Debunking St. Mitch

Mitch Daniels will soon be leaving the Indiana governor's office to become president of Purdue University. He'll leave Indianapolis with praise from budget-balancers in other states, the admiration of pundits and a wistful regard from the Republican Party, which hoped that he could have been their presidential nominee this year. (He refused, for personal reasons.)

It's an odd chorus of huzzahs for a governor who, if he hasn't impoverished his state, has helped impoverish its residents. All statistics, including those from Daniels' own government, show that per capita income in Indiana has steadily declined during his eight years as governor. When he took over, Indiana ranked 33rd among the 50 states in per capita income: the latest figures, from 2010, rank it 42nd, with no reason to think things have improved since then.

If Indiana is becoming the Mississippi of the Midwest, the Daniels years helped make this happen.

Aaron Renn, the Indiana native who hosts the invaluable blog, The Urbanophile, focuses mostly on cities. But occasionally he writes about his home state. The last posting, "Mike Pence vs. Mitch Daniels," assesses the Daniels tenure and how his probable successor, Congressman Pence, will differ. It's a fascinating look at a troubled state, but it's also a useful guide for other Midwestern states who are wondering how they can attract industry, create jobs, raise incomes, generate vitality and recover from the recession that has gripped this region for 30 or 40 years now.

One way is the Daniels Way and, on the surface, it's impressive. He balanced the state budget, upgraded the state's credit rating, restrained local spending by sponsoring a constitutional property tax cap, pushed through right-to-work legislation and infuriated Illinois with a campaign to lure businesses to move across the state line. When he goes, he'll leave behind a solvent state government, which is more than many states, especially Illinois, can say. It was a fiscally conservative and pro-business administration, and businesses loved it.

Which is not to say he's succeeded, even by his own standards. As Aaron Renn recalls, Daniels came to office with this pledge: "We will do everything we can to raise the net disposable income of individual Hoosiers." 

This hasn't happened. According to state figures, in the year 2000, Indiana's average per capita income was $34,772, which ranked 33rd in the nation. In 2005, when Daniels took over, Indiana ranked 34th (according to slightly different figures from the U.S. Bureau of Economic Analysis.) By 2010, Indiana's per capita income was only $34,042. (That's right: per capita income, adjusted for inflation, actually went down from 2005 to 2010). This left it ranked 42nd in the U.S, and last in the Midwest.

In other words, while most of the rest of the country moved up, however fitfully, Indiana moved down. Its per capita income growth in the first decade of the century was minus 2.1 per cent. This ranked it 48th in the nation: in the Midwest, only Michigan, which lost most of its auto industry, did worse.

Perhaps Indiana, having put its fiscal house in order, will do better in the future. Don't bet on it. Pence, the probable next governor, isn't.

As Renn points out, Pence isn't even promising to raise incomes. Instead, he's promising to increase private sector jobs -- but in sectors like farming, which pays poorly, or manufacturing, where pay is better but the future is grim.   

Pay is declining in areas of manufacturing where Indiana is strongest. Most of what's left of this nation's integrated steel industry is clustered along the Lake Michigan shoreline of northern Indiana. The biggest plant of all is at Burns Harbor and its owner, ArcelorMittal, is demanding that wages and benefits for workers there be cut by 36 percent. Much of Indiana's other industry -- in auto parts, glass and other industries -- has declined or died in recent years, although a number of Japanese auto companies have moved in, mostly into southern Indiana, where unions don't exist and wage scales are low.

This is not a recipe for broad-based prosperity. But if Indiana is leading the Midwest's race to the bottom, can other Midwestern states chart a more positive future?

Governments, businesses and economic planners across the region are debating this challenge. One idea is to focus on clusters of high-tech, high-skilled, high-end manufacturing --- auto design and research rather than assembly, water solutions, green energy industries such as wind turbine, medical devices and services. These industries -- indeed, any plausible solution -- requires increased spending on education and infrastructure, closer ties between universities and industry and regional cooperation.

Will this work? No one knows. But what we can say for sure is that Indiana has tried the other approach -- reduced government spending, lower taxes, fiscal restraint, cuts in education, repressed wages -- and the result is a steadily declining standard of living for most Hoosiers.

At first, this doesn't make sense. Businesses, we are told, want low taxes, low costs, fewer regulations, less social responsibility. A state offering these pluses is bound to attract businesses, right?

Right -- but the wrong businesses. As Renn points out eloquently, the businesses who are most concerned about saving money on taxes and wages are low-cost, low-wage businesses that care only about costs, not quality. High-value businesses care about costs, too, of course, he says, but they also want and need "a highly-educated work force, global connectivity, an entrepreneurial mindset and ecosystem......It's hard to grow your life sciences industry without getting more life scientists." 

As he says, businesses are like people. If you're looking for a house, will you buy the cheapest house you can find? Probably not. The cheapest house will be a hovel -- cheap but unlivable. Rather, you'll go for the most expensive house you can afford, because it's more likely to have safe streets, good schools, nice neighbors and a bit of green.

Ditto for businesses, he says. Businesses looking for nothing except low costs have already found them -- in Mississippi, Mexico or China. Businesses worth having are willing to pay for smart workers, healthy cities, a good environment.

These are the businesses that Indiana, which its budget-balancing fervor, have deliberately shunned. As those income figures shows, its people have paid the price. As Mitch Daniels leaves office, his legacy is a lesson to the states next door.

Comments

[Chris Barnett]

Richard, by and large, the big point is clear and hard to argue with but I think the race to the bottom is almost over.
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For better or worse, Indiana is hitched to transportation manufacturing (cars, trucks, buses, and jets). For that reason, a good multi-year run of increasing US vehicle sales would probably stop or even reverse Indiana's income declines.
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I suspect the people at Honda and Toyota and Subaru might take issue with the notion that they do not emphasize quality in manufacturing.

[Aaron M. Renn]

Chris, I think you are wrong. Many actions of Indiana's leaders suggest that they are gearing up for a protracted race to the bottom. Indiana's manufacturing dependent economy is definitely pro-cyclical, so an overall uptick in the economy would benefit it, particularly with an aging fleet of cars on the road. But we've seen these types of bounces many times in the past and they don't last.

I agree that the transplants pay decent wages, have good working conditions, and emphasize quality. But one plant per decade or so, plus suppliers, does not an economy make.

[Mike]

It would be great if the Indiana per capita income figures would have improved. However, it's highly unlikely, given the years that you selected, that any governor could have improved them. 2005 was right before the recession and 2010 was during the early stages of the recovery.

To prove the point, not one state shows an increase in Per Capita Personal Income between 2005 and 2010. And the average decrease was 17.3%, which is far greater than Indiana's decrease of 11.7%. Granted, Indiana was starting from a lower figure than other states. This is been the norm in Indiana for decades due for various reasons, such as the ag economy that you mention and a lower cost of living.

Here's how IN stakes up:

Per Capita Personal Income by State

State Change 2010 - 2005 % Change
Indiana $(3,667) -11.7%

Illinois $(7,039) -19.5%
Ohio $(3,943) -12.1%
Michigan $(2,481) -7.5%
Kentucky $(4,835) -17.0%
Average -14.0%

U. S Avg -$5,998 -17.3%

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