March 28, 2021
What Will This Economic Recovery Yield for Indiana?
In the coming months, the U.S. economy will appear as if it is returning to normal. That won't really be the case, but the conversation about the economy will shift from stabilizing and relief to long-term growth. Midwesterners, particularly Hoosiers ought to be very nervous about the next decade. The last economic recovery left the region and our state in relatively worse condition than the Great Recession. There is every reason to believe the next recovery will again leave much of the Midwest farther behind the nation as a whole.
The poor prognosis for the Midwest rests upon the long-term shifts, or what economists call 'structural' shifts, of our economy. Consumers spend a dwindling share of their earnings on goods, instead buying services such as recreation, travel, education and healthcare. That trend works against our strengths or 'comparative advantage.'
These shifting consumer preferences alter the calculus of producing goods and services. The demand for workers nationwide is overwhelmingly for college graduates. As I've repeated in this column, more than 8 in 10 new jobs created since 2010 went to college grads. Over the next decade, nearly all new jobs and most new wage growth will go to those workers with a four-year degree.
This does not mean that less well-educated workers cannot find work. There will be a steady stream of retirements in other occupations. But, it does mean that all the economic growth will only occur in those places with a high share of college graduates. That is very bad news for Indiana, since we are in the bottom third of educational attainment.
Indiana's declining economic position is not an accident. It is the result of numerous policy choices, for several decades, made by elected leaders of both parties. These were not malevolent choices, just myopic ones that ignored a half-century of data about the nation's changing economy. Today, Indiana's economic, education and workforce policies are far more closely aligned to 1962 than 2062, which is when today's high school students will still be a decade away from retirement.
One way to avoid the continued plague of short-sighted policies is to think about economic growth the way economists do. Economists think of growth as being caused by the self-interested efforts of entrepreneurs to combine people and machinery – or what we call capital – to produce goods and services. This might seem like some highfalutin model, but it helps focus government policies.
Government can only promote economic growth by doing things that influence the productivity of people and capital. But, most of what government does has little effect on either worker or capital productivity. Indeed, much is harmful, as a disproportionate share of my columns have noted. But, there are a couple of areas where government action can influence productivity.
The first way is to improve the quality of the government's part of productive capital. The private sector owns most machinery and buildings, but the public sector owns or regulates significant capital. Thus, better bridges, roads, air traffic control systems or how effectively government regulates water, sewer, electricity, and telecommunications access also affects productivity.
States, including Indiana, spend a mind boggling amount of public money to attract new investment. States also try to cut taxes in the belief that capital owners are mostly concerned about the cost of owning that capital. But, capital investment goes to the places where it will be most productive, not where it is cheapest. If that were not so, Manhattan, Palo Alto and Boston would all be an economic wasteland, and Indiana would thrive.
Indiana's problem in attracting capital isn't because venture capitalists don't know about us, rather it is because they know us quite well. The most effective way to improve the productivity of capital is to combine it with highly educated workers, which is why capital disproportionately flows to Manhattan, Palo Alto and Boston, not Indiana.
The most effective way government can affect productivity is by focusing on people, or human capital. The most productive businesses locate and expand in the cities and towns that provide them a pool of well educated and skilled workers. Here we are at a deep disadvantage. From 2010-2019 Indiana's businesses created more jobs for high school dropouts than college graduates. This is that 'structural' change that sees advanced manufacturing, high technology and other highly productive sectors fleeing Indiana, and expanding elsewhere.
Fundamentally, Indiana needs to boost educational attainment. As of 2019, Indiana's educational attainment was a full generation behind that of the U.S. as a whole. Indiana has the workforce that is ready for 2004, not 2021. To put that in context, 2004 was the first year with a Bluetooth-enabled Blackberry, the iPod (not iPad) and the concept of 'blogging.'
The remedy to our educational attainment problem will not be quick or cheap. It will require strategic patience and courage from elected leaders. It takes real political pluck to tell voters the truth about our lagging economic prospects, and to explain to them that we need more money for education from pre-K up through college.
More funding alone will not fix Indiana's educational attainment deficit. It is necessary, not sufficient, but it must be a first step. The quest to better fund schools is not a partisan issue. Underfunding of public services that are critical to the economy has never been a conservative principle. Following a decade of budget cuts and experimentation with schools, we have enough data to draw some pretty clear conclusions. These tax cuts and educational reforms have not yielded us their promise of better educational attainment or economic growth. It is time to get back on track or prepare to face another lost decade.
About the Author
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