January 23, 2022
Indiana’s Long-Term Economic Prospects Are Poor
Indiana is in the midst of a fairly brisk recovery from the Pandemic Recession. We are creating jobs at the same rate as the nation as a whole, enjoy a low unemployment rate and our key sectors of manufacturing and logistics are booming. In fact, the Indiana manufacturing economy produced more goods in the second quarter of 2021 than in any three-month period in our state’s history. Of course, we did so with 11,500 fewer factory workers than in the last quarter before the pandemic started.
In some ways, the current recovery mimics the recovery from the Great Recession. Indiana did far better than would be expected from 2007 to 2009, and by 2010 the state was recovering quickly. That was a notable departure from the jobless recoveries Indiana experienced after the 1991-92 and 2001 recessions.
One important reason for the stronger recoveries in 2010 and 2021 is more aggressive federal policy than in previous downturns. The American Recovery and Reinvestment Act of 2009 was $856 billion, the CARES Act of 2020 was $1.8 trillion and the American Rescue Plan of 2021 was $1.9 trillion. In contrast, fiscal stimulus in 1991-92 was largely non-existent, and in 2001 involved modest tax cuts through 2003.
Indiana’s recovery, particularly in manufacturing and logistics, was caused by the fiscal policy interventions of the Trump and Biden administrations. Likewise, the flush tax coffers Indiana now enjoys are wholly a consequence of COVID stimulus. That is not a critique of Indiana’s tax policy, just a consequential fact that needs to inform any discussion of future economic policy.
The stimulus is over, and the return of inflation ensures that interest rates will soon rise. As intended, higher borrowing rates for cars, RVs and homes will slow economic growth and job creation. With what seems to be a coming retreat from COVID, makes it seem that things will soon return to a more normal state of affairs.
More normalcy might be welcomed, but a sober assessment of Indiana’s economy makes it clear that state policymakers should be deeply alarmed about ‘normal.’ An honest, long-term assessment of the state’s economy should be treated like a three alarm fire. I’ll focus on the 21st century as a whole to make my point.
In 2000, Indiana ranked 24th in average wages nationwide, with the typical worker earning almost 88 percent of the national average. By 2019, we’d dropped to 35th in average wages per job, or just over 85 percent of the national average. In just the decade of the longest economic expansion in American history, Indiana’s per capita income relative to the rest of the nation saw its biggest 10-year decline in history. This sort of rapid declines in job quality and earnings are catastrophic for Indiana’s long-term prosperity, and addressing the decline is the number one policy issue facing the state.
Apologists for this decline will argue that it is due to our lower cost of living. That is not merely wrong, but that answer would fail a high school economics quiz. Businesses pay wages based on productivity, not cost of living. Yes, across much of Indiana, the cost of living is low, but almost 100 percent of that is due to low housing costs. Housing prices are low only in places few Americans wish to live. In Indiana’s most expensive counties, income and wages are rising briskly, as is population.
Just to clarify this point, from 2000 to 2019, Indiana created 154,000 new jobs, but 195,000 of these went to the Indianapolis Metropolitan Area. No, that is not a math error. The non-Indianapolis portions of the state had 40,000 fewer jobs in 2019 than they did at the turn of the century, while Indianapolis grew much faster than the state as a whole. Only the highly educated, high-tax parts of Indiana are growing.
Throughout the 21st century, Indiana has vigorously pursued tax cutting policies, but these tax cuts have been targeted almost exclusively at one or two industries. Our overall business taxes, as reported to the Federal Department of Commerce ranked 8th lowest in 2000, dropping to 6th lowest by 2019. However, our taxes on manufacturing dropped from 25th to 4th lowest over the same period, while we shed 120,000 factory jobs.
No one can construct an honest argument that this has bettered the Indiana economy. This is mostly because cutting taxes on manufacturing necessarily means spending less on key public services, while shifting the tax burden to households and other businesses.
Of course, serious folks in the statehouse recognize this as a problem, but policies that would help remedy the issue are costly and face strong lobby groups. Still, continuing to pursue policies of the past will be far costlier, and the budget dilemma in the statehouse lays out the problem pretty starkly. Since 2010, all inflation-adjusted increases in Indiana’s state budget have been almost wholly allocated to mitigating the effects of poverty and low-wage employment. So, we are spending a lot more on child social services and Medicaid, and less on the things that would actually prevent poverty.
Both higher education and K-12 have seen significant budget cuts. We are spending a smaller share of our state’s GDP on education than at any time in decades. Inflation-adjusted per student spending on college and K-12 students is lower than at any time for which comparable data is available. The consequences of this are obvious. The share of Hoosier high school graduates heading to college has been in decline for five years, and the absolute share of adults with a college degree started to decline in 2019.
I know many readers think college education is wasteful, and goodness knows I have my own complaints about higher education. However, American employers don’t share those concerns. Over the past 30 years, 81 percent of the net new jobs went to college graduates and the remaining to those who had been to college. Employment for high school graduates and dropouts declined. Sadly, Indiana’s experience could not be more different.
From 2000 to the end of 2019, the Census Bureau and Department of Labor report that Indiana created 83,173 jobs for adults without a high school diploma, but only 67,730 for college graduates. Today, Indiana is seeing an aggressive downgrading of the education and skills of its workforce. In the 200-plus years of statehood, nothing like this has happened before, and it marks a deeply troubled future for our state. We are rapidly becoming an economic refuge for low-wage employers and employees.
To be clear, businesses move to places that have an abundance of the workers they need. Jobs follow people and Indiana is educating and keeping fewer college graduates than at any time in decades. We should welcome the solid COVID recovery, but also recognize the growing frailty of Indiana’s long-term prospects. That is the state of the state of Indiana in 2022.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
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