For the past week or so I have been flooded by phone calls from colleagues in Illinois and Michigan, chortling over a new marketing campaign launched by Hoosiers.  The privately financed billboards and radio spots ask businesses and residents whether they are tired of high taxes and unresponsive government?  If so, they are invited to “Come on IN” to Indiana.  It’s high order fun this holiday season.

Indiana sits as a small island of growth in the Midwest, and it is useful to try to understand why.  Last year, Illinois and Michigan saw really significant job losses (more than one out of every 200 jobs), while Ohio lost about half that percentage.  Indiana saw job gains of about 0.3 percent – significant gains when placed into the context of our neighbors. 

Economists have spent considerable effort understanding why regions grow.  But the factors that traditionally explain regional differences in growth just don’t fit the data.  The big growth factors: educational attainment, infrastructure, basic public services and ready access to capital are alike across the region. 

Industrial structure could explain differences in state level growth, but again the data just doesn’t fit.  The leading job losses have come in manufacturing and Indiana is more dependent on the manufacturing sector than any of our neighboring states. 

Were the growth rates reversed, with Indiana losing jobs and the other states gaining, it would be easy to chalk it up to the decreasing demand for manufacturing workers.  The problem isn’t in the gross loss of jobs it is simply that job creation in Indiana is really outpacing that of our border states.

Even geography cannot explain the differences.  It’s probably warmer in Muncie than in Michigan’s UP, but if I were to go to the expense of moving to warmer climes, I would stop at the Chattahoochee, not the Ohio River.

The only factor that can explain Indiana’s continued growth is public policy.  Indiana has embraced what I call a “market friendly” public policy environment. 

Indiana enjoys, and now flaunts, its low taxes (though this won’t be a selling point if some sort of property tax reform isn’t passed soon).  Every state ranking on business costs places Indiana well below the Midwest pack (a remarkable achievement given consistent wage growth over the past decade).   There are certainly areas that still need work (like local government structure), but generally, Indiana has an economic climate that fosters job creation. 

Other states, namely Michigan have long touted their “business friendly” environment.  In the 1990s an economic development grant program provided $1.8 billion worth of incentives.  The program created jobs at a cost of roughly $125,000 per year. 

Michigan’s current dilemma is worse.  Out-migration is crippling the state’s economic future (though it has kept the unemployment rate down to a dismal 7.7 percent).  This summer the state increased taxes by $1.4 billion just as the state’s economy leads the nation in job losses and unemployment. 

To be fair, cutting government is difficult work.  Michigan’s bi-partisan legacy of poor fiscal decisions and anti-market policies have made it worse than it should have been, and the state’s current crop of elected officials have only served to extend the tough decisions to a future date when the choices will be even more painful.