U.S. Economy

How Wisconsin Can Escape the Middle of the Pack

Tax breaks only go so far. The next step is reversing cuts to the state university system.

Standing out isn't easy.

Photographer: Darren Hauck/Getty Images

Wisconsin is, by many measures, a medium state. It ranks 20th in population and 24th in median household income (as of 2016). Its poverty rate is 18th. Its best university, the University of Wisconsin-Madison, ranks 46th among national universities in U.S. News and World Report. Its biggest city, Milwaukee, is the 31st-largest city in the country.

True, Wisconsin has suffered from the decline of manufacturing, but it isn’t a Rust Belt sob story like Michigan or Ohio. It hasn’t been among the places hardest hit by the opiate epidemic. When people think of the state, the first thing that comes to mind is probably either beer or cheese.

During the 21st century, Wisconsin’s economic performance has been … well, middle of the pack. In terms of income, it has lagged Minnesota and Illinois, the neighboring states to which it is most often compared:

Ho-Hum in Wisconsin

Real median annual household income

Source: Federal Reserve Bank of St. Louis

And in terms of employment and population change, it has done a bit better than Illinois but a bit worse than Minnesota:

Stuck in the Middle

Share of population that's employed

Source: Federal Reserve Bank of St. Louis

 

There Are Worse Things Than Being No. 2

Index of state population growth*

Source: Federal Reserve Bank of St. Louis

* 2001 = 100

There’s nothing wrong with comfortable mediocrity -- not every state can be a Texas, Washington or Virginia. But there’s also no reason not to strive for excellence. Since his election in 2011, Wisconsin Governor Scott Walker has gained a reputation as a free-market economic reformer -- conservatives credit him with lowering the state’s unemployment rate, and praise his policies of union-busting and austerity. Walker also enacted a tax credit for manufacturing and agriculture. There seems to be a hope that Walker’s business-friendly policies will be able to transform Wisconsin into a snowier version of Texas.

So far, results look decidedly in keeping with existing trends. An analysis by economist Noah Williams of the University of Wisconsin found that the tax credit did boost the manufacturing industry in Wisconsin border counties, relative to their neighbors just across the border in other states. That’s good news. But the result can’t necessarily be extrapolated to the whole state -- it could just come from companies deciding to move their factories a few miles across the border. Overall, the employment bump from the tax credit raises total manufacturing employment in the state back to the level of 2007:

A Long Way From the Top

Wisconsin manufacturing employment

Source: Federal Reserve Bank of St. Louis

Meanwhile, neither tax incentives nor Walker’s high-profile battles with unions have prevented Wisconsin from slowly but steadily losing ground to Minnesota. This is unsurprising -- free-market policies usually don’t do much to boost state economies. In order for states to attract new businesses, it’s usually not enough to simply remove barriers -- businesses have to have a reason to choose a state in the first place.

So what can Wisconsin do to make itself a more appealing destination for business investment? One idea is to go after the technology industry. In Wisconsin’s case, that probably means getting both large tech companies and venture capital dollars to move to Madison, home of the state’s best university. As economist Enrico Moretti has shown, cities with high levels of human capital have increasingly pulled away from old-line manufacturing hubs, and Madison is Wisconsin’s smartest city. Especially in a mid-sized state like Wisconsin, urban policy and state policy go hand in hand.

There is already some progress on this front. Wisconsin has tax incentives encouraging tech startups -- the Qualified New Business Venture program and the Venture Capital Investment program. And Madison is starting to show a few glimmers of tech activity. But there’s a long way to go -- according to the Kauffmann Foundation, a think tank, Wisconsin ranked dead last in an index of business startup activity.

Meanwhile, Walker’s approach to the state’s higher-education system could be hurting the cause. The governor has slashed hundreds of millions of dollars from public-university budgets. His weakening of tenure will make the state’s universities less attractive to top researchers, and make it much harder for  UW-Madison to climb the rankings.

This is bad news for Wisconsin’s technology industry. Big prestigious universities are essential in creating high-tech clusters, from the University of California-San Diego to the University of Texas at Austin. UW-Madison is hard at work trying to support the city’s tech industry, but budget cuts and weakened tenure will make this an uphill battle.

In addition to reversing his anti-university policies, Walker should consider another measure -- banning noncompete agreements. Noncompetes, which prevent the free movement of employees between companies, hold back knowledge-based industries by putting strictures on the free flow of ideas. California’s refusal to enforce noncompetes is often cited as one reason behind Silicon Valley’s enduring success, yet few other states have banned the practice. Wisconsin could score a major coup by becoming the first major state after California to eliminate this anticompetitive practice. Doing so would certainly turn some heads in the tech industry.

Madison shouldn’t be the only focus for Wisconsin’s growth policy -- there’s also Milwaukee, whose economy has lagged in recent decades and which could use some major urban renewal. But overall, Wisconsin’s leaders should realize that in order to break out of the pack, the state will need more than tax incentives for old-line industries. It will need to upgrade its cities to draw the industries of tomorrow.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Noah Smith at nsmith150@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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