for Michigan’s Future?
November 11, 2011
The Mackinac Center for Public Policy on Monday is hosting an event with Indiana Governor Mitch Daniels as the featured speaker. This is a continuation of a decades-long tradition of inviting Indiana governors — mainly Republican — to tell us the policies they have pursued to grow the Indiana economy, so we can learn from them what to do.
One problem: Indiana is today, and has been for decades, the poorest and least educated Great Lakes state. That’s right. Even after Michigan’s awful so-called lost decade, Indiana is poorer than we are.
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 on both overall state business climate (10th) and corporate tax index (21st). The latter is the lever the Snyder Administration has argued is the most important to growing the Michigan economy.
So for those who live on Planet Ideology — where all that matters is faithful adherence to a conservative policy agenda — Indiana is a model for Michigan. But for the vast majority of Michiganians who care about whether they have a job and a good income to raise a family, Indiana doesn’t look so good.
Indiana’s per capita income, proportion of households with incomes of $75,000 or more, poverty rate and proportion of adults with a four-year college degree are all the worst among Great Lakes states.
So if Indiana is not the Great Lakes state where residents are doing the best, which one is?
Minnesota is the highest rated state in the region on just about every economic measure that real people care about. It is the Great Lakes state with the “more and better jobs” that Governor Snyder has said is his goal for Michigan.
In our latest report on Michigan’s transition to a knowledge-based economy (available at michiganfuture.org) we collected detailed data on each state’s economic performance since 1989 to figure out which states are doing the best and why. Here is what we found for Minnesota and Indiana.
In terms of per capita income — the best measure of economic well being — Minnesota is the 15th most prosperous state in the nation at $41,875. Indiana is 40th at $34,022. Thirty-five percent of Minnesota’s households have incomes of $75,000 or more; Indiana has just 26 percent. Indiana’s poverty rate is 16 percent, compared to 11 percent in Minnesota.
For the first time our report broke down per capita income into its components, which provides a much clearer picture of how each state’s residents earn their income. Per capita income from private sector jobs (both wages and employer paid benefits) in Minnesota is $26,668 (6th highest in the nation), compared to $20,355 (33rd) in Indiana. Private sector employment earnings, of course, are what every state’s economic policy is designed to accomplish. This is the Top Ten every state wants to be in. Minnesota is there; Indiana is not close.
In terms of employment, once again you would rather be in Minnesota than Indiana. The latest unemployment rate in Minnesota is 6.9 percent, compared to 8.9 percent in Indiana. The far better metric is the employment rate, the proportion of those 16 and older working. In 2010, Minnesota’s employment rate was 67 percent, Indiana’s 57 percent.
What about growth? Many argue that growth is a more important metric than current level. Here again there is no contest. Real per capita income growth in Indiana from 1989-2009 was $6,028, compared to $10,373 in Minnesota. So on average, each Minnesota resident saw his or her income, corrected for inflation, grow $4,000+ more than each resident of Indiana over the past two decades. And nearly all that difference came in per capita income from private sector jobs — up $6,101 in Minnesota, compared to $2,339 in Indiana.
Maybe most worrisome for those living on Planet Ideology is that low tax/small government Indiana is far more dependent than Minnesota on transfer payments for its residents’ personal income. Transfer payments are those made by government to or on behalf of individuals. They include Social Security, Medicare, Medicaid, TANF cash benefits, food stamps, veterans’ benefits, tuition support like Pell grants and subsidies for college loans, the Earned Income Tax Credit, and more.
Transfer payments account for 20 percent of Indiana’s per capita income and 55 percent of its personal income growth since 1989. That compares to 16 percent of Minnesota’s per capita income and 29 percent of its two-decade growth. The exact opposite is the case for the desired private sector employment earnings, which represent 58 percent of Minnesota’s 20-year growth, compared to 41 percent in Indiana.
The evidence is clear: we should want Michigan to be more like Minnesota than Indiana.
So why is it that the governor of Minnesota is not a regular invitee to Michigan? A good guess would be that Minnesota is not a low tax/small government state. It is the worst-ranked Great Lakes state by the Tax Foundation — 43rd from the top on its overall state business climate index. And its ranking of 44th on the corporate tax index is only better in the Great Lakes than Michigan’s ranking of 48th.
The evidence is also clear that you cannot get Minnesota’s economy by pursuing Indiana’s policies. Indiana has been trying its low tax/small government formula for decades and is falling farther and farther behind Minnesota and other prosperous states. So if Indiana’s policies are not the path to prosperity, what are?
Michigan Future has been researching this issue for nearly a decade. We’ve found that the most prosperous states — and particularly those with the highest personal income from private sector jobs — are those that:
- Are over-concentrated, compared with the nation, in the proportion of wages coming from knowledge-based sectors;
- Have a high proportion of adults with a four-year degree;
- Have a big metropolitan area with even higher per capita income than the state; and
- Within that big metropolitan area, the largest city has a high proportion of its residents with a four-year degree or more.
Our basic conclusion is that what most distinguishes successful areas — such as Minnesota, which has all of those attributes — from Michigan is their concentrations of talent, where talent is defined as a combination of knowledge, creativity and entrepreneurship. Quite simply, in a flattening world where work can increasingly be done anyplace by anybody, the places with the greatest concentrations of talent win.
States and regions without concentrations of talent will have great difficulty retaining or attracting knowledge-based enterprises, and they are less likely to be the place where new knowledge-based enterprises are created. The knowledge-based economy is now the path to prosperity Michigan must pursue.
Pursuing that path means preparing, retaining and attracting talent is economic development priority #1. If we do everything else well that we call economic development and we don’t get younger and better educated, Michigan will continue to get poorer compared to the nation.
Michigan has lagged in its support of the assets necessary to develop the knowledge-based economy at the needed scale. Building that economy is going to take a long time and require fundamental change. But the data show it is the only reliable path to regaining high prosperity.
There are no quick fixes. The Michigan economy is going to continue to lag the nation for the foreseeable future. But there is a path back to high prosperity. The framework for action is:
- Build a culture aligned with (rather than resisting) the realities of a flattening world. We need to place far higher value on learning, an entrepreneurial spirit and being welcoming to all.
- Creating places where talent — particularly mobile young talent — wants to live. This means expanded public investments in quality of place with an emphasis on vibrant central city neighborhoods.
- Ensuring the long-term success of a vibrant and agile higher-education system. This requires a renewed commitment to public investments in higher education — particularly the major research universities.
- Transforming teaching and learning so that they are aligned with the realities of a flattening world.
- Developing new private and public sector leadership that has moved beyond both a desire to recreate the old economy as well as the old fights. Michigan needs leadership that is clearly focused, at both the state and regional level, on preparing, retaining and attracting talent.
The world has changed fundamentally. The choice we face is this: do we do what is required to build the assets needed to compete in a knowledge-based economy or do we accept being a low-prosperity state?