How is Indiana’s economy? And what policies does the state need to implement to move the needle?
That was the topic of discussion at the Indiana Fiscal Policy Institute’s annual luncheon on Wednesday, which brought together state lawmakers, industry leaders and others invested in the Hoosier economy.
A keynote panel, moderated by Courtney Arango, director of government affairs for AES Indiana, gleaned insight from Philip Powell, who serves as executive director of the Indiana Business Research Center – housed at Indiana University’s Kelley School of Business — as well as Indianapolis-based urban policy and culture researcher Aaron Renn.
What the panelists described was a state that’s made great strides — but still has some “catching up” to do. Increasing Hoosiers’ educational attainment, skilling up Indiana’s workforce and investing more in local governments were among the recommendations offered by Powell and Renn.
Their conversation, in full, has been lightly edited for length and clarity.
Arango: So, we’re looking towards a new administration. What are your opinions on the current state of Indiana’s economy? What are we doing well? Strengths? Weaknesses?
Powell: Every year at the Kelley School of Business, we sort of take a look at the state-level data, and I have good news to share. We think about prosperity in the state. This is not a sexy term, but higher productivity is the only way that we’re going to drive more prosperity and higher wages for Hoosiers. And for a long time, Indiana’s productivity growth has lagged the nation. But with Gov. Eric Holcomb’s administration, and our great General Assembly, in 2017, we focused like a laser on the workforce. With the new data that’s out between 2017 and 2022, Indiana’s productivity has grown faster than the country, and that is a turning of the trajectory. Now, we still have a long way to go, but we have some new momentum that we have not had in a while.
Renn: I think there’s sort of two dimensions, what I call the horizontal and the vertical. The horizontal was quantitative growth. Are we adding, essentially, people? Which is important in the economy, because that’s our labor force and jobs. And then the quantitative is measures of quality. How well do jobs pay? Are we getting richer? Are we getting more educated? Quantitatively, we’ve done pretty well in terms of growth. Our population grew 5.8% between 2010 and 2023. That’s 26th in the country. But if you’re down in the Sunbelt, nobody has good growth. Only Minnesota beat us in the Midwest in terms of population growth. … We also did well on job growth from 2010 to 2023 — we grew jobs by 15.7%. That was 19th in the country, the best in the Midwest. That’s below the national average, but again, in a slow-growth part of the country, it’s pretty good. However, in line with some forecasts that we’ve seen from the Business Research Center, that growth is going to be coming to an end, and that’s going to have profound implications on the qualitative front. Indiana’s per capita incomes are far below the nation … the key is that we’re actually eroding over time. One of the reasons that our incomes are so low is that our educational attainment is low. … We have fallen further behind the country in terms of college degree attainment. … And then measures like health, there’s not just one statistic there, but in basically every survey, we’re in the bottom 10 states. We’re getting further behind the country in terms of life expectancy, for example.
Arango: Can you share a little bit about Indiana’s population future and potential implications?
Renn: Study data shows that our population growth is going to be slowing dramatically between now and 2050. But population is really a little misleading. When it comes to the economy, it’s really about your labor force. With an aging economy, with an aging population, we have more and more of our population that are not going to be in the labor force, because they’re going to be retired. One study forecasted that between 2015 and 2045, Indiana’s total labor force was only going to grow by 1.6%. So, basically, we’re not going to grow in terms of our labor force. And in fact, that same study also predicted that 70 of our 92 counties would have a declining labor force, starting by 2025, which is just around the corner. This is going to have profound implications for everything that we do as a state, fiscally and in terms of economic policy. If this data is correct, the era of job growth in Indiana is essentially over, regardless of what we do, because if you don’t have workers to build jobs, you cannot grow jobs. This idea that we can just cut taxes on certain industries to stimulate growth — that’s not going to work.
Powell: I want to just underscore the long-term trajectory. We have a tall mountain to climb, and we all know that. So, where do we go next? I’m a firm believer that any organization, or within any geographic region, we control our own destiny. In the history of the United States, we have seen regions that were depressed, flat, are going backwards and sliding backwards, and because of great leadership, because of great strategy, because of great vision and great marketing — which doesn’t include tax dollars — they’re turning around metropolitan areas. … When you break down the productivity growth data from 2017 to 2022 and break that down by metropolitan areas, who are the leaders? Muncie, Kokomo, Terre Haute and South Bend. These are metropolitan areas that have always been at the bottom of the list. But these are parts of the state that are growing faster than other parts. … The way you climb a tall mountain is that you have great leadership. It’s just a matter of coming together and having a focused strategy and having great conversations.
Arango: We’re going to talk about taxes for just a moment. Recently, the Indiana Chamber released its study that indicated that Indiana is a good state to do business. The data show that Indiana overtaxes two important sectors to our economy: manufacturing and life sciences. So, from your perspective, how important are these findings? What are your recommendations as Indiana looks to grow and evolve these industries?
Renn: I think if we look at the labor force situation, the idea that we’re going to grow jobs somehow through cutting taxes is just not going to happen, because we’re not going to have the workers. We’re already the most manufacturing-intensive state in the country, and by a significant margin. So, whatever the tax structure of manufacturing is certainly hasn’t inhibited large amounts of people from setting up here. I think if we look at these declines in income, if we look at educational attainment … the long-term vision for the state ought to be about increasing the skill levels of our workforce through higher levels of education. That would enable us to reshape our economic base over time, to be one that is much higher skilled and pays higher wages. It’s about transforming the economy over time through investments in upskilling and better education of our people.
Powell: When you look at the data, evidence and the history of our most successful metropolitan areas in the state, in terms of economic growth, tax reduction is an enabler, but it’s not a driver. The driver is talent. The most dynamic economy in the Midwest is Minneapolis. They have very high tax rates. What drives Minneapolis forward? They have a thriving entrepreneurial sector and put back into talent. We have some innovations that are cutting-edge, in terms of policy. We have the Career Scholarship Accounts, which allocate money to students so they can get job training. We’re one of the few states in the country that have something like that. That money also enables apprenticeships. There’s been a lot of work at the state and the regional levels here focused on adapting and what helps us leapfrog in terms of the way that we prepare our workers. We would love to have more college graduates, right? But the point is that between having a high school diploma and having a college degree, there’s a sweet spot for more of the trades. … It’s all about structure. It’s all about how we allow students to find that middle path to the trades. And that’s where we really see the most acute labor skill shortage here in the state. That’s holding us back.
Arango: We all know that business capital expenditures are a metric that’s used by many to measure economic development success. Is that the right metric? Or what other measures of success should we be looking at?
Powell: When we think about productivity, we want to think about skills and education. But just as important are modern workplaces where you have great technology. A worker can be much more productive if they have the most advanced technology that’s out there. The work we’re seeing from the Indiana Economic Development Corporation to bring in these new generation companies working in new generation sectors is spot on. The capital expenditures that they’re getting is going to increase labor productivity. All this together is why we’re seeing Indiana growing faster in labor productivity than the nation.
Renn: In an inflationary environment, capital expenditures data can be misleading. It used to be that the biggest thing I ever heard of being built in Indiana was the airport terminal with $1.1 billion. Now, every time I turn around, there’s another multibillion dollar project going. Data centers are extraordinarily capital intensive. How many jobs do they create? How much taxes do they pay? I would be much less concerned about capital investment metrics than I would be of measures of quality of life and wellbeing — the standard of living of our people, which is primarily our per capita incomes. To me, raising our incomes is the biggest deal, because it underlies everything else that we struggle with, like, for example, the ability to afford a house.
Arango: I’ll wrap up with a future question. What do you think are the most important policies that Indiana needs to look at to be a great place to live and work in the 21st century? What are we underinvesting in? Where should we relocate?
Powell: I want to give an uncharacteristic answer: let’s double down on what we’re doing. We’re just seeing the early stages of success. But the type of innovation and policy design that we’re seeing from the General Assembly is starting to move the ship. I think this focus on redefining how a 16-year-old can envision their pathway into the labor force, that’s gold. Let’s put them at the center. Let’s put their families at the center. Let’s make sure they have the right information to make good decisions. Because if we empower the student and the worker with these policies, we’re going to continue to see more of the progress that we’re seeing from current innovative policies that are less than two years old.
Renn: I would say that we have to fiscally empower local governments in order to provide good, quality public goods and services to their people. If we’re trying to attract talent in Indianapolis, and they come and take a look at the quality of our streets, they can see the problem. We have to solve problems like infrastructure in Marion County. We’ve seen Hamilton County create an environment that is competitive at the national level. And the actual economic performance data shows that, because Hamilton County communities have been able to invest, and it seems like every time we turn around, the state just wants to make it harder and harder and harder for anyone to spend a dime at the local level. I think we need to empower local governments fiscally, to provide good, basic quality public goods and services.