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For the past several years, the Indiana Economic Development Corporation has touted record capital spending.
It reported $22 billion in new investments in 2022 and an additional $29 billion in 2023. These are both record years for the Indiana Economic Development Corporation. Still, several state officials lament that taxpayers don’t seem to understand how “big” these numbers are or how important they are to Indiana. That’s a good question. Worth considering.
The state Economic Development Corporation was established as a privatized development group during Gov. Mitch Daniels’ administration and was overseen by a board of management and elected leaders. With fewer than 100 people, we have a fast-paced array of activities, from managing READI grants to helping companies navigate state regulatory agencies.
Recently, the agency has also taken on the role of a real estate developer. This decision (along with months of congressional hearings) will require a separate column. Otherwise, the Indiana Economic Development Corporation has remained his model development agency for nearly two decades.
The data they report is based on trade agreements for companies planning to expand into Indiana.
These are investments that promise to perform over many years. Recent reports show that about a third of these projects have lower-than-expected investments. Another third is completely unreported. Therefore, the ultimate level of these investments should be taken with a grain of salt. But that’s not why taxpayers should view these announcements with skepticism.
Indiana’s total capital stock reported to local governments exceeds $5 billion. Approximately 35% of that total avoids taxation through tax reductions, exemptions, and deductions.
Nearly all of the investment claimed by the Indiana Economic Development Corporation is subject to the reduction. Therefore, even under the best of circumstances, it will be many years before these companies pay significant amounts in property taxes. Additionally, any non-reduced property will always fall within a tax increment financing district. In such places, tax dollars would be diverted from their original purpose for 25 years.
Taxpayers who are skeptical of these announced investments make a very good point. Of course, this investment often results in new jobs, or at least the acquisition of new jobs. There, taxpayer skepticism is further justified.
Many of the new job announcements are in the manufacturing industry. This makes sense, since most companies are not “loose-footed” in the sense of being able to be based somewhere other than where their customers are. Therefore, new job announcements are almost always limited to manufacturing, logistics, and sometimes corporate headquarters. These are all facilities that “export” goods and services to consumers outside of their general neighborhood. So how did our success in attracting capital investment translate into jobs?
Manufacturing employment in Indiana peaked in 1973, and we’ve continued to track employment gains ever since.
We started the Great Recession with more than 545,000 factory jobs, but have fallen by more than 120,000 in two years.
From 2009 to 2018, we gradually restored those jobs. After that, Indiana began to fall into a recession.
The coronavirus has provided a big boost to manufacturing production and sales, but has not affected employment.
Factory employment in Indiana is on the rebound, peaking in late 2022, down several hundred jobs from 2007 and 2018 levels. We are returning to the long-term trend of fewer factory jobs.
Since the start of the coronavirus pandemic, our transportation and warehousing jobs have increased by nearly 30,000. So, while we may be grateful for these jobs, we may also have other questions, such as how great these jobs are. That’s also an unpleasant answer.
Inflation-adjusted average wages for transportation and warehousing workers in Indiana are now about 0.5 percent lower than they were in 1998. This is because employment growth in these sectors is concentrated in low-wage occupations, with turnover rates exceeding 40% annually. . This type of job creation dynamic cannot bring prosperity to Indiana.
One of the benefits of additional capital investment is an increase in gross domestic product. Indiana’s inflation-adjusted GDP for manufacturing increased by about 13% compared to pre-coronavirus levels, and for transportation and warehousing by about 8%.
Therefore, the overall size of the Hoosier economy is correlated with capital investment growth in these industries.
This is not the most surprising observation an economist can make. But today, the question arises: With so much capital and investment in manufacturing in Indiana, why are jobs declining?
Well, all that capital is designed to save labor. Therefore, the investment amount outlined by the Indiana Economic Development Corporation includes equipment and software used to reduce labor costs. This is a good thing that healthy economies have been doing for centuries. Labor-saving technology enriches our lives in various ways. Widespread use of these technologies enriches us all, but the effects are uneven.
Better-educated workers benefit greatly from labor-saving technology. The reason is that labor-saving technologies complement the skills of well-educated workers. Therefore, firms with higher capital-to-labor ratios typically employ more workers with higher education levels. However, less educated workers are much less likely to benefit from labor-saving technologies. This is because these technologies do not complement, but replace, less-educated workers.
Growth in gross domestic product (GDP) due to capital investment occurs without adding new workers. Indiana’s factories today are more productive than ever, producing more goods (adjusted for inflation) than at any time in history. We’re just doing it with far fewer workers.
There’s nothing wrong with companies purchasing labor-saving technology. Indeed, we should celebrate these investments. However, the average taxpayer does not receive any real benefit from this investment.
In fact, there is considerable evidence that the indiscriminate use of tax incentives, particularly tax breaks, actually makes most taxpayers worse off with this new investment. After all, they are the ones suffering from further road congestion and funding increased demand for public services and road repairs.
New businesses usually help defray at least some of the costs of these public services, but cuts place all the burden on existing businesses and families.
None of these observations stand alone as an argument against business attraction policies or business tax exemptions, deductions, or reductions. However, they are food for thought.
We must continue to celebrate labor-saving technology and prepare more of our citizens to thrive as jobs are replaced by machines. Nor should we be surprised that voters are suspicious of economic development policies that have minimal benefits and high costs. they may be right.
Dr. Michael J. Hicks is Director of the Center for Business Economics Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University.
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