Start me up

Conclusion of a two-part series on the Wisconsin economy.

Let’s cut to the chase.

Wisconsin needs a new economic strategy.

The Badger state’s recovery from the Great Recession is painfully incomplete, as part one of this series argued. Dane County and select other locales are doing just fine, while much of rural Wisconsin and portions of Milwaukee are economically struggling and socially troubled.

It’s worrisome that the downturn, which took a buzz saw to middle-class jobs, is long over. According to national benchmarks, the recession ran from December 2007 to June 2009. Many economists worry that by historical standards we’re due for another fallback.

The clock, in other words, is ticking for Wisconsin.

It’s not that Gov. Scott Walker and his fellow Republicans, who have unified control of state government, haven’t had economic successes in following a classic conservative game plan since the Democratic collapse of 2010 — cut taxes, reduce regulation, undercut unions and curb class-action lawyers.

Regarding the economy, “on many levels we seem to be trending upwards,” says Brett Healy, president of the conservative MacIver Institute for Public Policy. He points to a list of corporate construction projects in southeastern Wisconsin: German candy-maker Haribo building its first American plant, Amazon opening a giant warehouse on I-94, packaging materials distributor Uline leaving Illinois for Kenosha County, and, of course, the Foxconn mega-deal that promises 13,000 high-tech assembling jobs in return for $3 billion in subsidies.

(Gov. Walker’s office and re-election campaign did not respond to repeated requests for comment.)

“If you’re Gov. Walker, these recent announcements are a sure indicator that Wisconsin is doing something right,” says Healy, who adds his own cautionary note that time will tell what pans out.

The problem is that the state’s commitment to manufacturing, even with its smart nod to high-skilled manufacturing, is one-sided and overwhelming. Part and parcel of the yesteryear economics that holds up the chimera of mining as the savior of northern Wisconsin.

And consider that the Foxconn package is the costliest manufacturing subsidy project in Wisconsin history by a factor at least 10. And that payback in new taxes generated by Foxconn, assuming the campus develops as proposed, won’t come until many of us are dead and buried. No less than in 2043, according to the Legislative Fiscal Bureau.

What else to do to revive Wisconsin gets tricky. Because there are no money-back guarantees for plotting economic strategy. Directing resources at one strategy usually comes at the expense of pursuing another opportunity. The politics of it all — sometimes far-sighted, sometimes crass — are undeniable. So is the thick syrup of delicious special interest money that always coats whatever the pols swallow. Did I say it gets tricky?

Here’s the point: Government does best when it sticks to the basics. Infrastructure! Education. Transportation. Safety. Health. Parks. And if it does incentivize certain economic behaviors government should do so carefully and in a way that provides public good and not private payoff.

And there has to be a vision. Or as hockey legend Wayne Gretzky famously put it, you need to skate “to where the puck is going to be, not where it has been.” That isn’t happening. Wisconsin tenaciously holds on to the economics of nostalgia.

It’s all about manufacturing. The governor even declared October manufacturing month in Wisconsin.

Consider the sweeping 2011 tax credit that all but eliminated the state income tax paid by factory owners and farmers. (Dropping it from 7.9 percent to .4 percent after the credit was fully phased in this year.) The value to claimants? Almost $300 million in fiscal 2017, which is projected to more than double to $650 million in the new two-year budget

The seeming good news is that a conservative think tank calculated that the tax credit produced more than 20,000 manufacturing jobs in Wisconsin, rising to a total of 42,000 when spinoff jobs are considered.

“My results suggest that broad-based cuts in business taxes could generate substantial employment gains in manufacturing and overall,” UW-Madison economist Noah Williams wrote in Forbes.

The bad news is that Williams can’t tell you just where the jobs were created and if the people collecting the tax credit actually added manufacturing jobs. His results are purely an extrapolation — not a nose count — based on comparable data with other states. He admits his paper is not a cost-benefit analysis.

“I don’t think those tax credits make a darn bit of difference,” says Steven Deller, another UW-Madison economist. Deller compares the manufacturers’ tax credit to the mortgage-interest deduction homeowners take on their income taxes.

Everybody claims it, just as they claim their property taxes as an income tax deduction. “But do those deductions cause you to buy a house? Noo!” Deller intones. Ditto with the assertion that factory owners add jobs when their income taxes are cut.

All this, you could say, is “academic,” because when the federal count of Wisconsin manufacturing jobs was released shortly after the Williams study was announced, it showed Bucky had actually lost manufacturing jobs in 2016 — a decline of 3,776 jobs from December 2015 to December 2016.

Just as bad, there was a 5.3 percent plunge in manufacturing wages; one of several troubling economic turns reported by the Milwaukee Journal Sentinel.

This was a timely reminder that while the computer-directed workflow and robotized production of advanced manufacturing reatly improves productivity, it doesn’t necessarily add a whole lot of jobs. That’s another reason why skeptics wonder if Foxconn will ever produce 13,000 jobs.

So where is the puck headed?

Max Lynch, 29, is passionate if not furious. Milwaukee-raised and UW-Madison-schooled, he is a co-founder of Ionic, the Madison-based platform designer for mobile app developers. Backed by more than $12 million in venture capital, mostly from coastal sources, Ionic sells to the world with a staff of 25.

We are on the phone, and Lynch, who’s filled with startup brio, tells me that Madison tech companies do not need tax breaks! Yes, this is an exclamation.

“Taxes are not even remotely important to our company,” he says. “We never even think about it. No! We are in a growth industry. We are investing a lot of money to grow quickly. Our constraints are people and capital. We need [money to hire] talented people. Taxes are irrelevant. The politicians talk about attracting manufacturing companies with tax breaks — that is completely the opposite of what you would do to grow a technology industry in Wisconsin. And the technology industry by many measures is the future of this state.”

The most valuable companies in Wisconsin are going to be in Madison, Lynch predicts. “The kinds of companies we’re building are going to be valuable in a way that manufacturing companies just won’t be.”

That’s because manufacturers, particularly those in traditional supply chains for cost-cutting corporate giants, are competing for those contracts on price per unit. That’s not true of the burgeoning software industry. “We are building companies that have incredibly high profit margins, that can reach millions of people and have low operating costs. You’re going to see an outsized amount of value created in Madison that’s going to overcome the downsized Milwaukee.”

Whoa! This is the kind of talk that drives people in Milwaukee and the outstate crazy. Yet another provocation from arrogant, jerky Madisonians who think they’re hot stuff. I mean, you could write a book about it. (Katherine Cramer did about the rural backlash: The Politics Of Resentment.)

And the lack of cooperation between Madison and Milwaukee — or even polite acknowledgement of one another — well, you could write an Isthmus cover story about that.

But Lynch is on to something. The Madison tech world does have a fire in its belly. Last week, we reported how Dane County in the last few years has beaten the pants off the rest of the state in new jobs and new businesses.

From 2010 to 2014, the number of jobs in Dane County jumped by 9.7 percent — more than double the 4.3 percent rate for the rest of Wisconsin. In terms of business establishments, Dane County’s total increased by 3.1 percent while the rest of Wisconsin suffered a 1.6 percent decline. Note that Dane County also beat the national benchmarks (+8.1 percent jobs, +2.3 percent businesses), while the rest of Wisconsin trailed far behind.

“When you look at Madison something really special is happening here,” says Lynch. “It’s rare. But it’s very, very fragile. It calls for urgency, but I don’t see it.”

Lynch argues that the conservative social agenda pursued by the governor and the Republican majority at the Capitol is damaging the state’s tech scene. “It’s just not popular with the people building these companies,” he complains. “It’s just incredibly toxic.”

That agenda hurts recruitment of top talent to Wisconsin, he says. San Francisco and Boston are progressive strongholds. So are Portland and Seattle. Getting their best and brightest to relocate here — especially at the executive level, say, for a chief operating officer or marketing chief — is a challenge, says Lynch.

Or as Forrest Woolworth, a founding team member and chief operating officer of the mobile game shop PerBlue, puts it: The rest of the tech world needs to know “that Madison is not a crazy conservative place in the middle of a corn field.”

The swirl of culture war issues that periodically envelop the Capitol — and draw national attention — are a problem. “These are small razor cuts that keep adding up to a big wound.” Woolworth says. “They make it more difficult to relocate and retain people here.”

Woolworth, who’s a leader in the tech founders’ group Capital Entrepreneurs, does see progress. He praises the state’s frequently criticized Wisconsin Economic Development Corp., saying it’s handling of the Act 255 tax credits for qualified startups has been a boost for the state tech scene.

And he’s a big fan of MadREP — the Madison Regional Economic Partnership — for promoting the small but growing game-maker cluster in Dane County that includes the pioneering Raven Software, Filament Games and Human Head Studios. (Woolworth says collectively they probably employ 500 people.) On Oct. 27, MadREP will co-sponsor the first Midwest Games Development Conference at the Alliant Energy Center (see related story page 23).

Still, Woolworth sees a problem: “It always seems to come down to fixing manufacturing,” he says of the pols.

So what is the alternative? How do we build a broad-based Wisconsin prosperity?

“For years and years we used to believe — and the data supported it — that people follow jobs,” says Deller, the UW economist, who does community outreach for the UW-Extension. “That’s been kind of turned on its head. Now jobs follow people.”

Successful communities are strong on infrastructure and encourage entrepreneurism. “Placemaking” as the experts at UW-Extension call it.

Deller cautions that placemaking is a long-term strategy for economic development. Five to 10 years to pay off. Eau Claire, the college town of 68,000 in western Wisconsin, has been praised for building on the city’s urban charms and pulling together UW, tech school, business, civic and arts leaders in common cause.

This includes indie rock icon Justin Vernon of Bon Iver, who’s chosen to dig his roots into his hometown (including making an arty video for Red Wing boots celebrating the terroir) and has gathered the sort of tattooed, big-bearded country hipster creative community that figures into new economy success. (Yes, like in Brooklyn.) There’s good synergy here.

Eau Claire’s tech avatar is former music major Zach Halmstad, founder of Jamf software, which employs 200-plus locally and sells Apple-focused enterprise tools worldwide from its offices in Eau Claire and Minneapolis. He and Vernon, old music buddies, are investors in downtown Eau Claire.

“We’re both thankful for the opportunities we’ve had in Eau Claire, “ Halmstad told the Xconomy news site.

Deller likes the Eau Claire leadership model. “They’ve had a taste of success, and now they’re trying to build on it.” For Deller, the challenge is fostering entrepreneurship.

“Back in the 1950s and 1960s, the engine of economic growth was the Fortune 500. They were the source of jobs,” he says of America’s largest corporations. “Now almost all the net job growth comes from startups and smaller businesses with less than 50 employees. That’s where Wisconsin is lagging.”

Deller and his Extension colleagues make the case that there is a native entrepreneurism already underlying hardscrabble country life. That is, in how a lot of people cobble together work to keep bread on the table.

Over the course of the year, you might do custom combining of farm fields, relief milking for dairy farmers, drive a school bus, and fix farm machinery in your garage-shop, explains state Sen. Kathleen Vinehout (D-Alma). “There’s a lot of entrepreneurship, but it’s not long on security.”

“More and more people are working for themselves,” says Tessa Conroy, a UW-Extension economic development specialist. These DIYers, Conroy argues, harbor the seeds of a new rural economy and need to be encouraged and supported. She likes their initiative, but acknowledges that real growth occurs when the self-employed create businesses that hire others.

Conroy notes an important reality to be faced in the placemaking approach: Entrepreneurs tend to be more restless than other people.

“They can move or live where they want, so you have to ask: Is your community attractive to entrepreneurs? Do you have good internet, good access to markets, good roads, good schools?” Too often in rural Wisconsin the answer is NO.

That’s what I heard from Vinehout and her western Wisconsin colleague state Sen. Jennifer Shilling (D-La Crosse): Schools, roads, wastewater treatment, broadband and farm programs all need more funding. Keeping rural school districts competitive is a particular problem.

“The big cities in Minnesota keep winning the bidding war for our teachers,” says Vinehout. Rural districts are “becoming finishing schools” for teachers and administrators who leave for better paying jobs, Shilling grumbles.

Spotty broadband remains a hardship for education and business in the hinterlands, despite regular press releases from Madison on how much better things are. Only 32 percent of Wisconsin households are connected by broadband versus the national average of 47 percent, according to the Federal Reserve Bank of Minneapolis. Wisconsin is trounced by all its neighboring states in the provision of high-speed internet, except for Iowa.

Vinehout says her country road connection is so bad that her college-age son in the Twin Cities won’t even return home on weekends if he has work to do.

Knapp has heard the complaints from rural schools and businesses. “What’s really stifling them is [the absence of] broadband,” he says. “In some places the connection is so horrible that when the kids get out of school and are doing homework at 4 or 5, the internet comes to a screeching halt.”

That’s life in the country. Its problems fester unaddressed except in rhetoric.

Consider that in 2003, Republicans and Democrats at the Capitol bowed to industry pressure and set up barriers that effectively blocked local governments from providing quality internet service as a public utility.

Or how about the lack of concern UW and Capitol leaders seemingly had for cuts in the UW-Extension budget? Those cuts came at the expense of dozens of county ag agents who, among other tasks, help conventional farmers transition to organic farming.

Farming is never easy, but organic farming has been a bright spot in western Wisconsin. The higher price organics earn has provided a lifeline for family farms in Coulee country. The Organic Valley coop, whose national sales exceed $1 billion a year, represents about 600 Wisconsin farms and employs more than 500 people at its Cashton and LaFarge headquarters in little Vernon County.

“Pasturing is a critical step towards organic dairying,” says Organic Valley CEO George Siemon. “It’s a simple thing, but they cut the funding.”

Governmental neglect is the common thread connecting the left-behind lives of farmers and inner city Milwaukeeans. State Sen. Lena Taylor (D-Milwaukee) and state Rep. Jason Fields (D-Glendale) stick to the basics like Vinehout and Shilling do.

For Taylor, this revolves around programming for the 4E’s — education, employment, entrepreneurship and environment. “Our kids need to have the skills to be productive when they graduate high school,” she says. “They need a pathway to work. But that system is broken. I don’t know what else to say.”

For Fields, the basics come down to improving communications between cops and the community, cracking down on crime, reducing recidivism and improving transportation so his struggling constituents can get to jobs outside their neighborhoods.

Both are dissatisfied with how social programs are run. Taylor sees “a lot of waste in poverty programs because of poor coordination.” Fields blames “nepotism and cronyism” for shoddy performance.

Both lawmakers feel the culture of poverty has to be overcome. Taylor worries about three generations of teen mothers on public assistance. “Their normal is abnormal,” she says. “That won’t be easily fixed.”

Taylor adds: “You have people — I can’t believe I’m saying this — who are content making $600 a month. You can’t live on that. If that’s all you see in your worth, that’s a challenge. You want people to see themselves as innovators and entrepreneurs so they can pay their own way.”

Fields, one of only four Assembly Democrats to vote for the Foxconn package, gingerly raises a critical issue: Something has to be done to connect inner city Milwaukee residents with the Foxconn jobs that appear headed for suburban Racine County.

“Why is there resistance to getting people to where the jobs are?” he asks.

That’s a huge question. That’s a huge issue. It gets to one of the core challenges for Milwaukee and Wisconsin: How do you deal with Milwaukee as one of the most hyper-segregated cities in the nation? Forty years ago, the economic consequences were muted because the city’s thriving industrial belt was nearby, and black families prospered. Today those good paying jobs are gone from the central city with devastating social and economic consequences.

The National Urban League, in its annual State of Black America report, ranks the Milwaukee metro area fourth worst in the nation for disparity in annual income between black ($28,947) and white ($65,862) households. Another study ranked Milwaukee County as one of the worst counties in the nation — in the bottom 5 percent — for poor kids climbing out of poverty.

These kids are trapped in the poorest of neighborhoods.

Similar dire findings come regularly from COWS, the progressive-oriented think tank on the UW-Madison campus. Associate director Laura Dresser says Wisconsin’s horrible racial disparity is driven by the Milwaukee area’s “high levels of inequality, economic isolation and the inability to weave that region together instead of apart.”

The Milwaukee metro region’s economic engine, Dresser says, just isn’t reaching and lifting everyone up. Critics blame a pernicious suburban tilt in transportation planning — for buses, rail and freeways — that isolates urban Milwaukeeans and reinforces the “silent apartheid” of suburban zoning codes, as commentator James Rowen puts it.

The end result is not looking good for anyone. The metro region as a whole scores badly in key rankings of major American cities. And if the state’s largest metro area is struggling, well, you have to wonder: How can Wisconsin prosper?

There are other good ideas to turn things around besides placemaking and community infrastructure. The sharpest, in my opinion, seeks to harness Dane County’s growing tech clout and its UW research dynamo with Milwaukee and Waukesha’s still dominant financial and business base and its own considerable educational assets.

In 2016, former Gov. Tommy Thompson told me that was his one regret about resigning his post to work for President George W. Bush in 2001: He never got to pursue his vision of creating a multi-county economic zone akin to North Carolina’s Research Triangle.

Retired insurance executive Tom Hefty has talked up an I-94 development corridor for 30 years, including in a 2012 Isthmus cover story that pointed out that the four counties — Dane, Jefferson, Waukesha and Milwaukee — are a potential powerhouse for the state if they can be united in a common economic vision. They cover less than 5 percent of the state, but have one-third of its population, 44 percent of its college graduates and 38 percent of all Wisconsin jobs.

Tom Still, head of the Wisconsin Technology Council, has his own take on what he calls “the IQ Corridor” that runs all the way up to the Twin Cities.

This idea has gotten absolutely nowhere at the Capitol.

That leaves us with the $3 billion Foxconn project that is not so much a strategy as a Las Vegas casino bet. If the cards fall right, Wisconsin will win a lot of jobs, create a long supply chain of parts manufacturers, stem the brain drain, and just maybe recoup (in new taxes) hundreds of millions of dollars of taxpayer subsidy a quarter century after construction begins.

As I wrote last week, it’s hard not to see such a wager of state resources — the largest U.S subsidy ever given to a foreign corporation — as an almost desperate admission that Wisconsin cannot grow its own great entrepreneurs.

Meanwhile, rural Wisconsin still needs more than bromides and high-capacity wells. The high-poverty ghetto eating away at Milwaukee still calls out for state and regional action. And the burgeoning Madison tech scene? We’ll see if it can swim against the tide of Wisconsin politics. 

Editor's note: This article was updated to correct the title of Forrest Woolworth. He is a founding team member and chief operating officer of the mobile game shop PerBlue.