Economy and Government

EYE ON THE PIE: Yes, Virginia, there is an 'Indiana economy'

August 21, 2006

"Is there really such a thing as the 'Indiana economy'?" The question came from Ed Doric, a pillar of our community. We were at one of the many fests that provide camaraderie and calories during our humid Hoosier summers. The crowd moved us apart so I could not answer his inquiry. Let the following be accepted as my response.

Yes, Ed, there is an Indiana economy. As certainly as there is a U.S. economy, as surely as you or I exist as independent entities, there is an Indiana economy. We are intertwined with others, but we are sufficiently different and separate that our existence need not be questioned.

True, our border areas have strong links with economic activity in other states. From the Cincinnati suburbs in Dearborn County to the homes of Chicago workers in Lake and Porter counties, from the boundaries of South Bend and Fort Wayne to the scattered communities facing Louisville, we are integrated into other economic regions.

But we are, nonetheless, an entity, separate and distinctive, albeit not independent. Why? Because there exists a legal boundary and decision-making authorities defined by that conceptual line that influence behavior and command conformity.

The state of Indiana and its governmental subdivisions have the powers necessary to tax and regulate economic activity in ways that differentiate us from Illinois, Michigan, Ohio and Kentucky. Thus, businesses and individuals in Indiana can be expected to behave somewhat differently from those in other states. This gives us a distinctive Indiana economy.

For example, if Indiana's Worker's Compensation taxes and regulations are less demanding than in other states, we will tend to attract and retain firms for which such matters are important. If we are more generous in our development incentives, we will attract firms that can locate just about anywhere. If we have better schools and a better-educated work force, we'll see our state outpace our neighbors in growth.

This line of argument makes it seem that Indiana's economy is exclusively determined by the actions of government. That is not the case. At least two other factors are of consequence.

First, the political lines drawn nearly 200 years ago gave us certain assets, but denied us other advantages. Imagine an Indiana that had the Wabash River as its western/northern boundary. Fort Wayne, South Bend and northwest Indiana would be part of another state. Alternatively, if our western border ran straight north from where the Wabash River joins the Ohio River, west of Mount Vernon, Chicago would be in Indiana.

Second, there may be significant cultural factors that have developed over the years that encourage firms and individuals in Indiana to behave differently from those in other states. Our reluctance to accept change, our history of bigotry and xenophobia, our refusal to modernize and improve government all contribute to making it difficult for us to advance.

A resistance to change retards our economy. When we do not welcome newcomers to our communities, we reduce our chances for growth. A multitude of small governments (townships, school corporations, counties) raises the costs of doing business and living in Indiana.

Ultimately, the cumulative effect of these factors leads to an economy different from that of other places. Then we find that we do have something we can call the "Indiana economy."



Marcus taught economics more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to mortonjmarcus@yahoo.com.
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