For nearly two decades we have recommended that Michigan make Minnesota the model for its economic policy. We chose Minnesota because year after year after year it is the most prosperous Great Lakes state. It not only is a neighboring state, it also is a cold weather state and a non-costal state.

The recently released 2023 state per capita income data makes clear once again that Minnesota has the economy Michigan should want to have. Michigan is 39th in per capita income at $61,144, 12.4 percent below the national average. Minnesota is 12th in per capita income at $72,557, 3.9 percent above the national average. All a Great Lakes state best.

The two Great Lakes states that policymakers of both parties almost always compare Michigan to––Ohio and Indiana––are also low-prosperity states. Ohio is 37th in per capita income at $61,495, 11.9 percent below the national average. Indiana is 38th in per capita income at $61,243, 12.3 percent below the national average.

Minnesota also is the Great Lakes state with the highest proportion of adults with a B.A. or more. It is 11th in the nation. Michigan is 34th, Ohio is 37th, Indiana is 42nd. The proportion of adults with a B.A.or more is probably the best predictor of a state’s per capita income. Because college-educated talent is the asset that matters most to high-wage employers.

What has Minnesota done to become the Great Lakes’ most prosperous state? In 2014 we asked Rick Haglund to answer that question. His report, State Policies Matter: How Minnesota’s Tax, Spending and Social Policies Helped it Achieve the Best Economy Among Great Lakes States, is as valid today as it was a decade ago. Yes the data in the report needs updating, but Rick’s description of the path Minnesota has taken for more than five decades is still accurate today.

Rick’s conclusion:

Lawmakers and governors in many states, including Michigan, have focused primarily on cutting taxes and shrinking the size of their governments as the path to prosperous economies. As this report has shown in detail, Minnesota has traveled a different path. There is no question Minnesota is a high tax state—as stated earlier, its residents paid $2,309 (updated for 2023) more than Michigan residents in state taxes alone.

But it has largely invested that additional revenue in services and investments that matter in a knowledge-based economy. An educated workforce, efficient transportation systems, vibrant cities and metropolitan areas, and a secure safety net for those making the transition to a global economy all matter in creating a prosperous state.

Minnesota has made those necessary investments and enacted policies making the state welcoming to all. It really shouldn’t be surprising, then, that it has the strongest economy in the Great Lakes region and one of the most vibrant in the country.

Maybe most important is what isn’t part of the Minnesota playbook:

• Minnesota did not lower taxes. In fact as Rick documents, in 2013 when Michigan was slashing business taxes, Minnesota raised taxes on companies and the wealthy. In 1980 Minnesota had the 6th highest state taxes per capita in the country. Michigan ranked 13th. Minnesota’s state taxes per capita were 122 percent of Michigan’s. In 2023 Minnesota had the 8th highest state taxes per capita in the country. Michigan ranked 34th. Minnesota’s state taxes per capita were 162 percent of Michigan’s.
  
• Minnesota did not slash its safety net. As Rick wrote: “Many states have cut benefits to the poor and unemployed in the belief that these payments dissuade people from looking for paid work. Minnesota takes a different view. It has created one of the strongest safety nets in the country, spending generously on benefits to help those who have lost jobs or been stricken by poverty get back on their feet. That protective net has not trapped Minnesotans and turned them into a bunch of government-dependent slackers. Far from it.”
  
• Minnesota does not offer big incentives for economic development projects. Read the Minnesota Economic Development Resource Guide and you will not find any big incentive program like SOAR, Michigan’s new billions of dollars business incentive program.
  

Michigan has, of course, done the exact opposite. On a bipartisan basis accepting that high taxes, particularly on businesses are job killers, the state has anchored its economic development playbook on cutting taxes for at least three decades. And, also on a bipartisan basis, enacting one version after the other big economic development incentive programs. As well as slashing the state’s safety net in part on the belief that a more generous safety net discourages people from working.

At its core the Minnesota playbook for economic success has been higher taxes used for public investments to compete for talent by offering good schools from birth through colleges and
creating places where people want to live by offering high quality basic services, infrastructure and amenities.

Minnesota focus on making public investments in education from birth through college and creating high quality of living communities combined with being welcoming to all is the foundation for its economic well-being success. Minnesota has developed a policy playbook that makes preparing, retaining and attracting talent its economic development priority one. That is exactly what is needed in today’s economy where talent attracts capital.

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Luke explores the contrast between Michigan’s ranking of 44th compared to Indiana’s 5th. Even though the two states now have very similar business climate policies and on most metrics Michigan has somewhat better results. Why this perception gap exists is interesting, but certainly not the most important question. Far more important is why do we think business cost rankings matter and why do we continue to want to compete with Indiana.

If you care about more and better jobs –– Governor Snyder’s goal for Michigan’s economy –– you want a Michigan that looks far more like Minnesota than Indiana. Minnesota with the best economic outcomes in the Great Lakes –– both more jobs and higher incomes  –– is ranked 30th in this CEO survey. (Connecticut and Massachusetts –– the two most prosperous states –– are ranked even lower at 45 and 47.)

As we explored previously on every important economic metric Minnesota has far better outcomes that Indiana. And rank far worse on every major business climate ranking. Minnesota’s May unemployment rate is 5.3%, Indiana’s is 8.3%. And Minnesota’s per capita income is about $9,000 higher than Indiana’s. Which would you rather have, far lower unemployment and $9,000 more per person in your household or a better Chief Executive magazine business climate ranking? The answer is obvious. What isn’t obvious is why our elected officials are aggressively pursuing an agenda to make Michigan’s policy look like Indiana’s not Minnesota’s. What we do know is that you aren’t going to get Minnesota’s economy by pursuing Indiana’s policies.

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Among all the disappointing actions taken by Michigan policy makers the past two years––particularly in December––the most disturbing is explicitly positioning Michigan to compete with Indiana. As we and many others have pointed out incessantly Indiana is one of the poorest states in the country and is now and has been for decades the poorest of the Great Lakes states. Why would we want to be like them?

(For the details on Indiana’s economy see two recent posts here and here.)

What made Michigan special for folks across the planet––many of whom flocked here––for most of the 20th Century was we were one of the most prosperous places on the planet. The place that created the American mass middle class. Largely because of high paid, unionized factory jobs this was the place where if you worked hard you were most likely to realize the American Dream.

Obviously that was less and less true in the last decades of the 20th Century and collapsed in the first decade of the 21st Century. As factory jobs were eliminated here by the hundreds of thousands and nationally by the millions and high paid factory jobs––unionized or not––went extinct.

As the domestic auto industry––still the engine of the Michigan economy––collapsed Michigan suffered through what is now commonly described as a lost decade. The question for policy makers is “where do we want to go from here?”.

Basically there are two choices. One is to stay concentrated in the industries that made Michigan prosperous in the past, primary factories but also tourism and agriculture. But that is no longer a path to a mass middle class. Michigan’s traditional engines now are characterized by slow or no job growth and lower wages. This shrinking middle class economy is what you get if you choose to be competitive with Indiana. The other option involves positioning Michigan to once again be a place with a broad middle class.

To do that necessitates transitioning Michigan away from a factory-based economy towards one that is concentrated in the high education attainment sectors of the economy––primarily health care, education, finance and insurance, professional and technical services and information. These are the sectors where job growth has been the fastest for, at least, two decades and where wages are now the highest. (For details see our latest report on Michigan’s Transition to a Knowledge-based Economy.) This would mean competing with high prosperity states like Massachusetts and Minnesota.

The choice our state policy makers have made to compete with Indiana is like the Detroit Tigers during their lost decade (more like a decade and a half from 1989-2005 when arguably they were the worse team in baseball) choosing to compete with franchises who year in and year out don’t make the playoffs, rather than teams who compete for the championship year in and year out.

Like our state policy makers the Tigers had a choice to make: join the annual also-ran franchises or commit themselves to do what is necessary to build a championship contender every year. Tiger management chose the latter even though it is more expensive and more difficult. Far easier and cheaper to compete with the teams at the bottom than those at the top. Think how different the Tigers would be today if they were satisfied competing with teams like the Pittsburgh Pirates rather than the New York Yankees.

In terms of state economies Indiana is the Pirates. Actually worse. The Pirates have been terrible for two decades, Indiana has been the poorest Great Lakes state for more than four decades. In terms of state economies Massachusetts and Minnesota are the Yankees.

What distinguishes Massachusetts and Minnesota from Indiana (and Mississippi)? What would Michigan need to do compete with high prosperity rather than low prosperity states? The two defining characteristics of high prosperity states––other than those with large oil and natural gas deposits––is they are over concentrated in the high education attainment sectors of the economy listed above and the proportion of adults with a four year degree or more. Massachusetts and Minnesota are in the top 10 in each, Indiana is in the bottom 10 in each.

Giving up on a Michigan with a broad middle class should be unacceptable. (Just like giving up on competing for championships was unacceptable to Tiger management.) That requires state policy makers who are committed to positioning Michigan to compete with high prosperity, not low prosperity, states.

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What is true in football–what matters is winning and losing, not what the experts think about how you are going to perform–should be true when it comes to states economic perfomance. How the so-called experts rank your state doesn’t matter, how your state’s economy performs–do you have a job, how much do you make–does. Being highly ranked in some business climate index doesn’t pay the bills or  provide money to save for your kids college education.

Unfortunately too many times real world economic outcomes are trumped by rankings when it comes both to our perceptions of which states are doing well and which aren’t and, of greater consequence, to the states we model when it comes to economic growth policy and programming. Not smart!

As we explored in our last post, despite being trumpeted for decades as the Great Lakes state Michigan should model itself on, Indiana has a lousy economy. And yet they are the highest ranked Great Lakes State in the latest Tax Foundation State Business Tax Climate Index. Ranked the 11th best in the nation. The Great Lakes state with the worse Tax Foundation ranking is Minnesota. Ranked 45th, only 5 states ranked lower. (Michigan is ranked 12th.)

My guess is folks in Indiana are not rejoicing in being ranked  11th by some group of experts, anymore than USC football fans are in being ranked #1 by the experts. Indiana is 41st in per capita income–the worse in the Great Lakes–with a full year 2011 unemployment rate of 9.0%  and 25.3% of its residents with income 150% of poverty or lower. And my guess is folks in Minnesota could care less about being ranked the 6th worse state in terms of business climate, anymore than Notre Dame fans care about being unranked this preseason. Minnesota is 11th in per capita income–the best in the Great Lakes–with a full year 2011 unemployment rate of 6.4%  and 19.5% of its residents with income 150% of poverty or lower.

Minnesota’s per capita income is about $9,000 higher than Indiana’s. Which would you rather have, $9,000 more per person in your household or a better Tax Foundation business climate ranking? The answer is obvious. What isn’t obvious is why our elected officials are aggressively pursuing an agenda to make Michigan’s policy look like Indiana’s not Minnesota’s. What we do know is that you aren’t going to get Minnesota’s economy by pursuing Indiana’s policies.

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Highlights of the message include a continuation of the Governor’s insistence that Michigan be friendly to immigrants including a call for Congress to take action to make it far easier for foreign born college graduates to stay and work in the U.S. And a recognition that quality of place is an essential ingredient to concentrating talent here. That creating places where talent wants to live matters along with preparing talent.

But what makes the message extraordinary and possibly transformational is that the Governor writes: In the 20th century, the most valuable assets to job creators were financial and material capital. In a changing global economy, that is no longer the case. Today, talent has surpassed other resources as the driver of economic growth. Talk about a complete break with the past!

For decades state and local economic development has been based on a belief that providing incentives to financial and material capital is how you grew the economy. Hardly anyone debated whether there were any other options. In this message Governor Snyder asserts that not only is there another option, but that talent is now the preeminent driver of economic growth. This means that actions that concentrate human capital should be economic development priority #1. Preparing (the subject of most of the message’s proposals), retaining and attracting talent are the actions that matter most to whether Michigan has a strong, prosperous economy in the future.

Evidence that as the Governor writes today talent has surpassed other resources as the driver of economic growth comes from the strong and growing alignment of college attainment and state per capita income. Of the top 15 states in the proportion of adults with a four-year degree or more, 13 are also in the top 15 in per capita income. Michigan’s fundamental problem is that we are now 36th in college attainment. Unless we fix that we are going to be one of the country’s poorest states.

Dome Magazine published a column I wrote comparing the Indiana and Minnesota economies. Indiana is a state that is viewed as offering the most business friendly environment in the Great Lakes and because of that has been held out for decades as a state Michigan should model. In the Governor’s words it has pursued a strategy of being friendly to financial and material capital. Minnesota on the other hand is the Great Lakes state with the highest proportion of adults with a four-year degree or more.

Indiana, in the 2011 state rankings by the well-respected conservative Tax Foundation, is the highest ranked Great Lakes state on both overall state business climate (10th) and corporate tax index (21st). Minnesota is the worst-ranked Great Lakes state by the Tax Foundation — 43rd from the top on its overall state business climate index. And its ranking of 44th on the corporate tax index is only better in the Great Lakes than Michigan’s ranking of 48th. On the other hand, Minnesota is the Great Lakes state with the highest college attainment rate, Indiana the lowest.  So the two states offer a real world test of the Governor’s assertion that today talent trumps financial and material capital.

My Dome article details the economic performance of the two states on both employment and income metrics as well as both current levels and growth. The bottom line: on every metric of economic well being residents of Minnesota are doing far better than residents of Indiana. For most metrics Minnesota is not only the highest ranked in the Great Lakes but a national leader and Indiana is at the bottom in the Great Lakes and not much better nationally.

Governor Snyder is right: talent is the most important driver of economic growth. In an increasingly knowledge-based economy (the Governor’s Michigan 3.0) talent is the most valuable and scarcest asset. Increasingly employers will move to the places that provide them with the largest talent pools. Understanding that talent is the economic growth priority is a major step forward. We need now to act boldly on that understanding with a new agenda that concentrates talent in Michigan. It is what matters most to Michigan’s economic future.

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Lets look at a state that many in Michigan think get policy right: Indiana. For decades we have been lectured on the need for Michigan to be more like Indiana. The most recent example is a Detroit News editorial comparing Indiana’s ability to reach agreement on a downsized budget to Michigan’s continuing gridlock.

In the Great Lakes, Indiana is the poster child for both the small government ideologues (low taxes, less government spending, weak regulations) and the good government moralizers (less partisanship, balanced budgets). According to them that should lead to a strong economy today and tomorrow.

Think again! Indiana in 2008 is fortieth in per capita income – the eleventh poorest state in the country. The only Great Lakes state poorer than Michigan. Since 2000 – while Indiana has been held out as model for Michigan – its fallen from thirty second to fortieth. Who wants to be like them?

Contrast that to California – which we are told is doing state policy the worst. Its ninth in per capita income, down from eight in 2000. Clearly small government and a less partisan politics that produces balanced budgets is a lot less important to economic success than many believe.

So what does explain California’s prosperity and good future economic prospects and Indiana’s relative poverty? Participation in the knowledge-based economy: where job growth has been the fastest for two decades and where most of the good-paying jobs are. (For a description see our Second Annual Progress Report.) Sixty one per cent of California’s wages and salaries come from knowledge-based economy employers compared to forty five percent in Indiana and fifty eight percent for the country.

The places where the knowledge-based economy is the strongest are those with the highest proportion of adults with a four-year degree. Because its the most valuable asset to knowledge-based employers. As we have written repeatedly its the factor that best predicts prosperity. California is fourteenth in college attainment, Indiana is forty first.

On all these factors (income, concentration in the knowledge-based economy and college attainment) Indiana is the worst in the Great Lakes. One lesson we need to learn is that you can’t get California’s economy by adopting Indiana’s policies. Small government, less partisanship and balanced budgets are not the path to prosperity.

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