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Lou Glazer

Why “Low Cost” Doesn’t Equal “High Value”

January 29, 2016

Four years ago I wrote a Dome column entitled, Model State for Michigan’s Future? where I asked why Michigan, for decades, has wanted to have an economy like Indiana’s rather than Minnesota’s.  Minnesota having the Great Lakes’ most prosperous economy, Indiana the region’s poorest.  It was then the only state in the region with a per capita income lower than Michigan.

I suggested then that the reason many Michigan political and business leaders wanted to be like Indiana was ideological, not economic.  I wrote:

“What Indiana is best at among the Great Lakes States is adherence to the low tax/small government policies advocated by conservatives as the magic elixir to grow the economy.  In the 2011 state rankings by the well-respected conservative Tax Foundation, Indiana is the highest ranked Great Lakes state in both overall state business climate (10th) and corporate tax index (21st).  The latter being the lever the Snyder Administration has argued is the most important to growing the Michigan economy.”

At that time Minnesota was the worst ranked Great Lakes state by the Tax Foundation: 43rd on its overall state business climate index and 44th on the corporate tax index.  Let’s update where the two states are today and which would have been then—and is now—a better model for Michigan.  Which is better meeting Governor Snyder’s goal for Michigan of creating more and better jobs?

First, the Tax Foundation rankings.  In their just released 2016 State Business Tax Climate Index.  Indiana is a top ten state and ranked 8th.  Minnesota, a bottom ten state, ranked 47th.  On corporate taxes Indiana is ranked 20th, Minnesota 46th.  So when it comes to adherence to a low tax/small government policy framework, Indiana is still the Great Lakes leader and Minnesota the region’s laggard.

My column four years ago used 2010 data.  That year, using revised data, Indiana’s per capita income was $34,390, ranking 40th; for Minnesota it was $42,567, ranking 13th.  In 2014 (the latest available data), Indiana’s per capita income is $39,578, ranking 38th; Minnesota’s $48,998, ranking 13th.  The gap between the two states has grown from $8,177 to $9,420.

The year 2010—the first year after the Great Recession officially ended—was still a lousy economy.  A better comparison year is 2007, the last year before the Great Recession.  That year allows for an apples—to—apples comparison of the peak of the last economic cycle against the current peak of this economic cycle.

From 2007 to 2014 the per capita income gap between Minnesota and Indiana has grown from $7,692 to $9,420.  In all three years (2007, 2010, and 2014) Minnesota was the Great Lakes most—and Indiana the least—prosperous state.  And, the gap between the two keeps growing larger.

What about employment?  For December 2015 (the latest available data), the unemployment rate in Minnesota is a Great Lakes state’s best at 3.5 percent.  Indiana’s is 4.4 percent.   A better measure of employment is the proportion of those 16 and older who are working.  In 2014, 67.0 percent of working age Minnesotans had a job compared to 59.6 of Hoosiers, a 7.4 percentage point gap.  That is up from  a 6.6 percentage point gap in 2007.

If the same proportion of Hoosiers were working as Minnesotans, there would be 377,000 more Hoosiers working today.  This represents a 13 percent increase in employment.

Finally, what about wages, the better part of more and better jobs?  Median 2014 wages in Minnesota were $38,070, ranking a Great Lakes state’s best 11th.  For Indiana it was $32,500, ranking a Great Lakes state’s worst at 37th.  The median wage gap between Minnesota and Indiana from 2007 to 2014 has grown from $5,300 to $5,570.

So, the data are clear: When it comes to what Michiganders care about most economically––the ability to pay the bills and save for their retirement and their kids’ education––of the Great Lakes states, Minnesota is the state we should be learning lessons from.  Across the board, Minnesota has the best economic outcomes in the Great Lakes.  This, of course, raises the question, “How can this be true in a high tax state?”  We have been told repeatedly for at least the last twenty years that low tax states have the best economies.

When you look at data, what is most predictive of state per capita income is four year degree attainment.  A core characteristic of prosperous states and metropolitan areas is a high proportion of adults with a four year degree or more.  Why?  Because the economy is increasingly knowledge-based.  The broad, knowledge-based services sector now accounts for 42 percent of American jobs and 54 percent of wages.  It’s the core of American’s mass middle class.

Prosperous states––except for a few that are energy-driven––are overly concentrated in knowledge-based services.  Those states also have the highest proportion of adults with four year degrees.  The two go hand-in-hand because the asset that matters most, and is in the shortest supply, is talent.  Of the states ranking in the top ten in the proportion of adults holding a bachelor’s degree, seven are also in the top ten in per capita income.  The other three are 13th, 14th and 19th.

High-prosperity Minnesota is 10th in college attainment.  Low-prosperity Indiana is 42nd.  Michigan is 35th in per capita income and 34th in the proportion of adults with a four year degree or more.   CNBC recently ranked Minnesota as the best state to do business in.  Good economy?  Yes.  Good place to do business?  Conventional wisdom is no.

So how can CNBC rate them as the best state to do business?  CNBC agrees that they are a high-cost state which, normally, is all these business-friendly ratings measure. They rank Minnesota 35th in cost of doing business.  But CNBC believes that being a good place to do business is more than being a low-cost place to do business.  And, it is in the other categories that Minnesota shines.

CNBC writes: “Never since we began rating the states in 2007 has a high-tax, high-wage, union-friendly state made it to the top of our rankings.  But Minnesota does so well in so many other areas—like education and quality of life—that its cost disadvantages fade away.”

Minnesota ranks 13th in workforce, 9th in infrastructure, 3rd in quality of life and 2nd in education.  These are four of the ten categories that CNBC considered as vital to being a good place for business.

(Michigan’s overall ranking by CNBC is 22nd.  We rank 17th in the cost of doing business, 25th in workforce, 26th in infrastructure, 48th in quality of life and 25th in education.  Indiana’s overall ranking by CNBC is 13th.  Ranking 1st in cost of doing business, 42nd in workforce, 22nd in infrastructure, 46th in quality of life and 26th in education.)

Those CNBC categories are consistent with the conclusions Michigan Future, Inc.––the think tank I lead––has reached on what matters most to putting Michigan back on the path to prosperity.  Specifically, that public investments in education, infrastructure and quality of place trump low taxes in creating states and metropolitan areas with high and rising standards of living.  In an increasingly knowledge-driven economy, preparing, retaining and attracting talent is priority one in economic growth.

Minnesota has achieved the economic outcomes we all want: High employment, high wages and high per capita income.  They’ve achieved this, in part, through decades of public investments in the real drivers of economic growth: education, infrastructure and creating communities where people want to live and work.  (For details on Minnesota’s policies see Michigan Future’s report: State Policies Matter.)

Minnesota Governor Dayton stated in an interview with CNBC that in their rankings Minnesota is a “high value state”.  Exactly!  What matters is what you get for your higher taxes or higher labor costs; there is a benefit side to the equation as well.  It’s not just costs.  What the CNBC metrics say is that it’s worth it to business to pay more if the results are a higher quality workforce, higher productivity, a better transportation system and a better quality of life.

For the past two decades, Michigan––like Indiana––has been traveling the, “Lowest-cost states have the best economy” route.  It hasn’t worked.  Despite the welcome decline in unemployment, Michigan still ranks in the bottom ten in the proportion of adults working, and in the bottom third in per capita income.  It’s time for Michigan to look to Minnesota for its economic agenda to become a high-value state rather than a low-cost state.

Lou Glazer is President and co-founder of Michigan Future, Inc., a non-partisan, non-profit organization.  Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.  You can learn more about Michigan Future at www.michiganfuture.org.

January 28, 2016 · Filed under Lou Glazer

3 responses so far ↓

  • 1 George Moroz // Jan 29, 2016 at 9:45 am

    Right on, Lou

  • 2 Chuck Fellows // Jan 29, 2016 at 10:32 am

    There are fundamental governing differences between these two states.
    One bases decisions on price and the other on many things, including price.
    One governs with a narrow perspective versus a broad one.
    One governs myopically, the other embraces diversity.

    Attitude is more important than money.

  • 3 Anagnorisis // Jan 29, 2016 at 11:19 am

    Then let’s make higher education free and health care too. There’s enough money wasted every day to cover those gains. No, wait, what am I saying? I must have lead poisoning, your honor; I was dreaming about a better environment, a smarter government, a beneficent state devoid of corruption, opportunism and malingering. Aarrrg! as Charlie Brown intoned.


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