Getting Ahead

By Thomas Hefty and John Torinus Jr.

In the July 2009 issue of Wisconsin Interest, we wrote that Wisconsin had fallen behind in the race to create jobs and raise family incomes. We found that the Doyle years were a decade of economic disappointments. The state failed to create new jobs while descending to Alabama-level wages.

By 2008, Wisconsin ranked 47th among states in five-year personal income growth. Our job growth was less than half that of neighboring Illinois, Iowa and Minnesota. And this was before the recession, which left the state reeling from job losses almost 20% greater than the national average. By December 2009, Wisconsin had lost a stunning 176,700 jobs-a 6.1% decline in the workforce-over the previous two years.
Since our July report, there has been mostly bad news. Forbes dropped Wisconsin to 48th in its 2010 business ranking of the states. The Pew Center on the States named Wisconsin one of the 10 worst states for fiscal stability, as it connected the dots between the state's dismal economic performance and the huge revenue gap in the state budget.

While the good news includes the state holding on to vulnerable jobs at Mercury Marine in Oshkosh and Republic Airlines in Milwaukee, no one disputes that Wisconsin has stumbled badly. Economists from the left, center and right all agree that the situation is dire. But what to do about it?

We would argue that when you're near the bottom, a viable and quick strategy would be to follow the example of successful states. "Watch and Learn," as the headline said in Site Selection magazine's review of best states for business. The magazine focused on Texas and North Carolina. But Wisconsin doesn't need to look that far for models of success.

We can learn from Iowa's job growth, and from Minnesota, where per capita income is 20% greater than Wisconsin's. But learning from others is a difficult lesson for a state still coasting on the fading glories of governors like Bob La Follette, Pat Lucey and Tommy Thompson. The notion of Wisconsin exceptionalism is deeply held. Unfortunately, the recent exceptionalism is not the right kind: Wisconsin has been exceptionally bad at economic development.

Here are eight ideas we think could turn Wisconsin around:

1 Get government to work better.

You might be surprised to see this on a list of economic development ideas. We think it is critical. A focus on government efficiency is long overdue. First, it sends a message to employers, workers, and retirees that Wisconsin is serious about being a good steward of tax dollars. And the savings can be redirected to investment in Wisconsin's economy and to finance tax reform.

There has been no statewide effort focused on government efficiency since the SAVE Commission in 1995. Yet there have been well-publicized examples of government waste in failed computer systems, fraud in the state child care system, and undermanagement of health care costs.

Instead of looking for efficiencies or the elimination of out-of-date programs, Gov. Doyle directed last year that all state employees-efficient or not, state-funded or supported by federal grants-take unpaid furloughs. Not surprisingly, given the lack of focus on improving efficiency, Wisconsin was the only state in the Midwest to raise personal income taxes in 2009.

Tying government efficiency to economic development is not new. The Brookings Institute recently recommended that Maine "trim government to invest in the economy and finance tax reform." Brookings recommended a strong, high-level, expert commission with power to "force legislators to achieve transformative efficiencies."

Wisconsin was a leader in governmental reform in the early 20th century. The La Follette era was characterized by independent, citizen-led agencies such as the Wisconsin Industrial Commission, with strong input from the experts at the University of Wisconsin-the "Wisconsin Idea" in action.

A government efficiency commission would prepare a package of recommendations, and then the Legislature would vote it up or down, much like Congress did when it received the military-base closing recommendations of the Base Realignment and Closure Commission. That way, special-interest lobbying for entrenched programs would be neutralized.

2 Connect education and work.

Wisconsin faces a paradox. Spending on education has been consistently strong, yet our workers lag in college degrees. As a result, economic growth and wages have lagged. Part of the problem arises from the lack of a state economic development plan. Without a plan, there is no guidance for education leaders on whether to emphasize biotech, engineering or journalism.

Wisconsin is an education factory. The UW System has 13 comprehensive campuses and 13 two-year schools, while the vocational-technical system offers 16 colleges with 52 campuses. These and the 20 private colleges are invaluable assets for the state. But in 2007 only 25.4% of the Wisconsin workforce consisted of college graduates-well below the national average of 27.5%.

Our universities need to be tied tightly to the economic focus of the state. The successful research triangle in North Carolina was built on just such connections between the state's top universities and the state's market-leading companies. Linking our colleges to jobs is very doable. For example, when the insurance industry said it needed to hire young graduates who had minored in insurance, four Wisconsin private colleges stepped forward with insurance programs.

In short, the state's education plan must be connected to its economic development plan, which comes first. All parties will benefit when that happens.

3 Build on our economic strengths with a cluster strategy.

Harvard's Institute for Strategy and Competitiveness defines clusters as "critical masses in one place of linked industries and institutions-from suppliers to universities to government agencies." Think Silicon Valley. Think the wine industry on the West Coast. Think the National Renewable Energy Laboratory in Colorado.
We need to put a fine point on our cluster strategy. Simply identifying broad areas such as biotech or agriculture isn't focused enough. Indeed, the cluster strategy is not new to Wisconsin. It was first recommended at the UW economic summits early in the last decade. But few steps have been taken to implement the strategy.

Why is it so difficult in Wisconsin? The answer is evident every time you see a picture of a politician handing out an oversized check. Those cardboard checks make for great political theater, but they also encourage poor economics. Politicians dislike the cluster strategy because it limits their political handouts-and photo opportunities. Feel-good politics lead to scattered and diluted use of scarce economic development dollars.

Which industries offer the best opportunities? One way to find them is to look at technology strengths-the number of patents. Wisconsin leads the nation in patents in three categories-

X-ray and gamma-ray medical devices; papermaking and related technologies; and marine propulsion. Ergo, we already have clusters here and in other industries. They just need more recognition and support.

4 Emphasize new business and entrepreneurship.

Last November, the Kauffman Foundation reported that nearly all net job creation came from young companies, those less than five years old. Where will the new jobs come from? The answer is new firms. Yet Wisconsin's rankings for small business are at the absolute bottom. Creating a positive climate for new ventures begins with attitude and salesmanship. Show that the government cares about entrepreneurs.

Treat them as the avatars of growth.

Look around: All of Wisconsin's great companies-including Quadgraphics, S.C. Johnson and Epic Systems-started here.

But Wisconsin is not hospitable to new business. It is widely understood that state agencies have a reputation for being difficult, if not outright hostile. What is government's response? Democratic legislative leaders are pushing for creation of a state ombudsman. This is a tacit admission of failure. Rather than an ombudsman, we need an administration that holds cabinet agencies accountable for creating a positive business climate.

Can you imagine a sign on the state border declaring: "Welcome to Wisconsin. Hostile Bureaucrats Ahead. Please contact our ombudsman for protection at 800-WIS-JOBS"?

We suggest that rather than an ombudsman, the state needs a governor who holds cabinet agencies accountable for creating a positive business climate.

Second, new ventures need funding. The tax credits created in the Doyle years are good, but by themselves have proved ineffective. More than 30 states have created venture funds that invest side by side with private investors. Most state venture funds have private sector management. Some funds use public employee pension assets. Some are funded by state bonding. Studies show that the state venture funds are cost-effective in creating good jobs.

Wisconsin has long lagged in early-stage investments. This has to change. With the state's huge investment in education, we have many smart, innovative people. Let's keep them here rather than see them migrate to Minnesota, Illinois and the coasts. If capital is made available here, they will leap to start new companies. In this arena, private financiers and investors need to lead the way.

Third, the state should support regional small-business efforts. The entrepreneurial ecosystem created by the group Biz Starts Milwaukee has aided the creation of 19 new high-growth companies in less than two years. That rate of about one a month needs to be doubled.

If most net new jobs come from young businesses, why not devote the same percentage of the economic development budget to high-growth startups? Similarly, rather than concentrate budget authority in Madison, why not transfer the new-business budget directly to regional organizations?

One of the charms of this strategy is that it doesn't cost much. High-growth start-ups can be launched with $250,000 to $1 million. Success is more about creating the right set of attitudes so that entrepreneurs are coached, supported, funded and applauded. Much of the funding comes from private sources and not the taxpayer.

5 Focus, focus, focus!

Call around state government to find the center for economic development efforts. Good luck!

Wisconsin has a confusing number of offices all engaged in this vital work: the Department of Workforce Development, the Wisconsin Housing and Economic Development Authority and the state Department of Commerce. Noticeably lacking is a Department of Job Creation.

Today, Commerce has primary responsibility for economic development, but it also handles petroleum recycling and clean-up, county-fair ride safety, building inspection, ski-lift safety, homeless shelters, and on and on. There is no focus.

With Wisconsin's economy in crisis, we don't have the luxury of supporting such a scattered and formless department. The Department of Commerce needs to be erased. We need to start over with a Department of Job Creation. Its other programs can be transferred to other agencies. We need a Department of Job Creation with a singular, laser focus.

Further, we believe the Department of Job Creation should report to an independent board similar to the Board of Regents. Its secretary should report to that board. We need to keep our job-creation efforts a safe distance from the non-strategic political process.

6 Target economic development funding.

In Wisconsin, much of the development funding goes to "community development," not to job creation. It's no surprise that Wisconsin has not attracted a major corporate headquarters in nearly two decades.

In other states, major high-tech companies have received grants of $40,000 to $60,000 per new job created. Smaller companies receive less. Wisconsin needs to get in the game. But with the state's fiscal situation so dire, where can Wisconsin find the bucks to attract jobs?

Begin with tightening up government management and reallocating the saved money to job development. Beyond that, we'd like to see more venture investing by the State of Wisconsin Investment Board. As one of the largest public pension funds in the country, the board's resources could be a difference-maker. In fact, the board committed to increase venture investing early in the Doyle administration, but follow-through has been poor.

The state should also be bonding for economic development. Wisconsin already has an agency to do that, the Wisconsin Housing and Economic Development Authority. However, WHEDA's bonding power for economic development has not been used. Apparently, the authority does not grasp the urgency of the moment.

What we're suggesting is hardly new. Other states have used pension fund investing and development bonding. Both require professional management without political interference. The success of the Ohio Third Frontier Fund is a good model for Wisconsin. It combines pension fund investing, state bonding, and a state venture fund to achieve targeted growth objectives.

7 Invest in sustainable development and green jobs.

Don Nichols, emeritus professor of economics at UW- Madison, once suggested that Wisconsin pursue a "Connecticut strategy" of attracting high-paying jobs from nearby New York and Boston. Why not use our lakes, forests, and streams and high quality of life to draw jobs from Chicago and the Twin Cities?

Every report on sustainable economic development cites the importance of quality-of-life issues. Yet for a state rich in natural beauty, we perform poorly by this measure. This is another Wisconsin paradox. Forbes' 2010 ranking of best places for business put Wisconsin at 48th overall. Yet the magazine ranked Wisconsin 11th in quality of life.

Reality is that Wisconsin's quality of life does not overcome our lackluster business climate. This can be changed with the right plan.

Second, green jobs are expected to increase. The skills that produce cars can produce wind turbines and water systems. But that also requires a savvy economic development plan and coordination of university research and public utility investments.

If wind turbines are being produced here, they need to be shipped across the country. That requires bridges, highways and railroad connections. Wisconsin is coming late to this game-growing green industries. But it deserves attention.

8 Get our fair share of federal spending.

One of Wisconsin's major economic weaknesses is the dearth of federal dollars coming into the state. This includes program aid to state and local government, procurement of private-sector goods and services and the salaries paid to federal employees. On a per-person basis, we rank a dismal 48th among the states in federal spending.

Thus, while Wisconsin sends $45 billion in taxes to Washington each year, only 86 cents of each dollar is returned here. Pending health-care and carbon-control legislation could make the imbalance even worse. In contrast, almost every rapidly growing state enjoys strong federal funding.

What does this shortfall mean? If Wisconsin were to have the average federal employment, the state would gain 22,000 high-paying jobs: The average federal worker earns $79,000 per year, compared to the average wage in Wisconsin of $39,000.

Following the lead of the late Sen. William Proxmire, Wisconsin politicians of both parties have railed against "pork barrel spending." Yet they continue to vote for appropriations that send disproportionate funding to other states. While other states get "pork," Wisconsin gets thin gruel.

Iowa with its strong record of recent job growth offers important lessons. Twenty years ago, Iowa ranked 48th in its return on federal dollars. Today, it ranks 24th, receiving $1.10 for every dollar it sends to Washington. That's one more reason Iowa's economic growth rate is now double Wisconsin's.

The economic impact of Wisconsin's weak performance in Washington goes beyond the direct dollars. Also lost is the multiplier effect of how the federal spending would generate new economic activity. Using a straightforward multiplier of 1.5, the $4 billion shortfall in federal spending translates to a $6 billion impact on the Wisconsin economy.

Put another way, the federal shortfall produces a negative impact of $1,100 per person in Wisconsin. That shortfall alone is roughly 40% of the difference between Wisconsin per capita income and the national average.

Simply stated, any successful economic development strategy must address federal spending in the state. This is most definitely not to argue for greater federal spending, but for Wisconsin gaining a more equitable share of existing spending.

Our ideas are meant to prime the pump. Many more will be needed to find the right strategy. We are hopeful that research by Deloitte Touche, a national consulting firm hired to conduct an independent assessment of the state's economy, will lead to an economic summit and detailed proposals for rebuilding the Wisconsin economy.

The good news is that we won't need to reinvent the wheel. Starting from near the bottom, we can quickly adopt the best ideas from successful states.

We close by saying that job creation is not an ideological issue. Nor is it the turf for any one political party. Job creation should be on the lips of every candidate for office, just as it should be high on the agenda for leaders in the private sector.
Economic prosperity is everyone's business.

Thomas Hefty is the retired CEO of Blue Cross-Blue Shield of Wisconsin. He co-chaired both Gov. Doyle's Economic Growth Council from 2003 to 2005 and Gov. Thompson's SAVE Commission on government efficiency. John Torinus Jr. is chairman of Serigraph Inc. in West Bend and a columnist for The Milwaukee Journal Sentinel. He is president of the entrepreneurial-booster group BizStarts Milwaukee.

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