As 2019 begins anew, economists suggest a softening national economy.  Industrial production is in decline and retail sales dropped in December. Consumers even shifted their purchases to Walmart, signaling lowered expectations about the economy.  Much of Europe is sliding into recession and China may already be in a slump.  The sole unambiguous piece of good news is found in the unemployment rate, but that is a lagging economic indicator.  

The spate of worrisome news could signal the beginning of a recession, but I think it is more likely a return to trend.  But, the problem is that the trend has been very unkind to the Hoosier economy.  A return to trend is not good news for Indiana.  Let me explain. 

US economic growth in the post-recessionary period averaged 2.25 percent, while Indiana lagged a full 0.2 percent behind the nation as a whole.  This may seem like a minor difference, but this difference over a decade amounts to a significant and alarming relative decline in the Indiana economy.  Small growth rate differentials matter, and with the average Hoosier now earning less than 87 percent of the typical American, we should be very worried about stagnating long-term economic growth.

Looking back at the recovery period reveals a turning point sometime between 2014 and 2016.  From the five-year period after the end of the Great Recession through 2014, Indiana grew about 15 percent faster than the nation as a whole.  Our personal incomes grew very fast during this time, closing the per capita income gap faster than at any other time in our state’s history.  By 2015, all that relatively fast growth ended.

Indiana’s economy shrank in 2015 and has struggled to regain its economic footing.  From 2015 through second quarter 2018, Indiana’s economy grew one full percentage point slower than the nation as a whole.  From 2013 to 2018, Indiana’s personal income growth also stalled, widening its gap with the nation as a whole by more than 30 percent, or more than three percentage points.  In 2018, Indiana clearly underperformed the nation as a whole in GDP and employment growth. In 2018, manufacturing employment stalled, signaling a likely slowdown in employment growth across the state in the months to come.   

Let me speak plainly; the recovery from the Great Recession is leaving Indiana behind.  Maybe the most poignant and alarming piece of data is the very poor composition of job growth.  As I’ve noted in recent columns, the share of workers with a college degree in Indiana has now slipped beneath that of Kentucky.  This heralds a longer period of stagnation in the years to come, and is surely among the reasons why Indiana’s economy diverged from better national growth mid-way through this recovery.  

This leads to some important questions about the role of public policy in our current condition.  Let me begin by ruling out such minor shocks as tax rate changes, the Healthy Indiana Plan or the RFRA controversy.  Moreover, these years saw the Regional Cities Initiative that boosted economic conditions in parts of the state. 

It is safe to conclude that much of the declining economic prospects can be attributed to the structure of our economy, which has failed to shift into more productive sectors employing better-educated workers.  One potential culprit in the lagging Indiana economy has been the shift in our human capital policies.  Our slack attention to bettering educational outcomes has surely contributed to slower employment growth among better-educated workers.  So how did this happen?

Between 2014 and 2016, there was a radical change in the mission of our workforce training agencies and the state’s largest community college. With little fanfare or public debate, the mission of these groups changed from focusing on the needs of the student to targeting the needs of business.  In practice that meant just a few vocal businesses. 

This change likely violated the intent of the Federal Workforce Investment Act, which provides funds for increasing earnings, skill attainment and enhancing the productivity of the nation.  The results have been dismal.  Since this change, Indiana’s employment profile has skewed heavily away from formal education. Thus, in a decade when more than 80 percent of new jobs nationwide have gone to college graduates, Indiana has seen only 17 percent of new jobs going to college graduates. 

This emphasis on deferring formal education to meet the short-term needs of business has also infected the K-12 system and threatens to engulf Indiana’s colleges and universities. It need not have been so.   Back in 2015, I welcomed Governor Pence’s call for more vocational education in schools.  But, what was designed as a wise policy to prepare more students for a productive life at work ended up causing the state’s school board to weaken curriculum requirements.  This has left us with a workforce less prepared to withstand automation-related job disruption.  Indiana is moving in the wrong direction, quickly.  We will pay the price of this for a generation. 

Let me say it plainly. Our educational policy shifts were not merely unwise but wholly uninformed. By focusing on the needs of just a few vocal businesses at the expense of students, we have significantly weakened the state’s economy. Since that shift, Indiana’s economy has grown at about 55 percent of the national rate. 

By softening the educational requirements in high schools, and by promoting jobs of today rather than careers for the future, we may well have squandered the opportunity for rapid growth during the longest recovery in US history.  The status quo is not working.  Our human capital policies won’t change themselves. It is time for the General Assembly to undertake a thoughtful and informed review of our human capital policies.  It is also time for employers and households to make it clear to elected officials that the long-term interests of Indiana lie in a well-educated, and well-trained workforce.