What We’ve Learned from Scott Walker’s Failures

Things haven’t gone according to plan for Wisconsin Governor Scott Walker (R). He took office claiming, “Get government out of the way of employers … who will then help Wisconsin create 250,000 jobs by 2015, and as we create those new jobs, we will be able to add 10,000 new businesses.”

  • As of the end of March, only 65,400 private sector jobs were added since Walker took office in January 2011.
  • Projecting Walker’s present rate of job creation out to 48 months would mean under 107,000 jobs created by 2015.
  • Before Walker was elected, Wisconsin’s Department of Revenue predicted the state would add 190,000 jobs by 2015.

Compared to other states:

  • Wisconsin ranked 11th in job growth the year before Walker took office.
  • Wisconsin ranked 37th after Walker had been in office 18 months. Walker argued during his recall election (June 5, 2012) that Wisconsin had “turned the corner on job creation.”
  • From September 2011 to September 2012, Wisconsin’s private sector job creation rate is now 44th of all the 50 states.

Governor Walker started with an aggressive plan to create jobs. Republican majorities in the Assembly and State Senate took care of their end of the deal and did what he wanted. They passed bills that:

  • Ended most public employee union bargaining, thereby providing funds for income tax cuts.
  • Reduced environmental regulations.
  • Created the  Wisconsin Economic Development Corporation to provide subsidized credit and grants.
Maybe adding a wall will keep businesses in Wisconsin?
A slightly used wall available in Berlin, Germany. Maybe it would keep businesses in Scott Walker’s Wisconsin? WEDC funds could be used to purchase it!

Why it hasn’t worked…

Whether we like it or not, we are in a knowledge based world. Jobs are increasingly technology driven. While Scott Walker and his Republican minions attempt to take us back to a simpler time, that time has passed. Today’s growing employers aren’t low cost, low tax driven smokestack industries that want environmental regulations scrapped. Those employers are going to Third World countries and we dare not even try and compete with them.

Today’s growing employers are more concerned about strong intellectual property laws than loose government regulation. Quality of life issues are important and don’t include open pit taconite mines.

Walker has plenty of tools for job creation. Unfortunately, they are the kinds of tools Mexico, the Philippines and Bangladesh offer. Expecting lower taxes, less regulations and government subsidized credit and grants to attract businesses to Wisconsin is an example of Republican dogma replacing research. It is a classic case of a company developing a product that they want rather than what their customers are looking for. Looking at the data backed information available, it is highly unlikely Walker will increase his rate of job creation throughout the rest of his term without a major U.S. recovery that trickles down to the 44th most effective job creating state.

Examining each piece of Walker’s plan to attract small businesses to Wisconsin…

Tax cuts/Less regulation Business owners that are expanding and hiring are putting profits back into their operations. Consequently, these companies and their owners aren’t paying state income taxes. Even going to the point of eliminating state income taxes will not impact them.  Consequently, state income tax rates are not a relocation consideration.

The San Francisco Federal Reserve Bank, in co-operation with the National Federation of Independent Businesses, studied a number of state level factors and their impact on employment in a FRBSF Economic Letter(1).

States where business owners cited high taxes and excessive regulation as problems actually experienced higher growth than other states. The difference was not statistically significant, yet low taxes and less regulation clearly don’t drive employment.

Harvard professors Michael Porter and Jav Rivkin interviewed Harvard alumni about their decisions on locating manufacturing and research and found tax rates were sixth on their decision tree and excessive regulation was eighth(2.).  A Center on Budget and Policy Priorities study (3) found state income tax cuts are rarely beneficial and more often detrimental to job creation.

Grants and subsidized credit –The Federal Reserve Bank researchers found the number of business owners citing financing and interest rates as their top concern hardly budged. It was low in 2006 and has remained low. Business owners will maintain their lender relationships and with the very low interest rates today, WEDC has little to offer successful entrepreneurs.

Actions tell us more than words. While Walker and fellow Republican’s claim to believe in the sanctity of private enterprise, their actions in forming WEDC speak volumes about their doubts that the private banking system can effectively fund businesses. WEDC’s high delinquency rate illustrates the ineffectiveness of a liberal government’s efforts to pick winners and losers in the marketplace. Lesson learned, leave banking to the bankers.

What drives job creation?

Instead of cheap taxes and little regulation, the Harvard researchers learned decision makers want competitively priced, skilled and productive workers. Wisconsin can’t meet these needs if the focus is cutting education funding to produce a budget surplus.

The Center on Budget and Policy Priorities study found start-up businesses (especially high tech ones) form in clusters, generally near major universities.  The Center’s researchers found state and local governments make important contributions to job creation by providing high-quality education at all levels and reliable physical infrastructure. Parks and public sponsorship of cultural events can greatly affect how attractive a location is to small business employees and customers.

Even more striking than the lack of jobs during Walker’s term is the quality of them. Early in Tommy Thompson’s (R) tenure as governor, Wisconsin’s per capita income ranked 25th. By the end of his protegé Scott McCallum’s term in 2002, Wisconsin’s ranking improved to 19th highest in the U.S.  While Jim Doyle (D) was governor, Wisconsin’s per capita income deteriorated to the 28th highest and has stayed in the mid to upper 20s into Walker’s term.

While it is difficult to quantify that state government spending or the governor’s priorities have any impact on per capita incomes, that shouldn’t stop us from asking the question. Thompson’s term was known for prolific spending. While he was governor, the University of Wisconsin and the K-12 system never had it so good. Jim Doyle cut annual spending increases from Thompson’s 7.4% to 3.1% during his term. Much of the reduction in annual spending increases was at the expense of the U.W. and the K-12 system. Walker made even more dramatic cuts to education that may contribute to further deterioration of Wisconsin per capita incomes. While frugality is always celebrated on this website, it could be that Thompson spent wisely and Wisconsinites were better off because of it.

Figure 1. Wisconsin's Per Capita Income Rank. Source: Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.  Released March 2013.
Figure 1. Wisconsin’s Per Capita Income Rank – Lower is better; Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. March 2013.

Copy the winners

The first, second and third per capita income states are Connecticut, Massachusetts and New Jersey. All are considered “high tax states”. Maybe it is just coincidence, all are  home to world-class universities. Connecticut has Yale, Wesleyan and the University of Connecticut. Massachusetts has the Massachusetts Institute of Technology (MIT), Harvard and Boston University. New Jersey has Princeton, Rutgers and Monmouth University.

Perhaps it is more than coincidence that Wisconsin enjoyed its highest per capita income rankings when we had a governor that spent freely on education? High end employer concerns about a qualified workforce are assuaged if they are located near an MIT, Harvard, Yale or a well funded University of Wisconsin.

To make Wisconsin a jobs magnet, our recent experience should teach us to do the opposite of what Scott Walker has done. This means emphasizing education and making the state a learning and research center. Taking this a step further, if we want to compete with Connecticut, Massachusetts and New Jersey, we need to use the resources of our state and make the University of Wisconsin system the world’s best. Instead of tolerating other colleges outspending us for our best young faculty, we need the resources to keep them and hire the best faculty at other universities.

Focusing tax dollars on core government functions will leave plenty of funding to go toe to toe with the elite universities. While Republicans want to privatize education, far better to privatize and cut the many market development programs scattered across state government. At the same time, a Peter Drucker style streamlining of the state government workforce, removal of 75% or more supervisors and selling the buildings they are kept in frees-up resources that can be pumped into the U.W. system. Truly elite universities in Madison and Milwaukee (for starters) provide the environment for the  cluster formation of high-tech businesses that drive successful state economies. Businesses that spring up around these clusters providing workers with everything from dinner to new houses offer bigger benefits to a broader range of Wisconsin’s economy than the original high-tech start-ups.

Summing-up

Regardless if you are measuring Scott Walker’s record based on his job non-creation or his inability to raise Wisconsin per capita incomes, he has been a failure. To make this a positive, we need to learn from his failures.The richest states determined long ago that being a low cost leader as far as taxes and regulation is counter-productive.  We need to step outside the box and spend what it takes to develop a niche for Wisconsin as the center of the knowledge industry. Then, step back and let the market do its magic for Wisconsin and citizens.

1. Atif Mian and Amir Sufi, 2013; Aggregate Demand and State Level Employment;  FRBSF Economic Letter.

2. Michael E. Porter and Jan W. Rivkin, 2012; Prosperity at Risk, Harvard Business School.

3. Michael Maserov, 2013; Cutting State and Personal Income Taxes Won’t Help Small Businesses Create Jos and May Harm State Economies, Center on Budget and Policy Priorities.


Thanks for commenting!

%d bloggers like this: