainly set the stage for the Republicans’ sudden and unheralded push for right to work during the legislature’s lame-duck session.

Did it also "set the stage" for their trying to cram through "open carry" legislation? For their attempting to cram through anti-abortion legislation? If you take a step back and look at the reactionary legislation of Michigan's lame duck session, the only reasonable takeaway is that the Republican Party had the bills prepared, ready and waiting, and that the only thing that changed following the election was that they no longer had to lie about their intentions. If Governor Snyder can be assumed to have had a change of heart, rather than it being inferred that he has been telling his party, "Wait until after the election", I expect that the change of heart had a lot more to do with the defeat of his emergency manager legislation than it did with the pro-collective bargaining amendment.

There's something else to consider: even if the Republican party passed its right-to-work law as petty revenge for the proposed collective bargaining amendment, they hid that intention through the election. It's correct to suggest that the amendment never had much of a chance, but it would have had a much greater chance of passing had the Republicans announced, "If this fails, we're going to make Michigan a 'right-to-work' state", or "We plan to cram through anti-union legislation in the lame duck session." I have encountered several people who voted against the proposed amendment on the basis that it was overreaching who have expressed that had they known what the Republicans were planning they would have voted for the amendment despite its flaws.

But it's important to remember something else. Even with the Republicans lying about their intentions due to their fear of a public that supports the right to unionize, they understand that many people who favor protecting the right to organize are not big fans of unions. They recognize that for the most part, whether we're talking about the state or federal level, the Democratic Party is of a similar mindset - to the extent that Democratic administrations may have pursued policies that slowed the demise of organized labor, they supported other policies that contributed to the loss of union jobs. Democrats have overtly rejected a German-style approach to labor organization. Under the best of circumstances, labor unions would not have had an easy time over the past half-century, but nobody's been trying to make it easy for them.

What of the unions themselves? Over the past fifty years, Michigan has had six governors. Four were Republican. Neither of the Democratic candidates emerged from unions. When the unions have managed to advance candidates with strong union ties... things have not gone well at the ballot box. Michigan's Democratic U.S. Senators are similarly pro-union, but not out of the unions. That is to say, the public at large seems to have long wanted to maintain something of an arm's length relationship with the state's unions. If history's lesson can be trusted, about the worst thing that could happen for the Democratic Party, two years from now, would be for the unions to dominate the nomination processs and election campaign.

When you ask people to make the case for unions, some will start with a history of the labor movement and point to the abuses of management, past, present and overseas. Some will talk about the importance of protecting the rights of workers in an imbalanced relationship, or of how weak U.S. labor laws are as compared to other countries while suggesting that the job and workplace protections we have emerged in no small part from the efforts of the labor unions. But you almost never encounter a full-throated defense of unions. It's in fact pretty rare to encounter somebody who, perhaps reluctantly but often quite willingly, admits to the problems associated with organized labor even as they defend the role of unions. Here's something else that's interesting. One faction that is heavily invested in the debate has done a terrible job of defending labor unions and organized labor. I am speaking, of course, of the unions themselves.

Governor Snyder can't make a case for his right-to-work law, so we get stories about jobs supposedly flooding into Indiana, or the suggestion that becoming a right-to-work state is actually good for workers and labor unions. You know what? If the "solution" to Michigan's economic woes is to add a handful of low-wage jobs to the economy, part of the race to the bottom that leads to Michigan's economy being indistinguishable from that of Mississippi, I don't consider that to be a good thing.

Flint has gone a great job adding non-union, low wage jobs - telemarketer phone banks. Is that the future Snyder wants for Michigan? Because if his model is Ann Arbor, this anti-union stuff is at best a distraction. I admit that my perspective is skewed by wanting good governance, healthy communities, the availability of good schools, good jobs, and the like. If you look at the states with the worst economies, the worst per capita incomes... Republican strongholds.

You Didn't Expect Him To Keep His Promises?

Governor Rick Snyder ran for office on a platform of offering a massive tax cut to Michigan businesses while otherwise slashing government spending in order to balance the state's budget, which faced a massive shortfall even before business tax reform. And now he's doing what he promised. Is the surprise that a politician is keeping his promises?

I was discussing Snyder after the recent election with somebody who was concerned about the Republican monopoly on the state's three branches of government. I argued that the Republicans have no impediments to implementing their reforms and thus can be fairly judged by whether or note the reforms they promise will turn around the state's persistent downward slide in fact work. If they bring about disaster for the state, at least in theory they should face disaster in the next election. The reply, "But what if they succeed?" Well, it's hard to argue with success.

But....

Right now a lot of people are upset about Snyder's proposed budget. You see, it turns out that when you have a massive budget deficit, add a major tax cut to the mix and rule out any tax increases... except for senior citizens who receive pensions (they're probably icky people anyway, like retired union workers, teachers and public employees)... you have to do a lot of cutting. And people who believed that they were immune from budget cuts because it's only other people who benefit from government spending are finding out, in a hurry, that they in fact did receive benefit.

If Snyder's business tax cuts inspire more businesses to locate in Michigan or help existing businesses grow, that would be good news for the state. One of the things that has been lost in the avalanche of analysis over the federal deficit is how much of the deficit is attributable to the recession. How much better off we would be if and when the economy rebounds, and how much better it is to close a budget gap through growth than through cuts - how ill-considered cuts can actually worsen the employment situation and prolong a recession.

But if that business income doesn't start pouring into Michigan, I'm not sure that low corporate taxes will do much for the state. If you slash spending on education, while school districts remain hampered in their ability to raise money through local taxes, you will see deterioration of schools: physical deterioration, a narrowed curriculum and a greater difficulty finding and retaining teachers. If you cut state support for colleges, you'll see similar things happen in higher education - and Michigan, which already bleeds talent to other states, will see more of its capable high school seniors leave the state before college as opposed to after graduating. Large businesses looking to enter a state can be expected to consider if the state will be attractive to employees. Many employees will tolerate a Michigan winter, but how many will also tolerate crappy schools? Despite a substantially higher cost of living, how many businesses will choose to locate in Snyder's hometown of Ann Arbor, as opposed to, let's say, Willow Run schools? Similarly, what of road conditions, availability of skilled workers, public spaces and cultural opportunities?

Snyder also claims to want an even playing field. That's how he justifies the proposal for taxing pensions - to quote Snyder's Chief of Staff, "A young, unmarried mother of two gets taxed on her earnings. Why should any other group be exempted?" The same "fairness"¹ logic, apparently, is being used to justify cutting tax credits for the film industry. Why should the state issue tax credits that favor one type of business over another? All business are created equal, right?

Except, of course, some businesses aren't like the others. A film production company may look more ore less like any other company, but each film it produces is a creature unto itself. I read an interview with a producer who made a joke to the effect that every script he reads "Fade in: A tax incentive state." Because that's the number one consideration when choosing where to shoot a film. It may not be "fair" but as a businessman Snyder should be fully aware by now that, even though it's been very good to him, life isn't fair. Film productions are like tourists, and if two hotels look pretty much the same they're going to pick the one that costs less.

Snyder shouldn't attempt to be cagey about it - he should be prepared to admit, flat-out, that he knows his budget proposal is likely to kill Michigan's film industry. I personally don't want to hear that we have to kill a nascent industry because it's "unfair" that the state is subsidizing its development. I want to hear the cost-benefit analysis of how a mature film industry will benefit the state, or how due to high subsidies the state will be better off even if it throws away the jobs and spending associated with film productions.

Snyder has the idea that tax credits should be replaced with "incentive grants" that can be evaluated on a year-to-year basis, and in many ways such an approach is superior to making optimistic projections about tax credits in order to get them into the budget with little subsequent regard for whether they work. But conventional brick-and-mortar businesses aren't simply looking at the coming year, and transient businesses like major film productions aren't likely to be choosing a shooting location at the last minute, so that approach can actually create considerable uncertainty. Besides, whether you offer tax credits or "incentive grants", you won't be offering them to every business so the "playing field" remains unequal. From a bean counting perspective this may make sense, and perhaps some inefficient grants will be ended as a result of annual review, but from any other perspective the proposed policy seems as bad as or worse than the status quo.

As I initially suggested, though, this is what Snyder promised. Nobody who voted for him should be complaining about getting exactly what they ordered. The shame is that we don't have a time machine, as I suspect the better time for Snyder to have been governor would have been during Engler's years, when the state was put on the receiving end of tax "reforms" that helped lock in place its ongoing decline. I don't know that Snyder would have done better, but if there is something to this "put a businessman in charge" thing, we at least had some room to play around with the budget without wreaking havoc.

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1. Seriously, fairness? When did Snyder become a Democrat?