California vs Indiana

In my last post we explored how is it that Time magazine could do a cover story on California’s bright future economic prospects despite a dysfunctional state government and business unfriendly policies. The stuff that conventional wisdom believes is vital to a state’s economy.

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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