ECONOMIC ANALYSIS: Why state's job growth is better than neighbors'

December 24, 2007

For the past week or so, I have been flooded by phone calls from colleagues in Illinois and Michigan, chortling over a new marketing campaign launched by Hoosiers. The privately financed billboards and radio spots ask businesses and residents whether they are tired of high taxes and unresponsive government. If so, they are invited to "Come on IN" to Indiana. It's high-order fun this holiday season.

Indiana sits as a small island of growth in the Midwest, and it is useful to try to understand why. Last year, Illinois and Michigan saw significant job losses (more than one out of every 200 jobs), while Ohio lost about half that percentage. Indiana saw job gains of about 0.3 percent-significant gains when placed into the context of our neighbors.

The factors that traditionally explain regional differences in growth just don't fit the data. The big growth factors-educational attainment, infrastructure, basic public services and ready access to capital-are alike across the region.

Industrial structure could explain differences in state-level growth, but again the data just doesn't fit. The leading job losses have come in manufacturing, and Indiana is more dependent on the manufacturing sector than are any of our neighboring states.

Were the growth rates reversed, with Indiana losing jobs and the other states gaining, it would be easy to chalk it up to the decreasing demand for manufacturing workers. The problem isn't in the gross loss of jobs; it is simply that job creation in Indiana is outpacing that of our border states.

The only factor that can explain Indiana's continued growth is public policy. Indiana has embraced what I call a "market friendly" public policy environment.

Indiana enjoys, and now flaunts, its low taxes (though this won't be a selling point if some sort of property tax reform isn't passed soon). Every state ranking on business costs places Indiana well below the Midwest pack (a remarkable achievement given consistent wage growth over the past decade). There are certainly areas that still need work (like local government structure), but generally Indiana has an economic climate that fosters job creation.

Other states, namely Michigan, have long touted their "business-friendly" environment. In the 1990s, an economic development grant program provided $1.8 billion worth of incentives.

Michigan's current dilemma is worse. Out-migration is crippling the state's economic future (though it has kept the unemployment rate down to a dismal 7.7 percent). This summer, Michigan increased taxes $1.4 billion just as the state's economy leads the nation in job losses and unemployment.

To be fair, cutting government is difficult work. Michigan's bipartisan legacy of poor fiscal decisions and anti-market policies have made it worse than it should have been, and the state's current crop of elected officials have only served to extend the tough decisions to a future date when the choices will be even more painful.

Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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