Ask the typical governor, Republican or Democrat, about economic development incentives off the record and watch the eyes roll. What they’ll tell you almost every time is that they can’t live with them and they can’t live without them. Yes, if you want to lure a big company into your state you have to offer money. But that’s just an ante. It’s not usually the deciding factor.
That’s what makes Michigan Gov. Rick Snyder’s attempt to reform economic development incentives so interesting. Unlike most politicians, he’s more than willing to question the value of financial incentives to businesses. He’ll call them “the heroin drip of state government,” and he’ll ask, referring to his own state government, “Are we just an ATM?”
A political rookie elected in 2010, Snyder is neither a typical “cut taxes, cut regulations” kind of conservative, nor a typical big-ego-CEO-turned-politician. With a business career that includes stints with Coopers & Lybrand, Gateway Computer Corp. and a venture capital fund, he’s a self-described nerd, focused on measurements, metrics and results. So he came at the economic development issue with a more rigorous and analytical approach than most governors.
But as the rookie governor has become more seasoned, Snyder has backed off the idea of eliminating incentives altogether. Instead, he’s redirecting them in two ways. First, he’s focused on growing firms in Michigan rather than recruiting firms from the outside, what he calls “economic gardening” as opposed to “hunting.” Second, he’s focused on providing companies with short-term as opposed to long-term assistance, an approach that he thinks will help both the companies and the state.
In other words, Snyder is using a venture capitalist’s approach to state-level economic development. It’s a model more states are thinking about, and a model that may hold more potential for long-term success.
Venture capitalists are in the business of finding promising companies and helping them grow by investing the right amount of money at the right time. They know that many (if not most) of their investments will fail. But they also know that the successful companies will more than make up for the losses.
So economic gardening, as Snyder defines it, is very much in the venture capital tradition. You don’t steal or strip big companies. You take small ones and figure out how to grow them into big ones.
Similarly, Snyder’s approach to getting money to businesses also falls within the venture capital tradition, though Snyder clearly has a long-range budgeting reason to do it as well. In many cases, Snyder has done away with long-term tax credits and replaced them with short-term financial assistance, giving businesses more cash now (by matching venture capital investments) rather than providing it over 10 or 15 years.
When Snyder talks about this shift, he focuses on limiting the state’s long-lasting liability. By eliminating long-term tax credits, he’ll say, the state is not tying up tax revenues in the out years. Mature companies might want long-term tax breaks, but growing companies need cash up front, at the right time, in order to grow.
It’s hard to say whether Snyder’s approach will work. After all, the incentive reform has only been in place for a few months, and it’s part of a much larger package, with overall tax reform being the centerpiece. But beyond that, given what’s happened in the last decade, Michigan has nowhere to go but up.
As the economic downturn drags on, we’d all be well advised to take a close look at Snyder’s venture capital approach to economic growth. When the presidential campaign unfolds this summer and fall, the central debate will be how to grow the economy. Mitt Romney will claim he created jobs at Bain Capital, which is not a venture capital fund but a private equity company that retooled troubled companies, whereas President Obama will claim Romney increased wealth but destroyed jobs in the process. Snyder’s venture capital approach may well teach the lesson that the presidential back-and-forth is beside the point.
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