Wisconsin Flunks its Economics Test


Our state motto is “Forward,” but Wisconsin is falling behind in the economic race to create jobs and raise family incomes.

As we’ll show here, Wisconsin is lagging its own economic performance of the 1990s and losing ground to other states—especially to other upper Midwest states like Minnesota, Iowa and Illinois. It is even failing to meet its own goals—established in 1997 with much fanfare by a blue ribbon commission—for ramping up the state economy.

Although our political and media leaders ignore these failings, Wisconsin residents intuitively understand how our economic anemia has sapped their incomes and diminished their opportunities.

Since 2005, Wisconsin has experienced growing out-migration. Our citizens have voted with their feet, moving to states where they foresee a better future.

In the end, gauging economic success is really pretty simple for most people. Is Wisconsin gaining jobs? Are family incomes rising? Are wages increasing? In a word: No. Yet our state officials go out of their way (perhaps understandably) to emphasize the good news about Wisconsin business while ignoring the bad.

Consider how officials in the Doyle administration have massaged the unemployment rate to make Wisconsin job performance look better than it really is.

Beginning in 1988 and ending in 2006, the state unemployment rate was lower than the national average. That was good news. But as the Wisconsin advantage began to erode, the state Department of Workforce Development compensated by re-estimating the size of the workforce.

In one month, 30,000 unemployed workers disappeared from the data, the largest one-month drop in recent history. The unemployment rate showed an apparent (but unreal) dip. Presto, once again Wisconsin unemployment appeared to be below the national average.

But the surprising drop didn’t go unnoticed by the watchful economists at the Federal Reserve. In July 2008, the Federal Reserve Bank of Minneapolis publicly referred to Wisconsin’s new method of counting the jobless as “rosy or smoky” reporting. The Fed noted that the Wisconsin unemployment rate was inconsistent with other economic data, such as growing food stamp usage.

Despite the questionable reporting, the state Department of Workforce Development regularly issued press releases congratulating the Doyle administration on its economic success. This occurred as the 2008 legislative elections drew closer.

In August, the economy was headed into a steep recession, but Secretary Roberta Gassman proclaimed, “The latest labor market figures show conditions improving.... Despite the economic difficulties nationally, Wisconsin is doing relatively well overall.”

Close observers felt otherwise.

The surprise is that the sobering assessment transcends the usually polarized debate in Madison. From the left, right and center, the view is equally grim. Certainly, the policy recommendations differ among these analysts, but they share the same sense of worried urgency: Wisconsin has to do more to stoke its economy.

From the left, the Center on Wisconsin Strategy published its annual report in late 2008 with this unhappy summary:

“The national economy has grown more rapidly than Wisconsin’s, leaving the state’s per capita income more than $2,500 behind the national [average]. The gap separating Wisconsin and the United States emerged in the 1980s, but strong growth during the late 1990s helped Wisconsin close the gap. Unfortunately, Wisconsin is beginning to lag again as the national economy outperforms the state’s.”

From the center, the nonpartisan Competitive Wisconsin group (it includes both business and labor representatives) reached a similar conclusion in its 2008 benchmark report: “Wisconsin has moved further away from the national average in per capita income, number of new jobs created and number of new private businesses.”

From the right, various business publications have been uniformly unimpressed with Wisconsin’s performance. In the 2009 Chief Executive magazine survey of “best and worst states for business,” Wisconsin ranked 43rd, down 10 positions from 2007. The Forbes 2008 ranking also had Wisconsin at 43rd. The 2008 CNBC overall ranking of top states for business ranked Wisconsin at 37th. The conservative Laffer State Economic Competitiveness Index placed Wisconsin at 41st.

The consistency of these assessments can’t be ignored. Among the 50 states, Wisconsin generally ranks below average in economic performance—sometimes substantially below. And its recent performance is sliding downward.

Wisconsin ranks 47th in the five-year change in personal income, lower than its 42nd position in the 10-year metric. The Badger State ranks 43rd in change in state gross domestic product since 2000.

A little history sheds some light on these numbers.Like now, Wisconsin’s economy suffered in the mid-1980s amid a growing concern over the state’s business climate. That decline was symbolized by Kimberly-Clark’s decision to move its longtime headquarters in Neenah to Dallas. In response to losing one of the nation’s largest consumer-products companies, an independent Strategic Development Commission was formed to develop a state economic plan. Many observers credit that commission, and the focus that it brought to economic development, with helping elect Tommy Thompson as governor in 1986. With a new focus on jobs and an ebullient chief salesman, the Wisconsin economy grew again.

The state economy grew faster than the national average from 1988 to 2005. Wisconsin’s per capita income grew from 92% of the national average in 1990 to 98% in 2002. The state’s unemployment rate beat the national average for 18 years ending in 2006. Throughout this period, the state’s economic growth benefited from the hard work of Wisconsin families, especially rising workforce participation by women.

While still keeping apace of the national performance, Wisconsin job creation slowed in the latter half of the 1990s. The state responded with a flurry of action.

In 1997, Gov. Thompson created the Blue Ribbon Commission on 21st Century Jobs, chaired by UW President Katharine Lyall. Four UW-sponsored “economic summits” followed from 2000 to 2003. Two reports came out of the statewide dialogue: “The Wisconsin Economy in the Year 2010” and “Vision 2020, a Model Wisconsin Economy.” Annual benchmark reports were prepared by the Wisconsin Taxpayers Alliance and published by Competitive Wisconsin. Those benchmark reports measure both inputs, such as investments in education, and outputs, such as jobs and per capita income.    So, plenty of thinking went into where the state’s economy needed to go and how to get there.

For instance, the 1997 Blue Ribbon Commission established measurable goals, and those metrics and the current results provide a clear picture of the state’s weak performance in this decade:

1. “Wisconsin should aim to move its personal income per capita from 96% to 100% of the U.S. average by the year 2005.” Result: Failure. Wisconsin has declined to 93.8% of the national average.
2. “Wisconsin job growth should continue to outpace the nation.”  Result: Failure. Wisconsin job growth from 2000 to 2005 was zero, compared to annual national growth of 0.3%. From 2005 to 2007 Wisconsin’s growth was 0.7%, compared to a national average of 1.5%.
3. “Maintain Wisconsin’s unemployment rate at least 10% below the national average.” Result: Failure. Wisconsin’s unemployment rate was better than the national average until 2006. Since 2007, the Wisconsin unemployment rate has averaged higher than the national number. (In April 2009, the Wisconsin unemployment rate was reported at 8.8%, compared to a national average of 8.6%.)

When Jim Doyle took office in 2003, he faced a weakening economy and a growing state budget deficit. Fortunately, he had no shortage of studies to consult in formulating his economic program, the “Grow Wisconsin Plan.”

Grow Wisconsin was a compendium of unfinished recommendations from the earlier studies and UW economic summits. Doyle’s 2003 plan included more than 100 separate initiatives and was followed by “Grow Wisconsin, the 2005 Agenda,” which included an additional 200 measures.

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The governor’s plan enjoyed initial success. The Legislature repealed the corporate income tax provision that penalized job growth. There was regulatory reform, increased spending on education and new incentives for start-up capital. But Grow Wisconsin was not a strategic plan—it was a lengthy list of action items. Most of the 300 ideas were positive, but they lacked a focus and overarching strategy.

Indeed, their economic impact has been limited. In venture and angel capital, Wisconsin has adopted aggressive but narrowly focused tax credits for new investments. Those credits have been used by more than 100 start-up companies, but overall capital formation still lags far behind the leading states.    Wisconsin has 2% of the population, but its companies receive only 0.3% of early-stage investments. For 2008, early-stage investments in Wisconsin actually dropped 33%.

The state also took steps to encourage entrepreneurship, and it worked. Wisconsin ranked 26th in the 2008 Small Business Survival Index, one of Wisconsin’s better rankings in any recent national survey. But Wisconsin at its best is still below average. And a 2009 Kauffman Foundation report, “Entrepreneurship Across States,” ranked Wisconsin 46th in the percent of employment accounted for by young firms.

Above all, the focus of Gov. Doyle’s plan was to “retain and create high-wage jobs.” That laudable objective has been Wisconsin’s biggest failure. Since 2005, Wisconsin’s average wage has dropped by nearly 4 percentage points to 85.6% of the national average—roughly equal to wages in Alabama.

Wisconsin’s drop in relative wages and drop in job growth is troubling. Generally, states with below-average wages see job growth as businesses move to areas with low operating costs. The demand for new employees then drives up local wages. Similarly, areas with high wages tend to see slowing job growth. Yet, Wisconsin has managed to slide to below-average wages and below-average job growth.

In short, we have the worst of both worlds.

To be sure, statistics are dull and abstract. Economics is known as “the dismal science” for a reason. But there is nothing abstract in the hard reality in a citizen’s financial decision to move to another state—to a greener pasture.

Wisconsin lost population through migration in the 1980s when our economy faltered. Similarly, during the strong economic growth of the 1990s, the state gained an average of 20,000 people per year through in-migration. That trend continued until 2004.

But since 2005, Wisconsin has again experienced growing out-migration, with an average of 7,000 leaving the state in the most recent years. A recent Princeton University study showed that upper-income workers are the most likely to leave the state.

The study, which looked at demographic data through 2007, found that Wisconsin had the third-worst migration pattern in the country. The study concluded: “Wisconsin is more attractive to low-income individuals than to high-wage earners.”

That means the state is losing its highly educated and well-off citizens and attracting low-income people seeking our above-average government services. This is hardly a recipe for success.

We see a series of mistakes underlying the state’s fall from prosperity. The first is a lack of focus. The 2006 Legislative Audit Bureau report on economic development found 152 different programs with 26 agencies, councils and task forces administering the grab bag of offerings. The lead economic development agency, the state Department of Commerce, has been led by four different secretaries in six years.

Perhaps this explains the state’s failure to follow through on key recommendations, particularly to foster economic clusters. The synergy that like-minded companies and institutions create when they both compete and cooperate is one of the driving forces of modern-day economies. (Think of Silicon Valley and its computer technology cluster.)

The leading thinkers agreed at the four UW-sponsored summits that a cluster strategy was the best organizing concept for setting priorities for Wisconsin’s economic development. Other states have successfully used this model; we have given it lip service. Similarly, the state has failed to advance a comprehensive marketing program. UW-Madison’s La Follette Institute, in a report to Competitive Wisconsin in 2006, concluded that the state was entirely overlooked by the trade press that follows business-site real estate.

The state’s economic-development effort, in short, lacks urgency and follow-through. The phlegmatic posture is encouraged by state officials, who go out of their way to emphasize the good news and ignore the bad.

Wisconsin’s fudging of its unemployment rate is a good example of ignoring bad news. Bad data does not always lead to bad policy, but it stifles any sense of public urgency or accountability in addressing the failures.

Money magazine, which used the understated jobless rate, recently ranked Madison #2 in the country for job prospects. The Greater Madison Convention & Visitors Bureau and local media touted that recognition. But a similar Yahoo/Forbes magazine ranking of Best Cities for Jobs used actual job growth in its calculation, not the misreported unemployment rate.

Madison ranked 158th in that survey.

Obviously, if a state or region is #2 in the country, economic development policy must be successful. Why question the political leadership or change direction? But if a university town languishes in the middle of the national rankings, the state’s economic-development policies require attention and debate.
In fact, in actual job growth, Madison’s ranking was the lowest of any Big Ten campus community outside of highly distressed Michigan. The “rosy or smoky” reporting had an impact. It delayed a needed debate about economic direction.

Not only has an honest debate been delayed, but some officials continue to attack anyone who questions the state’s direction. Most recently in response to Thomas Industries moving almost 300 manufacturing jobs from Sheboygan to Louisiana, the state’s commerce secretary, Richard Leinenkugel, said, “Any time you go negative on these things, it doesn’t help in terms of business climate in Wisconsin.”

The secretary ignores the clear economic statistics—jobs are leaving the state. Ignoring the problem won’t make it better.

The final reason for Wisconsin’s economic failure is intangible: Call it business climate, call it the leadership or salesmanship factor. Businesses make location decisions based on objective factors, such as an educated workforce, business costs or tax rates. But as human beings, business executives also make long-term investment decisions based on their gut-level trust in the political system.

Those gut feelings are influenced by personal contacts—telephone calls, face-to-face meetings, handshakes with the governor and legislative leaders. All these help shape the perceptions of business executives.

For example, if the economy falters, do the business execs think the political leaders will cut spending or raise taxes? How much sway will political contributions have on economic policy? (The influence of money will always be there, but is it overriding?) If business leaders are upset about a policy, do they sense that they will get a fair hearing, or that they will be blown off?

Most of all, do they believe that the political leaders have a clear vision for the state’s economic development? By this measure, Wisconsin has not performed well.

In their initial letter to stakeholders in the Wisconsin Technology Council in 2002, the group’s leaders concluded: “The need for economic change is evident.... Barring dramatic change, some forecasts suggest [Wisconsin] per capita income will fall to 83% of the U.S. average in 20 years.” That downward trend is unabated. In 2002, the state was at 98% of U.S. per capita income; by 2008, it had fallen to 93.8%.

For better or for worse, Gov. Doyle has been at the helm during this slide. An increase in education spending and added incentives for venture capital and entrepreneurship aren’t sufficient by themselves for the state to enjoy economic success. Success requires a plan. It requires leadership in the governor’s office and in the cabinet offices. It starts with a positive attitude toward business, and it thrives with enthusiastic salesmanship.

But it also requires that a cold, hard reality be faced: Wisconsin is falling behind. Our economy is suffering, and so are our citizens. We need to build a more competitive economy or reconcile ourselves to becoming the Alabama of the north.

Thomas Hefty is the retired CEO of Blue Cross-Blue Shield of Wisconsin. He co-chaired Gov. Doyle’s Economic Growth Council from 2003 to 2005. John Torinus Jr. is president of Serigraph Inc. in West Bend and a columnist for The Milwaukee Journal Sentinel. Both Hefty and Torinus are past chairs of Competitive Wisconsin, a nonpartisan business advocacy group.