A recession is time to think long term

The United States and much of the world appears to be headed for an economic downturn.

For those of us in Indiana, evidence about the depth of a downturn is mixed. We have a high share of manufacturing, which will be heavily affected by higher interest rates. This makes it more likely our recession will be worse than the national average. However, manufacturing employment is now a smaller and less important part of the state and national economies than it was in 1981 when we last went through this type of downturn.

The nation began the 1981 recession with an unemployment rate of 7.2%. We are today sitting at 3.5%, and businesses will be reluctant to cut employment given their recent experience with tight labor markets.

However, the big lesson of a downturn is really how little control anyone has on short-term macroeconomic conditions. That should occasion us to think a bit more intelligently about the long term, where public policy and individual decisions will have influence.

It is election season, so we are unlikely to hear much substantive reflection on the long-term state of affairs in our state. Still, I would hope there are serious thoughts about the many ways state and local government, businesses and households can adjust their temporal window of concern. We should be thinking about Indiana’s economy in, say, 2030 or 2040 instead of dreading 2023.

One way to begin that thinking is by listening to the aspirations of Hoosiers. When I give talks around the state, I like to ask people, “What would you like to see in your local economy over the next 20 to 30 years?” The answer is always the same. Folks want to see steady population and job growth, increased prosperity and a chance for young people to build wealth through home ownership.

There is always interest in schools being a centerpiece of the community, and people my age express some hope their children could find a way back to live nearby. I often hear talk of better institutions, from local government — schools especially — but also congregations, civic clubs and the like.

There is clear frustration that national politics has poisoned the frank and pragmatic discussions we need to have locally. I also hear a lot about bad roads, crumbling infrastructure, the lack of public services and general underinvestment. These are all worries about economic growth.

There’s a lot I don’t hear. Few folks in Indiana lament the shortage of beaches or mountains in Indiana. I’m usually the only one complaining about the cold, but then I spent most of my life in the South.

When I ask about local concerns, I don’t hear about crime or immigration, which books are in the school library or which pronouns we use. I also don’t hear folks complain about taxes. None of these issues have come up in the more than a decade I’ve been traveling around the state.

My anecdotal evidence of people’s concerns are useful only because I speak to nonpartisan groups. When I’ve attended political events, I hear a very different set of concerns that are almost a caricature of the facts. I try to stay away from these because there’s so little to learn from a political event.

I note this experience because the concerns I hear about are all long-term issues that affect the lives of residents, and more importantly, the lives of their children and grandchildren. One way to think more wholesomely about the long-term economy is to view economic growth the way economists do in their writing and technical research. It is so very different from what you hear about the politics of growth.

For most of the past century, economists have used mathematical models to explain the growth of an economy. The model is that growth (e.g., change in incomes or GDP) is a function of people, capital investment (land or factories), human capital and technology.

We could simplify it a bit by dividing everything by the number of people. So per capita income is a function of the capital per person, human capital per person and technology per person. We could do this at a county or state level or between nations. We can do it in a single period, say, 2010 through 2020, or we could look at data over decades or even centuries.

The findings of this research are pretty compelling. My interpretation of the many dozens of studies I’ve read on this matter and some I’ve authored help me think about the future in a more focused way. These are what the statistical models of several centuries say.

Before the Industrial Revolution, arable land really, really mattered. During most of the Industrial Revolution, capital investment in factories and farming really mattered. People mattered, too, but people migrated like wildfire to economic opportunity. So if you had land and capital, you could find people.

Sometime in the middle of the 19th century, technology began to really matter. Fortunately, that technology centered mostly around manufacturing cities like Detroit or Boston.

Technology still matters, but sometime in the middle of the 20th century, human capital really began to influence growth. Human capital is hard to measure, but increasingly, we find the years of education per adult really explain growth. During the 20th century, technology started to move away from manufacturing cities to places where lots of highly educated workers lived. Think of Detroit in 1920 versus Cupertino in 1990.

By the 1990s, capital began to matter far less, and indeed by the 21st century, studies began to report that in the developed world, nearly all of the growth and prosperity between regions was attributable to human capital. This isn’t really a surprising result when one considers the goods and services people are now consuming, how they are produced and the extraordinarily free flow of capital across the developed world.

These findings should prompt Hoosiers to ask their leaders where they stand on these issues. Do they think future growth will primarily come from large capital investments in the state or from the human capital of our people?

If they say growth is about capital investment, they are mistaken and we need different, better-educated leaders. If they say the future is about human capital, we need to ask why the state is in the midst of historical disinvestment in people.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected].