Is Louisiana’s Megafund A Waste?

In today’s Louisiana Gannett papers is an article about the Louisiana Economic Development megafund, and efforts to raid it in an attempt to close the state’s yawning budget deficit. Stephen Moret, the state’s economic development secretary, is sounding awfully uncomfortable about the possibility his $123 million incentive fund could be poured into closing the deficit, and says Louisiana is “already at a competitive risk.”

Previous uses of the megafund included some $150 million last year to reel in the Foster Farms chicken plant and the ConAgra sweet-potato processing facility, both in North Louisiana. The megafund’s intention is to try to reel in out-of-state companies, and Moret says he’s working on 10 different opportunities that the current funds will be needed for.

Of course, $67 million of the $123 million in the fund was supposed to go to the V-Vehicle project in Monroe. Moret still counts that money as committed, though with V-Vehicle getting kaiboshed by the Department of Energy, from whom they expected to pull a $320 million loan, it seems there is little reason to keep that money committed – it will be at least another year before DOE would reconsider their rejection. Even then, and even with Mary Landrieu saying she thinks she can get the loan, there is much cause to doubt the project will ever go forward; after all, V-Vehicle is set to be a non-union shop and this administration is more in thrall to unions than any in recent memory.

Beyond V-Vehicle, though, a philosophical point about having a megafund in the first place should be explored.

What is the point of such a fund? Louisiana certainly isn’t the only state to have one; in fact, virtually every state and a host of major and mid-sized cities and regions have them. They’re in place to serve as sweeteners to attract large employers and economic projects to locate within a given state or area, which looks good in public opinion polls and can help, when people like Moret hit home runs, to revitalize struggling communities. It’s even occasionally true that money spent with economic development funds can produce a positive return on investment.

But consider this case in Michigan detailed by the Mackinac Center 10 years ago, and you’ll see the other side of the argument:

Consider the case of Boar’s Head Provision Company—a meat products company headquartered in Brooklyn, New York. In exchange for the company’s promise to invest $14 million and create 450 new jobs in Michigan over the next three years, the Michigan Jobs Commission arranged in 1998 to give Boar’s Head an “economic development package” worth up to $5.1 million in federal, state, and local resources. It includes up to $3 million for equipment leasing, an abatement of the 6-mill state education tax of up to $212,590, and as much as $1,000 per worker for training. Armed with these “incentives,” the company opened a processing plant near Holland, Michigan, on December 13, 1999.

The successor agency to the old Michigan Jobs Commission is now known as the Michigan Economic Development Corporation (MEDC). Its highly paid bureaucrats will count 450 “new” jobs as the agency’s contribution to the Michigan economy through the Boar’s Head deal. What its press releases will not reveal is the impact of the deal on other Michigan businesses, such as Koegel Meats, Inc., in Flint.

Like Boar’s Head, Koegel makes meat products. A Michigan-based family business for three generations, it produces an extensive line of cold cuts and the popular “Koegel’s Vienna Frankfurters” that get grilled by the millions in Michigan back yards every summer. Its meat products still use recipes devised by Albert Koegel when he emigrated from Germany to Michigan and started the company in 1916. The firm sells 99 percent of its product in Michigan and employs 110 people at its Flint facility.

Al Koegel, son of the founder, is not one to make a big fuss about unfair competition. Like his dad before him and his son John who will carry on after him, Al would rather run the business than spend time lobbying politicians. He cannot help but point out when asked, however, that for all of its 84 years, Koegel Meats always paid its taxes and never took a dime of taxpayer money: no abatements, no subsidies. The company always trained its own employees with its own funds. In fact, when the company was once offered federal money for job training, Al turned it down because he did not want the hassle of red tape and paperwork.

So we have here the classic American Dream story: A German immigrant comes to America seeking opportunity, settles in Michigan, starts a company, works hard, and succeeds. His family keeps the business here through thick and thin in one of the most high-tax, economically distressed areas of the state. They focus on customers, not government, and grow the business—taking no public money and paying full freight in taxes year in and year out. Now along come the wizards at the MEDC who, in the name of “economic development,” take money from taxpayers including the Koegel family business and give it to a New York competitor.

There is something seriously wrong with this picture. Lansing bureaucrats, most of whom probably do not know how to run a business, will take credit for their vision and thoughtfulness when they should be scolded for corrupting Michigan’s economy. A state agency will claim it “created” 450 jobs without perhaps even a single reporter asking tough questions like, “How many jobs may be lost or may never come into being at other Michigan meat product companies like Koegel in Flint or Kowalski in Hamtramck?” or, “Where will Boar’s Head’s workers come from in the tightest labor market in 30 years, and who will pay the bill for their previous employers to go out and find replacement workers?”

Now, V-Vehicle and Boar’s Head aren’t completely analogous – Louisiana doesn’t have any indigenous carmakers, and the only auto plant of note in the state is the GM operation in Shreveport which is in the midst of a closure due to that company’s woes and the impending shutdown of its Hummer line. But economic development funds definitely involve government operators picking winners and losers in the marketplace; somebody has to make the decision who the state will chase with those funds, and there is an effect on current players in the market when a deal is cut.

As the Mackinac report mentions, when Foster Farms opens a plant, there are technicians, accountants and managers who will be hired. And while those jobs will help a community, the people to fill them have to come from somewhere. Maybe they come in from out of state, which is the intended effect of reeling in a plant like that. But they also might come from people who are working at other local firms, which means robbing Louisiana companies of their talent and forcing them to go through the tough and often expensive process of making new hires. That’s not a net positive; while you can take the simplistic view that “we’re creating more jobs,” you’re doing it by bringing in an out-of-state operator who’s only coming because of the “incentives” or, essentially, bribes, that you’re offering. The home-grown company, the Koegel Meats, is the one who will stay with you and grow; the ringer is susceptible to pick up stakes and move to the next greener pasture.

More, economic development funds serve as a tacit admission that without them your state isn’t worth locating in. In Louisiana’s case, we’ve been throwing money at major companies for well over a decade in an effort to reel some of them in – while at the same time charging our people a state income tax, until recently imposing gargantuan and ridiculous business taxes, maintaining a property tax structure which siphons a disproportionate amount of its revenues from business and doing an absolutely awful job with its educational system – both in workforce development at the college level and in the basics with K-12 education – and maybe even worst of all operating a legal climate that amounts to a candy store for plaintiff attorneys. In other words, the state treats its current businesses horribly, but come on down anyway and we’ll make it worth your while; here’s some grease for your wheels.

Sure, other states are fishing for business. But in a bad economy, the smartest move for politicians is to address the concerns of existing businesses in the state and attempt to improve the climate for them to grow into the Fortune 500 type firms of the future. As we’ve previously alluded, what you want is Derek Jeters, not Roger Clemenses.

There is no shortcut to economic prosperity. Government can only create the conditions for it, not become an active player in the process, without becoming an obstacle to the kind of economic development it is supposedly working for. Gov. Jindal supposedly knows this, and yet he’s been as aggressive a proponent of megafund projects as any governor in Louisiana’s history. Perhaps with a major budget deficit and an impetus to get the size of state government to a much smaller, less intrusive level, the $123 million set aside for the megafund ought to be on the chopping block.

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