Michael Hicks: Economic optimism and worry on Thanksgiving

Thanksgiving weekend is a fine occasion to take stock of our world and to consider honestly how our economy fares globally, nationally and locally. The economy isn’t everything, of course. Freedom, family and health matter more. However, strong economic growth is the best remedy for many vexing challenges.

In almost every way the past three decades have been unprecedented periods of growth. In just 30 years, the world economy lifted more people from desperate poverty than in the accumulated 30 centuries before that. The number of humans participating in free elections doubled, and today 60% of the world economy resides in free nations with civil rights and elected governments. These countries are mostly close allies with extensive trade and security agreements.

The remaining 40% of the world’s economy is evenly split among tyrants and poor, unaligned nations. The balance of power between freedom and tyranny has never been this favorable. Moreover, the world’s second largest authoritarian regime, Russia, is in the midst of nearly unprecedented military collapse. This offers sobering lessons for China and the world’s other despots.

There is increasing evidence that the U.S. economy might be picking up steam for faster growth. These things are never certain and there are plenty of roadblocks, but the next few decades hold enormous promise. There’s never been a better time to be alive.

Still, one aspect of our economy worries me—growing regional inequality. In fact, many readers who find me too pollyannish probably feel that way because they live in places that are stagnant, or in decline. That is all too common a feature of several modern economies, most especially the United States.

From the end of the Civil War until about 1980, American states and cities were becoming more economically alike. This ‘convergence’ in economic jargon meant that poor places were catching up to rich places in terms of growth. Sometime after the 1970s, that convergence ended. For the past couple decades, poor places have become poorer, and rich places richer.

This ‘divergence’ has helped fuel voter anger and drives different narratives about how the economy is performing. So, a person living in rural Ohio or Indiana has a much different economic experience than someone living in, say, suburban Boston or Austin. In most of the United States, economic growth is healthy, but in many places it is moribund.

From the end of the Great Recession to now, average inflation-adjusted wages in the U.S. grew by 7.0% to $32.58 an hour. However, in Indiana, wages grew by 4.1% to $29.34 an hour. Conversely, in Massachusetts, wages grew by 13.9% to $40.19 per hour. It is easy to see how folks living in Indiana might be terribly frustrated by the economy, while those in Massachusetts are pleasingly optimistic.

These differences highlight some of the basic issues causing regional inequality. Massachusetts is a high-tax state, and Indiana is a low-tax state, so prevailing wisdom would be that Indiana would be growing fast. However, Indiana has low educational attainment, which is now in sharp decline. In contrast, Massachusetts is a highly educated state with nearly twice the share of college graduates as Indiana. The fundamental observation here is that taxpayers—businesses and families—look for value in public services, not price. Today, education is of prime value.

Perhaps the only good news about the ‘divergence’ in economic fortunes is that it has a strong policy component. Pure economic forces are difficult to alter, but those brought about by policies can change. Some of the policy variation between states comes from a fundamental misunderstanding about the factors that cause economic growth. Here’s where economics can help.

For much of the 19th and early 20th century, differences in economic growth came about from variation in available capital investment. This is economic jargon for business equipment, buildings, and public infrastructure like rail systems, roads, bridges and ports. Capital brought economic growth and wealth accumulation. But, in the middle of the 20th century, the focus of economic growth began to shift from machines to the human mind.

To be fair, economic growth was always caused by human ingenuity, but from about 1700 to 1950, the major innovations saved human and animal strength. In contrast, since the middle of the 20th century, most innovations have all been about leveraging brain power, or human capital, as we economists like to call it. In the developed world, human capital has become the primary, and possibly only, source of growth.

Today the engine of prosperity is education-driven innovation. Still, far too many elected leaders continue to think of economic growth the way it was 75 years ago. To them, prosperity comes from increased business investment; more machinery, equipment and warehouses. This misunderstanding would be harmless except that this antiquated view of economic growth crowds out spending on the things that really matter—primarily education.

Since 2006, Indiana cut its tax rate on manufacturing from the 38th to 4th lowest. At the same time, the state cut spending on higher education from 0.69% of our GDP to 0.49% of GDP. We made the 9th deepest cuts to education in the nation. No state with educational attainment as bad as ours was anywhere near our cuts or funding levels. So, what did Hoosiers get from these two highly different policy changes? We now have the smallest share of young adults heading to college in three decades, and 40,000 fewer factory jobs than in 2006.

It would be stunning if these data didn’t motivate fundamental reassessment of economic and education policies. Thankfully, we have precedence for thoughtful re-assessment of funding priorities in Indiana. In 2017, the legislature recognized that the road-funding taxes were not sufficient to build and maintain adequate roads. So, they shifted gasoline sales taxes to roads, and indexed the gas tax to inflation. It was pragmatic and wise. But still, Indiana’s educational outcomes are today far worse nationally than our roads have ever been.

Education funding in Indiana needs the same sort of focus. If we hope to enjoy the economic growth that is passing Hoosiers by, we must get another 10,000 kids to college each year. That won’t happen without significantly more tax dollars being spent to prepare and support those students. Failure to do so will simply fuel regional inequality and leave Indiana as one of those poor places that grows poorer. The choice is pretty simple, really.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected]