Friday, September 14th, 2012
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.