By Michael Hicks
Guest Columnist 

Over the past couple years, the Indiana Economic Development Corporation has advertised record capital investment numbers. In 2022, they reported new investments of $22 billion and in 2023 another $29 billion. These are both record years for the IEDC. Still, more than one state official has lamented that taxpayers don’t seem to grasp how ‘big’ these numbers are, and how important they are to Indiana. That’s a good question, worth exploring.

Michael J. Hicks

The IEDC was formed during the Gov. Daniels Administration as a privatized development group, overseen by a board of business and elected leaders. It is small, fewer than 100 folks, and it performs a dizzying array of activities from managing the READI Grants to helping businesses navigate state regulatory agencies. Recently, the agency began taking on a role as a real estate developer. That decision warrants a separate column (along with months of legislative hearings). Otherwise, the IEDC has been a model development agency for close to two decades.

The data they report comes from deal agreements for businesses planning to come to Indiana. These are promised investments that will play out over a number of years. Recent reporting suggests about one-third of these projects have investment lower than expected. Close to another third aren’t fully reported. So, the ultimate level of these investments should be taken with a grain of salt. But, that isn’t why taxpayers should view these announcements with some skepticism.

Indiana’s total stock of capital reported to local governments is more than half a trillion dollars. About 35% of that total avoids taxation through abatements, exemptions and deductions. Nearly all of the investment claimed by IEDC will be subject to abatements. So, under the very best circumstances, it’ll be years before these entities pay any meaningful amount of property taxes. Moreover, any property that is not abated will surely land within a Tax Increment Financing District. In those places, taxes will be diverted from their intended use for 25 years.

Taxpayers who are skeptical about these announced investments have a very good point. Of course, this investment often brings new jobs, or at least the claims of new jobs. There, the skepticism of taxpayers is even more justified.

Most of the new job announcements are manufacturing firms. That makes sense, because most businesses aren’t ‘footloose’ in the sense that they can locate somewhere other than where their customers are located. So, new job announcements are almost always limited to manufacturing, logistics and sometimes a corporate headquarters. These are all establishments that ‘export’ their goods or services to consumers outside their general vicinity. So how has our success at attracting capital investment translated into jobs?

Manufacturing employment in Indiana peaked back in 1973, and we’ve been chasing more of it ever since. We started the Great Recession with more than 545,000 factory jobs, but shrank by more than 120,000 in two years. From 2009 to 2018, we slowly recovered those jobs. Then, Indiana started to slip into recession. COVID offered a huge boost to manufacturing production and sales, but not jobs. Factory employment in Indiana clawed its way back, peaking in late 2022, within a few hundred jobs of our 2007 and 2018 levels. We are back onto our long-term trend of fewer factory jobs.

Our transportation and warehousing jobs have grown, adding close to 30,000 since the start of COVID. So, we might be thankful for these jobs, but we might have other questions as well, such as how good are these jobs. Well, that is another uncomfortable answer.

The average inflation-adjusted wage for Indiana’s transportation and warehousing workers is about 0.5 percent lower today than it was in 1998. The reason for this is that job growth in these sectors has been concentrated among low-wage occupations, with turnover topping 40% per year. This sort of job creation dynamic cannot deliver prosperity to Indiana.

One thing the additional capital investment does provide is GDP growth. Inflation-adjusted GDP in Indiana manufacturing is up almost 13% since before COVID, and almost 8% for transportation and warehousing. Thus, the overall size of the Hoosier economy is correlated with growth in capital investment among these industries. That is about the most unsurprising observation any economist could make. But it prompts the question, how could capital and investment in Indiana manufacturing be so much higher today, but employment lower?

Well, all that capital is designed to save labor. So, the investment numbers outlined by the IEDC include equipment and software used to cut labor costs. This is a good thing that healthy economies have been doing for several centuries. Labor-saving technologies make our lives better in many diverse ways. Broad uses of these technologies enrich us all, but the effect is not uniform.

Better-educated workers benefit enormously from labor-saving technologies. The reason for this is that labor-saving technologies complement the skills of well-educated workers. So, firms with high capital-to-labor ratios typically hire a larger share of better-educated workers. However, poorly-educated workers are far less likely to benefit from labor-saving technologies. The reason for this is that these technologies substitute for less-educated workers, rather than complement them.

The growth of GDP that accompanies capital investment does so without adding new workers. Indiana’s factories today are more productive than they have ever been, and they produce more goods (in inflation-adjusted terms) than at any time in history. We’re just doing so with much fewer workers.

There’s nothing wrong with firms purchasing labor-saving technology. Indeed, we should celebrate these investments. However, the typical taxpayer isn’t going to experience any real benefit from this investment. In fact, there’s more than a little evidence that the promiscuous use of tax incentives—particularly abatements—actually makes most taxpayers worse off from this new investment. After all, they are the ones who suffer from additional road congestion and fund the increased demand for public services and road repairs. Normally, a new business would help shoulder at least part of the costs of these public services, but abatements place all the burden on the existing businesses and families.

Alone, none of these observations constitute an argument against business attraction policies, business tax exemptions, deductions or abatements. They are, however, food for thought. We should continue to celebrate labor-saving technology, and we should prepare more of our citizens to thrive as their job tasks are replaced by machines. Also, we shouldn’t be surprised that voters are suspicious of economic development policies that offer substantial costs with minimal benefits. They may be right.