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Friday, September 14th, 2012

Mike Pence vs. Mitch Daniels

Barring some unforeseen major change of events, US Rep. Mike Pence, a noted advocate of fiscal restraint in Washington, is going to be Indiana’s next governor. While focusing on fiscal matters in Washington can make a lot of sense, I wondered what Pence’s plan would be for Indiana as it’s much less fertile ground fiscally. Pence will be taking over from Mitch Daniels, another fiscal conservative who spent the past eight years tightening the screws, taking Indiana’s state employee headcount down to the lowest levels since the 1970s. Thus as Pence takes over, it’s virtually certain he won’t find large amounts of cutting left to do, at least ways not enough to make his mark as governor. He’ll have to stake out other ways to make a difference.

He took his stab at it this week when he unveiled his Roadmap for Indiana. Though both are fiscally conservative Republicans, this roadmap reveals a sharp contrast between Pence and Daniels and indeed almost represents a repudiation of Daniels core agenda.

Mitch Daniels made raising Hoosier incomes the central organizing principle of his administration. As he told the Weekly Standard magazine, “We will do everything we can to raise the net disposable income of individual Hoosiers.”

This goal is clearly an imperative for the state, as the chart below will show. Hoosiers once had more disposable income in their pockets than Americans as a whole did. Yet that has steadily declined and Hoosiers are now making much less. Indiana has been growing progressively impoverished for more than a generation.

But if you look at Mike Pence’s roadmap, raising Hoosier incomes is nowhere in it. Instead, Pence’s goal is to increase private sector employment. In effect, if this roadmap is to be taken at face value, Pence has abandoned the idea of reversing Indiana’s trend of progressive impoverishment in favor of a simple employment metric.

In a lot of ways, this makes sense. What’s the biggest problem in the country right now? Without a doubt, jobs. When millions of people can’t find work at all, then creating new jobs, even if low paying ones, is better than nothing.

Also, Daniels frankly wasn’t able to deliver on his aspirations. During the Daniels administration, Indiana’s per capita disposable income as a percentage of the US average declined from 90.8% to 86.0%. Indiana’s percentage growth in per capita disposable income was 48th out of all US states and underperformed Illinois, Ohio, Kentucky, and Wisconsin, only beating Michigan in the region.

Perhaps Mike Pence figured that if Mitch Daniels couldn’t do it, he probably can’t either.

When you look at Daniels many actions in government, it’s clear that a lot of them would be favorable to business generally. He managed through the fiscal hurricane successfully and even managed to clip a credit rating upgrade for the state to AAA. He got the state onto daylight saving time. He implemented a massive highway building program. He instituted a constitutional property tax cap with de factos spending caps for local government. He implemented right to work legislation. Without a doubt he took a very pro-business approach, focusing on speed and breaking down barriers for major investments ranging from BP’s massive refinery upgrade to the Medco mail order pharmacy facility.

But apart from some limited transactional items like the Honda plant, it’s not intuitively obvious how these would raise incomes. Indeed, by focusing on cost items, the strategy is likely to attract those businesses that are most cost sensitive. And if they are very sensitive to items like their property tax rate, they are probably also sensitive to other cost items like labor. Thus these are likely to be lower value businesses with low paying jobs. Indeed, to the extent that Daniels job creation efforts were successful, the income metric probably suffered.

High value businesses care about cost and regulatory items, but items like having a highly educated workforce, global connectivity, an entrepreneurial mindset and ecosystem, etc. matter a lot too. This is where Indiana has been weak and there was little in the Daniels program that enhanced Indiana as a destination of choice for the high skill labor force and the like. It’s hard to grow your life sciences industry without getting more life scientists. It’s difficult to point to state programs that would attract this labor force. This is not purely a cost equation. While everyone knows price matters when shopping for a house, I suspect few people live in the cheapest house or apartment they could find. Rather, they are more likely to live in the nicest house they could afford, in the best neighborhood, with the best schools, the nicest amenities, etc. Cost is a factor, but it’s not the only factor. Cities and states, like houses, need curb appeal.

As for items that would improve the educational levels of home grown folks, that’s certainly laudable. But as education only makes people more mobile, increasing the educational attainment of natives only makes it more likely Indiana’s children will ultimately leave the state for better opportunities to deploy that education in a higher paying job elsewhere. Indiana University once put up a billboard that said, “More Brains, Less Drain.” But in fact the opposite is true. It’s “More Brains, More Drain” and the less educated you are, the more likely you are to stick around where you grew up.

On the other hand, given the continued income decline since 1950, it’s difficult to fault Daniels too much. His programs like Major Moves will continue to pay dividends long after he leaves. It may actually be too early to judge. And the types of policies that might have been more oriented toward high wage job creation might simply be unacceptable to most Hoosiers, people Daniels knows well.

And if you look at the country, you see an increasing bifurcation into high value “vertical” economies without much job growth like Silicon Valley and New York, and “horizontal” economies that are adding lots of jobs but with lower relative values and wages. Indiana and most of the Rust Belt is in a zone that has been producing neither good wages nor many jobs. Yet which of the other two groups is it likely to be easier to join? Clearly, joining the vertical club would be more difficult. That’s a degree of difficulty hard problem. Daniels was pretty bold to take it on. It was an aspirational choice.

Perhaps looking at the charts and what it would take to reverse the trend, Pence decided it wasn’t worth fighting such a difficult battle.

Pence’s abandonment of higher wage opportunities is also clear not just in the choice of metric, but in the target industry profiles. He is focusing on manufacturing, logistics, agriculture, and life sciences. Other than life sciences, these are not industries that are generating lots of high value jobs. The high tech sector, represented today through the Techpoint consortium as one of the state’s target growth sectors, is no longer present. I think that shows Pence is realistic about what his new direction means. He’s not going to promise something the approach won’t deliver. He kept life sciences, but unlike high tech, it’s an important legacy industry for the state.

Traditional union manufacturing jobs provided a standard of living that included home ownership, family vacations, a new family car, and the ability to put your kids through school. Though it may not have made people rich, it gave them the ability to live out the American dream. And the taxes from the workers and the plants enabled quality public services to be delivered. Today’s low wage manufacturing and distribution only affords a more marginal existence, and more marginal communities.

That more marginal existence would appear to be Indiana’s future, barring a change in economic macrotrends. As good middle class jobs exit and low wage ones take their place, low value, low wage industries will become entrenched as a constituency in their own right. This will reinforce the cycle.

This isn’t just a challenge and a choice facing Indiana. It’s the same in nearly every Rust Belt region. Will they seek to reinvent themselves as middle class or higher wage winners in the 21st century economy, with a very uncertain prospect of making it given the paucity of success stories? Or will they engage in a race to the bottom, seeking to underbid neighbors for low wage table scraps, while still remaining cost uncompetitive not just with overseas locations, but also with even lower cost and lower tax states in the South (including zero income tax states like Texas)? It’s an unappetizing choice to be sure. But for Indiana, Mitch Daniels chose one goal, Mike Pence is choosing the other.

35 Comments
Topics: Economic Development, Public Policy
Cities: Indianapolis

35 Responses to “Mike Pence vs. Mitch Daniels”

  1. TMLutas says:

    I think that the macro environment will be kinder to Pence than to Daniels as we’re just turning the corner of cheap Chinese labor. There will be fewer and fewer chinese workers coming on line to provide labor supply and thus less pressure on the down side of labor prices. That’s baked into the PRC’s demographics for the next few decades. Barring India suddenly changing its spots and accelerating its growth trend, Pence will get a lucky break.

  2. I agree with you. Also, Daniels took care of a lot political heavy lifting to get things like DST pushed through. Pence will benefit from that entire legacy, plus will likely never have to face an opposition controlled legislative chamber the way Daniels did.

  3. 08mms says:

    TMLutas: As a follow-up, I think we can expect many of the future manufacturing jobs to be relatively high-paying jobs. American manufacturing in this era is going to be robocentric, so most of the paid operators are going to be highly skilled (if not also highly educated)and command a wage premium. Unfortunately, there won’t be many of them in terms of numbers, but there can be also be ancillary job growth in the support systems that surround these manufacturing operations (transportation, material supply, ect.)

  4. James says:

    1. I don’t see much difference in the goals of the two. How is increasing private sector employment different from raising disposable income? If employment rises the will make the labor market tight and wage earners can demand higher salaries. Unless there is a huge increase in cost of living enacting the latter will cause the former.

    2. I also don’t see how Pence differs in governance from Daniels. That wasn’t clearly explained in the article. Can you elaborate?

  5. aim says:

    “If employment rises the will make the labor market tight and wage earners can demand higher salaries. Unless there is a huge increase in cost of living enacting the latter will cause the former.”

    There doesn’t seem to be much evidence of this in Indiana over the past 5 decades. None of the boom cycles in employment seem to have done much to boost worker income.

  6. James says:

    aim,

    I haven’t seen any evidence for tight labor markets in Indiana over the last 30 years. Some of the largest cities in Indiana have experienced long term decline:

    Hammond, Gary, South Bend, and Evansville
    http://en.wikipedia.org/wiki/Hammond,_Indiana
    http://en.wikipedia.org/wiki/Gary,_Indiana
    http://en.wikipedia.org/wiki/Evansville,_Indiana#Demographics
    http://en.wikipedia.org/wiki/South_Bend,_Indiana#Demographics

    The bright spots are Indianapolis and Fort Wayne, which experienced growth. Though growth is all relative, Indianapolis has decline in terms of real GDP vs the top 30 cities in America:
    http://chicagourbanist.blogspot.com/2012/07/chicago-treading-water-or-outperforming.html

    I haven’t seen much evidence for tight labor markets in Indiana over the last 30 years. Can you provide any?

  7. STP says:

    Low wages job growth is actually the future. Most of the jobs being created right now are in the private sector and the they pay poorly. Growth doesn’t have to equal prosperity. Jobs can grow while remaining low paying (as they will.) Productivity can increase–as it has been for sometime–and wages can still stagnate, as they are.

  8. Matthew Hall says:

    zgrowth will undermined by declining wages through declining demand at some point. Ultimately it is impossible to have economic growth without wages growth in real terms.

  9. Eric Fazzini says:

    As a former government employee in Indiana, do Mitch and other elected officials ever stop and think about how their suppression of public employees’ pay relates to the state’s disposable income and just general economics?

  10. Eric Fazzini says:

    STP, low wage job growth is definitely the future for a place like Plainfield, IN, which even with an International Airport with a brand new terminal is primarily becoming a distribution hub that pays $10-$15/hour. There’s your disposable income gap. For all the troubles states Mitch has tried to distance Indiana from, like Michigan and Ohio, their economies are still larger.

  11. Karl says:

    I suspect that your per capita disposable income data understates the real income of Hoosiers. Real income is the amount of goods and services one can purchase with one’s nominal earnings.

    First, your data might lack corrections for regional variations in price level. Americans pay considerably different prices for the same goods and services depending on the state in which those goods are purchased. Furthermore, real income i.e. what one can purchase with one’s earnings, equals nominal income divided by price level. Since Indiana has a lower price level than the national average, an omission of price level understates the real income of Hoosiers.

    Second, I am not sure if your disposable income data subtracted state taxes. Indiana has a lower per capita state tax burden than other states. Therefore, if the state tax burden is not subtracted from total income, the disposable income in states with higher tax burdens inaccurately appears more competitive. Conversely, states with lower taxes like Indiana would appear less competitive in terms of disposable income than these low-tax states actually are.

    If the data contains only nominal earnings and excludes state taxes from the tax burden subtracted from income, then your data significantly understates the real income of Hoosiers. Since real income measures the quantity of goods and services one can consume with one’s income, understating real income significantly understates the actual welfare of Hoosiers.

  12. John Morris says:

    What Karl says rings true. My guess is the NYC area shows pretty great income growth-that is highly distorted by the top earners. Lots of average folks leave the area for cheaper locations to improve their standard of living.

  13. Karl, that’s Daniels new line: Indiana is cheap to live so incomes don’t matter as much. However, Indiana was very cheap and had low taxes when Mitch was elected – and still suffered income declines

    Indiana’s been cheap and had low taxes all 40+ years I’ve been alive. Indiana didn’t suddenly get a lot cheaper in the last eight years such that lower incomes don’t matter. Looking at cost of living adjusted data would matter more if we were doing a point in time analysis, but we are not. Indiana has always been cheap, but it continues to get poorer. Also, don’t overestimate how cheap Indiana is. There are lots of cheap places to live in America.

    As far as the income metric goes, I used disposable income specifically because it accounts for items like taxes. I didn’t invent the numbers. They come directly from the federal government’s Bureau of Economic Analysis.

  14. Matthew Hall says:

    Yes, Indiana will never be able to undercut Mississippi and Alabama. It has to find a way to move up market.

  15. costanza says:

    @Matthew, Indiana has very little chance of moving up market. The only reason anyone moves there is because it’s cheap. It’s not going to attract new innovators.

  16. John Morris says:

    @costanza

    I don’t live in Indiana, but that statement is just over the top. Just the kind of in an in depth view one expects from The Daily KOS. Care to add any supporting evidence for what honestly isn’t much more than a slur?

    Indiana is not far from, Chicago, is home to a number of leading corprations like Eli Lilly and important colleges like IU. Purdue and Notre Dame. It also has a reasonably decent economy in relation to it’s midwest peers and one major city showing at least modest growth.

    While, I think the state is making some mistakes in terms of not embracing urbanism – there is really little to support your slur.

  17. John Morris says:

    @Aaron

    If Indiana becomes an afforable growth magnet, wouldn’t it seriously distort these statistics?

    IMHO, NYC likely shows awesome growth in average per capita income, partly because people of more moderate incomes are leaving the city.

    A lot of these large aggregate statistics can be very misleading. We all know, for example that many farm belt states have low rates of unemployment–because so many leave for greater opportunity.

  18. costanza says:

    @John, I have lived in Indiana, trust me.

  19. John Morris says:

    Sorry, I don’t. The statement is far to broad and unsupported to take seriously.

  20. John, why would Indiana become an affordable growth magnet? Texas cities have superior cost performance. They are as cheap as Indiana, but with a 0% income tax rate and strong job growth. And Houston at least is doing well on income too. Tennessee likewise is probably a better play.

  21. costanza says:

    That’s fine John, once you visit Indiana, we can discuss further.

  22. John Morris says:

    I have visited Indiana–Bloomington to be specific. Yes, it was a long time ago.

    Add supporting evidence or be considered a troll.

    @Aaron

    Sorry for going a little off, but this kind of comment is not really a comment. It’s a slur.

  23. John Morris says:

    @Aaron

    One of the main reason, Indiana could become a growth magnet is that in a really big country, you have demand for one or two of them. Obviously it’s very well located to be one.

    My point here is that affordable growth magnets can show poor per capita income growth and still be doing OK.

  24. costanza says:

    If the truth is a slur, so be it.

  25. John Morris says:

    @Aaron

    As many people on here have stated-no matter what the relative costs, they are not moving to Houston. The heat and humidity alone are a pretty big barrier.

    Personally, I never considered it for a lot of reasons like that. Decisions like this are complex, but a lot of people, would prefer to stay near family and previous networks. Obviously, Indiana has that potential in relation to Chicago and other states.

    I would tend to agree, it will have to up it’s game. I’m not sure, that automatically means having higher taxes or bigger government.

  26. Chris Barnett says:

    John, I think your logic has been applied many times over by “logistics” (i.e. trucking, warehousing, and distribution) companies. A 650-miles (one-day drive) circle around Indy includes a large portion of North America’s population.

    The same factor could apply to “close to family” decisions in the Midwest. The “easy long weekend” driving circle extends to Pittsburgh, all of Ohio, most of lower Michigan, much of Kentucky and Tennesee, all of Illinois, St. Louis, and southern Wisconsin. The Loop in Chicago is a daytrip, as is the Lake Michigan shore, Cincinnati, Columbus, Louisville, or Dayton.

  27. John Morris says:

    Obviously, Aaron doesn’t think Indiana can’t apply the advantage to move up the food chain to added value added stuff.

    I suppose, he can say- Indiana has pitched this year, after year expecting to grab corporate headquarters, reseach firms, tech manufacturing; start ups, and it just hasn’t worked.

    My guess is sort of has, but Indiana needs to up it’s game and offer a more diverse product–more urbanism–and a transport network that goes beyond just cars.

  28. Karl says:

    @Aaron

    There are two methods of measuring income: nominal income and real income. Mitch’s point should be that real income matters. In contrast to nominal income which measures the quantity of currency one earns, real income measures the quantity of goods one can consume with one’s nominal earnings. Therefore, real income provides a superior measurement of welfare in one time period or across several time periods. For example, imagine your income doubles and the cost of every good you purchase increases by a factor of ten. Although your nominal income increased, your income will purchase less and you will be worse off and forced onto a lower indifference curve. In other words, your real income will have declined. On the other hand, if your nominal income falls 50% but prices fall 90% you will be able to consume more and your real income will increase. In order to support your conclusion that Hoosiers are becoming poorer relative to the rest of the US, you should use real income data.

    I do not know every item the BEA subtracts from personal income when calculating disposable income. If the BEA does not subtract state and local taxes, this flawed methodology would make disposable incomes in high tax states appear relatively higher than disposable incomes in those states actually are. However, I do know that the BEA does not subtract sales taxes. Some states may choose to use sales taxes as a larger portion of their revenue than income taxes. This regressive tax burden is not be accounted for in the BEA numbers you cite.

  29. Karl, nominal vs. real generally refers to inflation adjustments.

    I’ll be the first to say that income adjusted for cost of living is the best metric. However, we aren’t looking at point in time. We’re looking at a trend. Indiana’s incomes relative to the nation has been going down. However, did its cost of living go down at the same rate? I don’t know for sure, but I don’t see any reason to believe that it did. For Mitch’s point to be right, cost of living would need to have fallen by the same rate as incomes. I don’t see it. Certainly not a decline of five percentage points vs. the US. Indiana was just as dirt cheap when Mitch took office as it is today.

    At the end of the day, if incomes had gone up, Mitch would be touting it. He picked the metric. I didn’t. And if he wants to use adjusted income, he should present a chart showing adjusted income using gold standard third party data to do it.

  30. Karl says:

    Aaron,

    The BLS measures inflation by following the total price of a basket of goods. The basket of goods – the tangible items that one consumes are a real variable, the currency cost of the basket is a nominal variable. The process of adjusting to inflation refers to converting nominal values into equivalent base year dollars. This conversion entails multiplying the number of baskets that one can purchase with a nominal amount at a certain time by the dollar price of the basket in the base year.

    Since the national inflation average can exceed inflation in Indiana, Indiana’s real income as a ratio of the national real income can increase even when Indiana’s nominal income declines.

    As demonstrated in my description of the inflation adjustment process, imagine nominal income as one’s salary and price level as the cost of a basket of goods. Real income measures the number of baskets one can consume with one’s income. I hope my make-shift table comes through OK with this word processor.

    Time: X X+1
    National Nominal Income: 200 210
    National Price Level: 100 210
    National Real Income: 2 1

    Indiana Nominal Income: 100 90
    Indiana Price Level: 100 120
    Indiana Real Income: 1 3/4

    IndRealIncome/NtlRealIncome: 1/2 3/4

    In this exaggerated scenario, national nominal income increased by 5% while Indiana’s declined by 10%. However, Indiana’s material wealth relative to national material wealth improves due to the different inflation rates.

    This example clearly demonstrates that the ratio of Indiana’s real income to the national average real income can increase even when nominal incomes fall in Indiana and there is positive inflation. This result occurs because faster national inflation diminishes the purchasing power of wages in these more expensive states.

  31. Karl, show me some actual data that Indiana didn’t under-perform, and I’m willing to look at it. You are just presenting hypotheticals.

    Keep in mind, Indiana under-performed every surrounding state except Michigan, states that have in many respects similar cost profile.

    I should note that my disposal income data correlated with many other examples of Mitch’s under-performance. Indiana ranked 46th from 2004-2001 in job creation. Indiana actually lost jobs during that period. Daniels went on radio in Chicago saying that Illinois was like “watching the Simpsons” – yet the Simpsons managed to out-perform Indiana on jobs during Mitch’s tenure.

    I’m actually a fan of Mitch Daniels – a big one. I think the policies he put in place will yield long term benefits. The fiscal health in particular can’t be over-estimated. But he clearly, contrary to his stated intention, did everything he could to make Indiana the Mississippi of the Midwest. Many of his policies were actively hostile to creating high value, high wage jobs. I believe that’s one reason metro Indy has clearly taken an economic and demographic stumble vs. peers in the last couple years.

  32. Karl says:

    I have demonstrated why the data you cited does not support your conclusion that Indiana has more impoverished relative to national standards. I am not raising this point to prove that the opposite of your conclusion. Instead, I am raising the issue so you can improve your argument; use the real disposable income data and make sure it subtracts the state tax burden.

  33. Karl, I didn’t see that you provided any data. You merely asserted that Indiana’s inflation rate was different from the country and that this means it didn’t lose ground and may have actually gained ground. I know the math works in theory, but unless there’s actual data to back this up, it’s just an unsupported objection. I seriously doubt the data back you up, because if it did Daniels himself would have been touting it – but he hasn’t.

  34. Karl says:

    None of the data you have sofar presented excludes this possibility. You agree with the conclusion demonstrated by my math – that Indiana can become relatively wealthier while its nominal income falls and there is positive inflation. This fact alone establishes that data you cited (lower relative nominal incomes) is not sufficient for your conclusion that Indiana has become relatively poorer. Since it is possible that Indiana’s nominal income can fall and yet Indiana can become relatively wealthier, your data does not support your conclusion.

    After listening to tons of political rhetoric that is completely devoid of nuance or evidence, I would not rely on politicians to engage in complicated economic debates.

  35. James says:

    Well Karl and Aaron, this research might interest you:

    http://www.hoosieraccess.com/2011/10/19/some-inconvenient-truths-about-indiana-tax-revenue/?mobile=1

    The evidence presented therein suggests that over the last decade Indiana has seen declining tax revenues but increasing tax rates. So what little evidence there is seems to refute the idea that Indiana became a relatively cheaper place to live, offsetting the declines in income.

    So far all the evidence suggests that Indiana became relatively poorer. Over the last 10 years and over the last 30 years.

    I have long suggested that the growth of places in the upper Midwest was, several generations ago, driven by geography and likewise is currently declining due to geography. This actually dovetails nicely with the post here:

    http://www.urbanophile.com/2012/09/23/review-the-new-geography-of-jobs/

    One has to question the serendipitous nature of growth in the information economy. Would Cleveland be a rising star if Bill Gates happened to be born there?

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