Mitch Daniels’s Indiana is an unusual outpost of fiscal discipline in the Midwest. Compared to its neighbors, Indiana stands out with its AAA rating and post-recession budget surplus. And now it looks like the governor whom the Hudson Institute’s Herb London once described as “viscerally parsimonious” has shown that fiscal sobriety is good not just for the taxpayer, but for the job-seeker.
In an original new study comparing the experiences of Indiana and Michigan during the recession, Dr. Mike Hicks and Kevin Kuhlman of Ball State University write:
Indiana and Michigan are remarkably homogeneous states, with similar populations, demographics, and industrial structure. They are adjacent and enjoy very similar patterns of historical development. The experiences of both Indiana and Michigan’s economies over the past 30 years have been similar. However, during this recession, the experience of the two states has diverged remarkably. This divergence is a subtle story of economic and fiscal conditions in both states.
The authors used a model to predict how Michigan would fare in the recession. The model perfectly predicted the 14.9 percent unemployment that Michigan experienced. The model also predicted Indiana would top 14 percent unemployment, but in actuality the Hoosier state peaked at 10.8 percent. Between 2007 and 2009, weekly wages in Indiana rose by $3.51 but dropped by $22.93 in Michigan.
Hicks and Kuhlman found that:
• Changes in manufacturing didn’t explain the difference between the states. Indiana is actually more manufacturing intensive than Michigan.
• Indiana reduced taxes during the recession while Michigan passed two tax increases.
• Michigan got more stimulus money than Indiana, yet performed worse. Even though unemployment was 40 percent higher in Michigan than in Indiana, each new stimulus job cost $70,000 more in Michigan than the Hoosier State.
• Indiana managed to keep its bond debt low. It has about one-third the amount of bond debt per capita as Michigan, an important signal that taxes won’t need to rise.
Daniels inherited a bankrupt state in 2005 and immediately launched a host of initiatives to bring Indiana’s fiscal house in order. The anti-Keynesian diet that followed—cost-cutting accompanied by low taxes and low levels of borrowing—resulted in the right kind of economic stimulus. A good lesson for other states.
Streeter is a Distinguished Fellow for Economic and Fiscal Policy at the Sagamore Institute and a Nonresident Transatlantic Fellow at the German Marshall Fund.