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.

Working With The Other Party is Only "Bipartisanship" When You Have a Choice

Jamelle Bouie takes a look at one of the themes of the Romney campaign, that he has "proved" himself capable of working in a bipartisan manner because he was a Republican governor working with a Democratically controlled legislature. While Bouie explores the fundamental dishonesty of using this theme to attack President Obama, there's something else that we should note:

It's not "bipartisan" to work with the other party when you have no choice. When a Democratic legislative majority passes a bill, the Republican governor who signs it cannot claim that in doing so he is "reaching across the aisle". The compromise of the governor's agenda is inevitable. The same is true when party control is flipped - Jennifer Granholm doesn't have a proud history of bipartisan accomplishment, but instead struggled for eight years to push back against a Republican-controlled legislature. It's what the people voted for, but I would not argue that the result was good for the state, nor would I accept a Romney-type argument that Granholm proved her ability to reach across the aisle merely by showing up for work and signing bills that were invariably passed by Republican majorities, no matter how many state Democrats also signed on.

It's difficult to address these issues without inviting a glib response, "You're right, I had to work with the other party, and I did, successfully, time and time again." But when you cannot pass a single piece of legislation without the support of a large number of legislatures from the other party, that is simply not evidence of how you would work in a polarized environment, where your party shares or holds control of the legislature.

Michigan's Weak Economy

I've been in Michigan a lot longer than George Will. In fact, I'm not sure that he's ever been to Michigan. But for some reason he felt obligated to discuss Michigan in his latest column:

Tuesday's Republican primary is in one of the nation's worst-governed states. Under a Democratic governor, Michigan has been taxed into a one-state recession. Native son Mitt Romney, the Republican candidate who best understands how wealth is created, might revive his campaign by asking: Whom do you want to be president in 2010 when the Bush tax cuts, which McCain opposed, expire?

I'm no defender of Jennifer Granholm, but her administration did not occur in a vacuum. She inherited a disaster left by John Engler, both in the form of a massive budget deficit and an ill-considered tax policy that was made part of the state constitution. Between that and the fact that during most of her tenure the Republicans have controlled both chambers of the State House, it's a child's game to put the blame on the governor or her party. In this particular game, as played by the likes of Will, when roles are reversed (a Republican governor and a Democratic House) all failures are still assigned to the Democrats as "they control the budget." I would personally argue that Michigan's economy has been badly managed for decades, by governors and legislators on both sides of the aisle.

If Michigan has been "taxed into a one-state recession", it is not because of the amount of taxes. The Tax Foundation recently ranked Michigan's "State Business Tax Climate" twenty-seventh out of the fifty states. Given Will's love of Mitt Romney, it is perhaps worth noting that Massachusetts ranked thirty-sixth. So maybe there's more to the picture than taxes. Maybe there's a lot more.

That's not to say that nothing about Michigan's tax policy hurts its future. Consider, for example, the fact that so much revenue is poured into corrections. In the 80's and 90's, legislatures had lots of fun being "tough on crime" - but all that toughness carries a huge price tag. The fact that if you move to Michigan, you'll pay a lot more in property taxes than your neighbor who has lived in the same house for a few years. Say what you want about businesses moving to California (49/50 for tax climate) anyway - Michigan is not California. Paring back public services and funding of state universities to avoid a tax increase? I'm not convinced that many people look at the quality of education available in the state, and the quality of education likely to be available in the future, then say, "I would rather have bad schools than slightly higher (or progressive) state income taxes." I am convinced that many people look at the quality of schools in a lot of the areas where they might locate their businesses, and worry that employees won't want to move there with their families. Oh yes - and the nearest big city is Detroit. (Chicago has the Magnificent Mile, but move to Michigan and you get Eight Mile....)

As for Mitt Romney being the candidate who "best understands how wealth is created"... well, yes. Romney was born into a wealthy, powerful family, so he would have a pretty good idea of how effective that can be at generating wealth and power. (Will provides some of the history, but I'm looking forward to having Bill Kristol fill in the details in his next column on "well-born" Americans.)

Let's close with an explanation of Michigan's budget woes that is somewhat more... competent than George Will's.

Michigan's seemingly perennial budget shortfall, now approaching a five-year run, is rooted in two fundamental issues: a cyclical economic downturn made worse by an endemic, structural deficit. ... Simply put, as its own economic recovery lags behind the rest of the nation, Michigan finds itself faced with the challenge of funding programs with costs that rise faster than available revenues, even in economic boom times. ...

The state's record 1.43 million Medicaid recipients are seeing cuts in services that could grow worse - and, ultimately, more costly to individual patients - if proposed cuts in federal funding are approved by Congress. Michigan's cities and townships have 1,100 fewer police patrolling streets since the terrorist attacks of Sept. 11, 2001, and communities are struggling to provide services like fire protection and road and infrastructure maintenance. And as other programs such as corrections swell, more tax dollars are diverted away from higher education, leading to steep increases in tuition and other fees that many say are putting college educations farther out of reach at a time when a changing economy most demands the degrees.

A perfect fiscal storm.

In Michigan's case, steady increases in corrections, Medicaid and K-12 expenditures and what Clay calls an antiquated revenue structure created for a yesteryear economy are leaving the state in a persistent hole....

In balancing annual budgets, Granholm and state lawmakers so far have combined more than $3 billion in cuts, the transfer of nearly $6.5 billion in one-time resources - including draining the state's $1.36 billion rainy day fund - over four years and selective tax increases and shifts to balance annual budgets.

The article also discusses the consequences of the state's failure to invest in education and infrastructure. Almost three years later, things look... no better, probably worse.