Michigan's local governments: a crucial part of our pre-industrial economic well-being!

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I remain convinced that the fragmented nature of Michigan's local governments is a handicap to our economic wellbeing, and that overhauling this artifact of a pre-industrial society is a necessary part of pulling us out of our current rut. The most important current function of our fragmented local governments is to decrease our social well-being and economic benefit. Since Google is currently the hip thing to discuss Michigan's economy around, I'll use that as an example - ArborUpdate's discussion of the A2 City Council's free parking offer provides a convenient case study.

In July of 2006, the State of Michigan announced that Google had chosen to locate its AdWords division in the Ann Arbor area, rather than in such competing locations as Boulder and Boston. Part of the deal was a $38 million tax credit from the State. There was much rejoicing - 1,000 jobs! From Google! With economists telling us these jobs would create an additional 1,250 jobs through the multiplier effect! This is huge! (I should point out here that I am quite happy that Google's coming to the area, and I don't intend to criticize them at all - they're just a convenient example of how we are being dumb.)

A savvy observer would note, however, that this deal was still very much in the air - an important part of the announcement was that Google would locate in the Ann Arbor area. They hadn't picked an actual site yet, and wouldn't necessarily locate in Ann Arbor. Just in the area.

I can assure you that, the day the announcement was made, every local government in a 30 mile radius was calling up MEDC saying, "We're in the Ann Arbor area! How do we get Google to locate here? Who do we call, and what do we have to offer?" Because this is how the corporation recruitment game works - the $38 million from the State is enough to get the company to locate here, rather than across the country, but the company still has plenty of room to harvest incentives from local governments.

So Google opened a small office in downtown Ann Arbor for the first dozen or so employees, while they looked around for an eventual home for their thousand-employee AdWords headquarters. We'll call this the "first one's free" part of the local government incentive seeking game. Google is downtown now, so what will Ann Arbor do to keep them there? Meanwhile, some of the surrounding Townships start setting up incentive zones so that they're equipped to make offers to Google. (In the complex web of Michigan economic development programs, some communities can automatically leverage certain programs, others can leverage them only if they take preliminary steps, and still others can't use them at all.)

Several months later, in November, Google announced that they'd be moving to 80,000 square feet of space on Liberty Street, still in downtown Ann Arbor. But wait - they've said their total need is 200,000sf of space. Indeed, this location will only be their home for perhaps 4 years. And, did we mention that it involved an offer of 200 free parking permits from the City? Oops, wait, did I say 200? I meant 400. Four hundred free parking spaces in downtown Ann Arbor, and that doesn't even get the City a permanent (or at least indefinite) resident - that just gets four years.

So at this point, it's been determined that, on top of the $38 million offered by the State, Google is worth 400 free downtown Ann Arbor parking spaces, just for 40% of their expected eventual capacity, just for four years. Presumably, this means the local incentive will have to scale up as Google does. A downtown Ann Arbor parking permit costs $105/month. 400 parking permits, at $105/space-month, works out to just over $500,000 annually. (And that doesn't take into consideration that there aren't any permits currently available, and there is, in fact, currently a waitlist of several hundred people for these permits. So we can add some amount to that cost for the harm inflicted on the people who have to wait longer for a permit, and the 400 people who are going to be bumped from their spaces in order to give those spaces to Google.) So half a million for 40% of Google. Just to make things simple, let's say this scales to $1 million annually in local incentives to have Google.

I believe that these local incentives should not be necessary, and, in fact, would not be necessary if it weren't for our balkanized local governments. I repeat, Michigan's local government system drains $1 million annually of public benefit away from the Google deal. We're burning money.

"But, Murph, how can you criticize this?! This means jobs! Jobs that we very much need! 1,000 jobs that pay decently and that will create another thousand jobs through multipliers! You're insane to criticize the incentives!"

False. The local incentives do not create jobs. The State's incentive is what won us Google, what brought those promised jobs here instead of to Boulder or Boston. Those jobs will be here, within the local job market, whether Google is physically located in Ann Arbor, Ypsilanti, Scio Township, or Canton. The local incentives are not part of the job creation.

"But, Murph, if we don't incentivize Google to locate downtown, they'll locate out in Pittsfield. Giving them an incentive to locate downtown will help our downtown businesses that we value so much! Many small businesses will survive and/or thrive because of Google’s new offices! That’s easily worth the 400 spaces in my book."

While I agree that locating 1,000 jobs downtown is more likely to benefit small independent business than locating them in car-dependent sprawl, this is not an argument against my point - it's an illustration of my point. The reason we have to offer companies an incentive to locate downtown is because the surrounding Townships are also offering incentives. If there weren't competing incentives involved, there wouldn't need to be an incentive to locate in downtown Ann Arbor (or, at least, the incentive wouldn't need to be nearly so large).

This is how our local government system hurts us. Somebody is going to give Google $1 million a year to locate on one side of an imaginary line rather than on the other side. $1 million a year to locate here, rather than six miles away. Six miles! That's all that's involved! That's all we're buying for our local incentive packages! I'd hope you'd agree that's it's pretty silly to blow $1 million annually just to move a company six miles. (Especially when it only cost $38 million, flat rate, not annually, to get them all the way here from Boulder. $30,000/mile for the first 1,200 miles, but $200,000/mile annually once they get here.)

This cost only exists because our local governments are so fragmented. Our local governments are set up in a classic Prisoners Dilemma, where they are forced to make decisions that are bad at a system-wide level in order to make their immediate situation a little less bad. Good decisions aren't an option, because making the good decision means that you end up with a worse outcome. If Michigan weren't so fragmented, this wouldn't be the case - eliminating the need for local governments to make bad decisions would cause them to stop skewing the playing field. If the playing field weren't skewed by the local governments' unfortunately necessary bad decisions, then an incoming company would just locate wherever made the most sense.

Consider: if every local governemnt in the area offers a $1 million/year incentive, Google will make exactly the same decision as is no incentive had been offered, because the options will have the same relative benefit to Google as if no incentive had been offered. But we, as a community, will be $1 million/year poorer. We will have given up $1 million/year in potential benefit, just because. Just because, that is, of the way our local governments are set up.

I apologize if I seem to be repeating myself too much, but the fact is that smart people have been saying exactly this for a long time. In Minnesota, they took action 35 years ago to reduce the Prisoners Dilemma nature of local government incentives, reaping more total system-wide benefit, and, as a bonus, applying that extra systemwide benefit to the places that needed it most. A similar system was set up in the New Jersey Meadowlands region around the same time, and I'd like to pull out a quote from the NJMC's page:

Projections made by the Commission indicate that, at full development, each Meadowlands community will have an excess of tax monies beyond the cost of delivering services to the Meadowlands portion of that community.

Each community will have an excess of tax monies - and, as a bonus, they've managed to clean up pollution and rehabilitate a watershed. I think Michigan could learn something here.

Of course, draining away the benefits of major economic victories, such as recruiting Google, is only one of the ways in which the fragmented nature of our local governments and the way in which local governments are funded combines to hurt us all, and, if we were willing acknowledge the problem, we could all come down from our little mud huts and build cathedrals together. (I might note here that Michigan has the opportunity to hold a constitutional convention in 2010.)

So far, though, I don't see a lot of interest in cathedrals - we'd rather keep competing to see who can build the biggest pile of mud, telling ourselves that this is the best we can do. Sure, there are people calling for increasing efficiency within local government, and combining functions across local governments. We have regional fire authorities, and library districts, and school districts that span several local governments, and we talk about regional policing, and pool our technology resources. But all this is just treating symptoms and ignoring the larger problems - making the patient (ourselves) as comfortable as possible.

(Let's see how much more hackneyed I can make this before I decide to quit, shall I?)

We're pounding in nails with our tape measure, while our neighbor is determining that his bathroom is 10.5 hammers wide, because we're too proud to work together and share our tools. Uh, "So we beat on, boats against the current, borne back ceaselessly into the past"? Okay, maybe that's enough.

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This is what happens when my

This is what happens when my alarm goes off on Saturday morning, and it's ironically the one day this week when I can't fall back asleep.

p.s. Hey, I wasn't the one who whined about my rss feed only having excerpts. Deal with it.

The math of Incentives

Okay, so $1 million in local annual incentives to get Google to locate in downtown Ann Arbor. That turns out to be $1000 per year for each of the 1000 expected employees. I imagine Google employees will spend at least that much per year just going out to lunch at local restaurants. I imagine that property taxes will also swell above that number as well. And so on and so on. There are many benefits to having Google downtown, especially with the city focusing on urban density. It's worth the investment, even if it's just a goodwill gesture.

And if they locate in

And if they locate in downtown Ypsi, they'll spend $1000/year on restaurants there. And if they locate outside of those downtowns, they'll still spend lots of money on restaurants - they'll just drive more. (Note: this is setting aside the fact that Google is notorious for having in-house free breakfast and lunch for employees, minimizing the individual driving around. Not bad for caterers, though.)

My point is that all of that overflow benefit exists in the area regardless of whether we give them $1 million to locate downtown. The incentive is not what creates that overflow benefit. That overflow benefit already exists, and our incentive is dollars subtracted from that overflow. We only have to offer that incentive because *other* local governments (like Pittsfield and Scio) are offering incentives, not in order to secure the overflow benefits.

Killing Willow Run

This is a lame response, but who wants to be the politician that refused to give Google, GM, Ford, Visteon, etc. tax incentives only to have them leave or close shop?

A different category

Two points -

First, I'm not calling for an end to all incentives. I'm specifically not criticizing the $38m. getting Google to "the Ann Arbor area". That's the level on which most of the benefit is won or lost - whether they're here(ish) or in Boulder. If they're here, everybody around here benefits. If they're in Boulder, nobody here benefits. So those incentives I don't have a beef with. (Unless one wants to pull out data about how small businesses generate most jobs, bring up import replacement development a la Jacobs, etc., and claim that these are the areas where we would be getting the best ROI on our economic development money.)

So, as with mckenna's response above, yes, the incentives that bringor keep a big company to the area win definite benefits to the local and regional community, and I'm not criticizing those. I'm concerned with the incentives that just push and pull the company a few miles back and forth - the part that has Pittsfield and Ann Arbor competing and losing some of the total benefit in the process.

Second, I'm not advocating an abstinance-only program - I'm not going to call on elected officials to take the moral high ground and refuse to consider local incentives, and let their neighbors poach the development. (Several of the participants in the ArborUpdate discussions are calling for just that.) My intent is to point out that this is currently a necessary evil set up by structural constraints such as the fragmentation of our local governments and local government funding coming primarily from the property tax. When we get to the point where Google (Ford, Pfizer, etc) are locating here rather than across the country or world, we should be able to declare victory - we've secured jobs and spillover benefits for local businesses! Instead, the existing structure forces us to then fight with our neighbors over who gets the local property tax dollars for Google - with our primary tool being to give away those dollars. The zero-sum, winner-take-all nature of local property taxes makes us act dumb and lose out on some of the potential regional benefit.

Now, there's also still a place for some local incentives. Maybe we decide we value things like walkable, human-scaled downtowns; farmland preservation; rehab of historic buildings; and watershed protection. If we as a region aren't throwing away potential benefit on the ratables chase, we have more room to incentivize development to locate in such a way as to advance those goals, rather than saying, "we have to maximize ratables first, then worry about our other goals."

local incentives might have been expected.

Thanks Murph for your ideas on this issue. I have to agree with you in that the local competition for businesses drains money away from Ann Arbor (and all localities) in the form of financial incentives.

However, it is entirely possible that this form of competition offers an additional incentive for businesses to move to Michigan. If businesses know that on top of the financial incentives already offered by the state the robust competition to secure their exact location will also benefit them financially, they may be more likely to move here. Does anyone have data on this particular dynamic?

The real complexity here seems to lie in the fact that these local incentives may not be particularly predictable or controllable for businesses or for Michiganders. Now I don't know that this is a bad thing overall, but it certainly does lead to some significant drawbacks along the lines that Murph articulated earlier. Regional planning may be more difficult in areas of resource management such as the water supply. There will undoubtedly be some smaller and poorer communities that are unable to draw many businesses to their location and these localities will continue to flounder. And relationships between local governments and state governments may also become needlessly antagonistic as the economic environment of the state continues to transition.

However, the key of this debate is whether or not these extra local incentives help to attract more businesses to Michigan. Against this measure, all other measures that have been discussed are secondary I think.

Of course, I have been wrong plenty of times before…

Thanks Murph!

Elias

Pfizer

Looks like Pfizer is a good case study for your arguement... How timely of them!

Again, not quite.

Pfizer's a case study of a different argument - be careful how much you throw at a big corp to locate here rather than Georgia. I'm okay with the tax incentives previously given Pfizer, especially as most of them were over-time incentives. (Incentives that still leave the locals a net increase up front are better than incentives that give the corp lots up front and count on collecting an increase later.)

It would be a case study for this here argument if Pfizer announced they were leaving Ann Arbor because Troy (name out of a hat) had offered them a better incentive package.

In my mind,

what Pfizer represents is the same thing as the auto companies represent -- incentives and tax breaks don't make a bit of difference if companies aren't making good business decisions. The lack of SBT in Michigan won't change anything for the Big Three, just as incentives didn't mean much for Pfizer.

Yes and no

I agree: it is true that incentives and tax breaks don't make a bit of difference if companies aren't making good business decisions.

However: Pfizer and the Big three are dissimilar in regards to what motivates the lay-offs and out-sourcing. Pfizer's recent decision was as much a political warning shot to the Fed. and Michigan as it was anything else.

Pfizer wants to tell the government that, "if you don't protect us against the generic drug manufacturers, we will deal with the issue in such a way that localities will directly bear the burden of our action."

Keep in mind that:
a) Debbie Stabenow has been a long campaigner for opening up the borders with Canada to allow Michiganders access to cheaper generic drugs.

b) while in need of more R and D to produce more patentable drugs, and while trying to keep 70% of the jobs in Ann Arbor within Pfizer itself, the decision was made to entirely eliminate the presence of the company from Ann Arbor.

To me, this seems to indicate that Pfizers move was intended to be a message to policy-makers as much as it was intended to actually help restructure their business.

Therefore, incentives may be capable of changing the minds of places like Pfizer, who are making political statements through their re-structuring plans. However, Pfizer has done needless damage to our state and the Ann Arbor community. It is truly socially irresponsible to -choose- to make cuts in our state given that our unemployment rate is one of the worst in the nation. Of course, I guess that's what they figured.

pfire pfizer.

Elias