MUNCIE – David Ricks, CEO of Lilly, recently told members of the Indiana Economic Club that state policymakers need to address poor educational attainment and high health care costs. These topics will sound familiar to faithful readers of this column, but it is refreshing to hear these points made so publicly by a business leader.

In a future column I’ll detail comprehensive policy options for reducing health care costs. As difficult as it will be to remedy this important issue, it is easy compared to our educational challenges. To fix our low levels of educational attainment, Indiana must better educate a higher share of its young adults and make more communities into places they’d like to live. This may sound easy, but any progress here requires that almost everyone set aside some long-held, mistaken opinions. The two most misunderstood issues are about what ails education and how taxes factor in to the location decisions of people and businesses.

Indiana’s comprehensive school reforms are not the problem. In fact, the success of broad school choice masked other problems. The evidence from several high-quality studies makes clear that school choice mostly benefitted students in local public schools. That should be unsurprising because the largest share of students who take advantage of school choice in Indiana move to another local public school, not to a charter or private school.

At the same time, a number of policy decisions other than school choice have reversed the state’s pathway to a better educated workforce. Indiana’s “go to college” rate peaked right at the moment the state began de-emphasizing college to both middle and high school students. That wasn’t an accident.

Gov. Mitch Daniels’ aspirational vision for educational attainment was replaced by a career focus that at its extremes saw sixth graders being pushed into truck driving careers. Those decisions were uninformed by any understanding of labor markets, disproportionately hurt children from poor families and constituted raw negligence at best, but it wasn’t the only problem.

While we began de-emphasizing college preparation, we also cut funding for K-12 and colleges. Had Indiana kept our education spending at the same level of state Gross Domestic Product that we did in 2010, we’d be spending close to $1.5 billion more today. In inflation-adjusted terms, we spent 17.5% less per student in the 2019-2020 school year than in the 2009-2010 school year. Despite the nominal budget increase last year, the inflation-adjusted cuts will likely exceed 20% less by the end of next year.

The reductions to higher education funding were even deeper. As a result of the de-emphasis of college and funding cuts, the “go to college”rate of Hoosier kids plummeted from 65% in 2015 to 59% in 2019. COVID made the situation worse. By my count, that’s roughly 40,000 “missing” college graduates in Indiana. To put in context, Indiana created 64,000 jobs for college graduates between 2010 and 2019. That was dismal.

In contrast, from 2009 to 2019, the nation as a whole created 14.1 million jobs for college graduates. Had we been growing at the national average, Indiana would’ve captured almost 275,000 jobs for college graduates during the long recovery of 2009 to 2019. As a matter of policy, Indiana has chosen not to supply the college graduates that the modern economy requires. That I believe, is the point of Mr. Ricks’ comments.

To be clear, not every person needs a college degree. However, 100% of the job growth over the past 30 years went to people who have been to college, and 81% of that growth went to those who graduated with a four-year degree. Individual people can make ends meet in many occupations that do not require a four-year degree, but there will be fewer jobs for them in the decades to come. Thus, cities and states cannot thrive without a high (and growing) share of college graduates. Indiana has chosen not to compete in that realm, and no amount of speechifying about ‘talent attraction’ can overcome that blunt fact.

The debate about school funding and aspirational education must take center stage in Indiana. This debate will involve many domains, most especially taxes. Among policymakers in Indiana, it is a widely held belief that tax rates are important influences on the location of firms and families. I’m sympathetic to that view and even shared it when I was a young economist. The problem with that opinion is that there’s very little evidence that it is true.

I have seen no credible study published in the past 40 years that finds state or local tax rates playing more than a very modest role in firm or family location decisions. Instead of reviewing that research, let me simply compare manufacturing between a low-tax and high-tax state – Indiana and California.

Hoosier policymakers like to tout Indiana’s low taxes and large manufacturing industry. California taxes its manufacturing firms at almost exactly a 50% higher rate than does Indiana, but California’s manufacturing industry is today four times bigger than Indiana’s, and it has grown 75% faster than Indiana’s over the 21st century. Here’s the real rub. Between 2000 and 2019, California raised taxes on manufacturing by almost one full percentage point, while Indiana cut taxes for manufacturing.

More telling perhaps is that the average Hoosier factory worker produces $219,100 per year in goods, while the average California factory worker produces $337,900 per year. That is a stunning productivity difference. The reason California’s factories are so much more productive is that  they employ a 51% higher share of college graduates than do Indiana factories.

There’s no way to sugarcoat it, Indiana’s low educational attainment leaves us unprepared for the start of the 21st Century. Since 2000, and more importantly since the end of the Great Recession, Indiana’s economy has underperformed in every important measure when compared to the nation. We are well behind in productivity, educational attainment, population growth, and personal income. Sadly, we are getting relatively worse in all these categories.

Indiana’s strategy of cutting taxes may have been desirable in 1975, but the needs of families and businesses have changed in the past 50 years. Today, the employers Indiana desperately needs are choosing places with dense numbers of college graduates and a strong pipeline of educated workers. In turn, those desirable workers overwhelmingly locate in communities with a high quality of life, which above all else means high-performing, well-funded schools.

It’s time we all have the intellectual courage to admit that Indiana competes poorly on the factors that drive population and employment growth in the 21st Century. We also need the courage not to accept it. 

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics at Ball State University.