The Two Wisconsins

Part one of a two-part series on Wisconsin’s economy and future.

We are told this is a glorious time for Wisconsin.

More of us are working than ever before. The percentage of Wisconsinites punching in each day is the fifth or so highest in the nation. The state’s jobless rate is at a historic low, tantamount to full-employment.

What’s more, the state’s safety net has held up. The adjusted poverty rate for 2015 “fell significantly.” Ditto for poor families with children, according to the UW’s Institute for Research On Poverty’s latest report.

In short, by many key measures Wisconsin has finally overcome the ravages of the Great Recession that chewed up thousands of jobs between December 2007 and June 2009. Re-election in mind, Gov. Scott Walker now touts Wisconsin as a “Top 10” state and a model for the nation. A good bet: This will be his campaign theme in 2018.

“Top 10” as the governor boasts about the state’s high school graduation rates. “Top 10” for our student ACT scores. “Top 10” for our fully funded pension program for public workers. “Top 10” for employing disabled people. “Top 10” for our business climate as judged by corporate executives.

And now the governor says Wisconsin is at transformational moment with the promise of thousands of high-tech assembling jobs in southeastern Wisconsin. Well worth, we’re told, the $3 billion in government subsidies.

“For so many years, no one thought a major employer would pick Wisconsin,” says Brett Healy, president of the conservative MacIver Institute for Public Policy. “It changes things overnight. It shows we can compete on a whole different number of levels for a major employer like Foxconn.”

By any measure, the deal with the Taiwanese company represents a huge bet that manufacturing — historically a defining element in Wisconsin’s prosperity, but for almost 40 years a declining or, at best, stagnant source of jobs — will once again be the linchpin of the Wisconsin economy.

Prudence is not exactly the password here. It’s hard not to interpret the Foxconn wager — the jaw-dropping largest U.S subsidy ever given to a foreign corporation — as a de facto admission that Wisconsin can no longer grow its own entrepreneurs.

And, just as troubling, it suggests a lack of vision — a failure to devise a comprehensive strategy to address the cruel and little-acknowledged truth of the Wisconsin economy.

Call it “the two Wisconsins,” as the Wisconsin Taxpayers Alliance presciently did in 2006 when the nonpartisan budget group documented Wisconsin’s split reality even before the Great Recession soundly fractured the state economy into winners and left-behinds.

Today, while Dane County booms and the bigger cities in the Fox River Valley and western Wisconsin prosper, the rest of the state is largely mired in a downturn that is a recession in all but name.

Wisconsin is not alone. This dichotomy is also America’s story, as the Economic Innovation Group, a centrist research group in Washington, D.C., first documented in May 2016. The EIG study — widely ignored and fraught with political implications, as pundit Harold Meyerson has argued — detailed how painfully limited the economic recovery from the Great Recession (the magnitude of job destruction earned its adjective) was compared to post-recession periods in the early 1990s and early 2000s.

“The 1990s recovery was powered by small counties, small cities, rural areas. It was very much a grassroots recovery where the entire U.S. landscape experienced a blossoming of enterprise,” says Kenan Fikri, EIG’s research and policy manager.

The early 2010s’ recovery was brutally asymmetrical. By the time the U.S. economy pulled out of the recession, the split was extreme between America’s prosperous and left-behind counties.

In a nutshell, the EIG found that the good times had returned to only select metropolises — including New York, Los Angeles, San Francisco, Phoenix, Seattle, Austin, Dallas — in spectacular fashion, while most small-town and mid-sized communities languished.

Fortunate for Wisconsin’s economy, Dane County was a conspicuous outlier — the rare mid-sized community that caught the powerful updraft of the urban tech boom.

Four key data points highlight how a recessionary pall hung over most of the country even when the sky brightened for a few metropolises:

• In the more egalitarian 1992-1996 recovery, counties with more than 1 million people accounted for only 13 percent of newly opened businesses, compared to a hefty 58 percent in the 2010-2014 recovery.
• In that same 2010-14 recovery period, three out of five American counties actually registered a decline in the number of business establishments. Yes, in the midst of a rising tide they suffered a drop in business formation.
• Job-wise, the disparity was even more extreme. Just 2 percent of American counties accounted for 50 percent of the job growth in the 2010s. And, yes, we’re talking mostly coastal and Sunbelt locales. With few exceptions (like Chicago and the Twin Cities), the Midwest was mostly a land of left-behinds.
• Middle-wage workers (who earn from $40,000 to $70,000 a year) got hit the hardest. Their ranks suffered fully half of the 8.9 million jobs lost in the Great Recession. And the recovery? Half of those 9.1 million new jobs are in low-wage sectors where workers make less than $40,000 a year. That cry you hear in the distance is the sound of Americans sliding out of the middle class.

“Quite a juxtaposition.” That’s how the soft-spoken Fikri describes the paradox of the two Wisconsins.

In a telephone interview, he’s explaining how Wisconsin has 10 counties — more than any other state — “that encapsulate the American Dream.” Take a bow: Dane, Eau Claire, Fond du Lac, La Crosse, Marathon, Outagamie, Sheboygan, Walworth, Washington and Waukesha counties.

By EIG’s metrics, these communities are prosperous, upwardly mobile for children, and have low levels of inequality across neighborhoods. “They are epitomized by a strong work ethic. The kids go to college,” he says. “These are the engines of the American Dream that everyone thinks about.”

For African Americans in Dane County, the results are not so good, as various equity studies have documented. Milwaukee County though is even worse for its black population. Fikri calls it “one of the most unequal counties in the country.” It personifies “the most pernicious combination” of social and economic factors: racial segregation with income inequality.

“That is alive and well in Milwaukee,” he says.

Meanwhile, when Fikri looks at rural Wisconsin and the outstate cities not in the golden 10 counties, he sounds like a doctor dispassionately giving a diagnosis that, yes, you are really old and sick.

“Wisconsin is suffering from a slow and steady rural depopulation and a proliferation of struggling small- and mid-sized cities that grew up around manufacturing,” he says.

Fikri’s view from Washington is backed up by people with boots on the ground.

“In rural Wisconsin, we say our best export is our children,” says state Sen. Jennifer Shilling (D-La Crosse). “We educate them, they go off to tech school, the military or college, and they don’t necessarily come back home. There aren’t the jobs and wages here.”

There’s deep poverty hidden away in rural Wisconsin, says George Siemon, leader of the Organic Valley farmers co-op headquartered in Vernon County. “They’ve been left behind,” he says. “They’re down and out, don’t have a job, got a health crisis. They need our help.”
 As for Milwaukee, the progressive research group COWS, formerly known as the Center On Wisconsin Strategy, has repeatedly studied the state’s largest city and found the same dire racial division as EIG.

Laura Dresser, COWS’ associate director, says the Milwaukee metro region, while not as strong economically as it was 40 years ago, still defines the state, including the “horrible racial disparity … we see between the central city neighborhoods and suburban Waukesha.”

Milwaukee has 69 percent of Wisconsin’s African American population. More than once it has been labeled the worst place in America for black people to live. The National Urban League ranked Milwaukee dead last in its 2017 Metropolitan Unemployment Equality Index.

The Milwaukee region’s economic engine just isn’t reaching and lifting everyone up, Dresser says. It’s malfunctioning because of the “high levels of inequality, economic isolation and an inability to weave that region together instead of apart.”

Meanwhile, Dane County’s role in propping up the Wisconsin economy comes at a price for Madison: Serious resentment outstate and in Milwaukee for Madison’s outsized share of tax dollars going to state employees and in support of UW-Madison.

Katherine Cramer’s 2016 book, The Politics of Resentment: Rural Consciousness in Wisconsin and the Rise of Scott Walker, captures small-town anger towards what residents there see as preachy Madison liberals and their cushy lifestyle.

Zach Brandon, president of the Greater Madison Chamber of Commerce, knows there’s a problem. He’s developed a traveling roadshow touting the Dane County tech scene and arguing that, whatever their political differences, Madison and Wisconsin need one another to succeed. He says he’s made the same pitch to the governor and to the Republican legislative leadership — and sounds cautiously optimistic that the message has been received.

“Austin is a model where the political and cultural divide between the capital city and the rest of the state can be put aside to build the economy,” Brandon says. “Texas is the perfect example for us.”

The irony, of course, is that “the progressive liberal communist community of Madison,” as U.S. Rep. Sean Duffy (R-Wausau) gleefully described the conservative bête noire to Fox News, has become a hotbed of capitalist entrepreneurialism and an avatar of the new economy, far outpacing the laggard performance of the Republican-voting outstate.

From 2010 to 2014, the number of jobs in Dane County jumped by 9.7 percent (+23,600), more than double the 4.3 percent rate for the rest of Wisconsin (+89,000 jobs), according to data the EIG sorted for Isthmus. In terms of business establishments, Dane County’s increased by 3.1 percent percent in this period (410 establishments gained) versus a 1.6 percent decline in the rest of Wisconsin (1,990 establishments lost).

It’s not that Madison is without problems. The closing of the almost century-old Oscar Mayer plant in July was a gut punch to the community’s fast-fading blue-collar economy. And Madison, as noted, has proved itself inhospitable to African-American achievement when it comes to work and education. But the city continues to stride confidently into the future.

Looking at different jobs data, economist Steven Deller, a community development specialist with the UW-Extension, came up with an even more striking finding of local success. Between pre-recession 2007 and after-recession 2015, nearly 75 percent of the almost 45,000 jobs added to the Wisconsin economy came from Dane County.

Fikri is impressed with Mad City. “Madison has a classic, purely high-end professional services and knowledge economy that is doing really well. It is one of the few places in the United States that isn’t a large city but nonetheless found [an economic] niche and is prospering today.”

Give credit to Judith Faulkner.

She’s the UW-Madison-trained computer nerd who grew a redwood-sized health tech company from a tiny seed she nurtured on campus. Today, almost 10,000 whip-crack smart techies work at Epic System’s Verona campus. Besides making Faulkner a multi-billionaire, Epic has positioned the Madison area for a huge leap forward in the 21st century.

A passel of web links collected by the Greater Madison Chamber of Commerce illustrates the city’s “emergence as a health tech hub.” A hospital news site declares that Madison is “poised to continue to grow exponentially as a player in the national digital health scene.” The U.S. Labor Department rates Madison second in the country for density of software publishing jobs. Glassdoor, the jobs and recruiting website, places Madison fourth highest on its list of best-paying cities for software engineers.

More recently, CBRE, a worldwide real estate services company, scored the Madison area number one on its assessment of “tech talent momentum markets,” citing the metro area’s 50 percent jump in tech workers over five years. A spokesman praised Madison’s “culture of tech, innovation and quality of life that’s hard to beat.”

Madison is not Wisconsin’s only success. Dale Knapp, the Wisconsin Taxpayers Alliance’s research director, points out a revealing fact about Wisconsin’s prosperity. “Almost everything economic in Wisconsin follows the Interstate system: Green Bay, Appleton, down to Milwaukee and to Kenosha and up over to Madison and then to La Crosse and on to the Twin Cities.”

Milwaukee, the state’s biggest city (population 600,000), is a problem. While by far Wisconsin’s largest generator of wealth, it is one of the poorest performing metropolises in the country. It remains crippled by the ruinous Rust Belt decline that took hold in the 1980s.

“Milwaukee is not an engine of economic growth. It just isn’t,” says Deller. “What we have is a series of second-tier cities — Madison, Eau Claire, Appleton, Oshkosh — that are doing okay. The problem is that they’re not big enough to pull the whole state up with them.”

The bottom line? Rural Wisconsin and Milwaukee share a cloudy future that darkens the state as a whole.

A small but telling detail captures that shadow side of the Wisconsin economy. Almost 10 years after the Great Recession commenced, the tax bases of 29 of Wisconsin’s 72 counties are still below their 2008 levels, according to the Wisconsin Taxpayers Alliance.

Make that 32 of 72 counties foundering if only residential property is considered. Indeed, the WTA points out that unlike the commercial and manufacturing categories, residential assessments as a whole are the only major category of Wisconsin real estate still “underwater” from their 2008 level.

Ouch. Home equity is how Americans typically build wealth to pass on to their children.

With several conspicuous exceptions, the “underwater” counties are home to small-town and rural Wisconsin residents.

“In northern Wisconsin, there are so many challenges,” says Knapp. “There’s no major city north of Wausau. The attraction for young people is not there. That population is leaving. The population over 50 — it’s just exploding.”

The irony is that the two most dissimilar geographies of Wisconsin — urban Milwaukee and the rural outstate — are united in their status as the left-behinds of the Badger recovery.

Those who can get out of these areas are going; and not many are moving in. Both Milwaukee County and much of rural Wisconsin show a population loss, an increase in gray heads and a decline of energetic millennials to take over when Baby Boomers finally die off.

Milwaukee County did show an encouraging population growth earlier in the decade, but the recent numbers, according to a BizTimes analysis, reveal a dispiriting decline. In 2016, Milwaukee County lost more than 5,200 people under the age of 35, including almost 3,000 in the critical 20 to 34 age group. In contrast, the cohort of aging Baby Boomers keeps growing.

“Milwaukee County is the worst [in the state] for keeping young adults,” says Randy Stoecker, a UW-Madison sociologist who’s looked at the same Census Bureau data.

Even more sobering is a map of Wisconsin prepared by that Matt Kures, Deller’s colleague at the UW-Extension. It shows the entire northern tier of 20 counties losing population between 2007 and 2015. Nine counties in central Wisconsin are another blotch of losers.

It gets worse. In 2010, Wisconsin had only two counties with a population age 65-and-older at 25 percent or higher. By 2040, Kures projects 45 Wisconsin counties will hit that golden oldie mark. How does that demographic produce a desirable workforce?

It probably doesn’t.

Truth be told, Wisconsin is old and unadventurous in many ways. Almost 72 percent of the population was born here, according to the UW-Extension. That’s the fifth highest percentage in the nation. In more economically dynamic states like Colorado, Washington, Oregon, California and Washington, the percentage of homeys is under 50 percent. That’s because ambitious job-seekers are steadily flocking to those states.

Ain’t the case in Wisconsin. The state’s “brain drain” — the loss of college graduates, despite the presence of the expansive UW System — is a recurring topic of worry in Wisconsin business circles. How can we compete in the knowledge economy if our best and brightest graduates leave the state?

Deller and his colleagues counter that the problem isn’t so much outflow — they say the Wisconsin exodus of its college grads is not extreme. The real problem is inflow. Wisconsin just isn’t attracting college grads to move here.

That’s probably because the Wisconsin economy resembles the Oldsmobile your grandfather drives. It has a nice cushioned ride but it’s boring behind the wheel and the 8-track is broken.

In Wisconsin, 79 percent of all jobs are in firms that are at least 16 years old — one of the highest percentages in the nation, according to Fikri of the Economic Innovation Group. This too poses problems along with obvious advantages.

“Those are stable jobs. They’ve been around for a long time. They are in companies that have competitive advantages and are good at what they do, or else they wouldn’t be around,” he says.

“But old companies are less likely to innovate than new ones,” he cautions. “They are less likely to come up with radically new products and technologies that will likely scale and grow large in the future. It’s the incumbent’s dilemma. Old companies are good at what they do. But they’re not as agile and responsive [to market changes] as new companies.”

Fikri warns this is a risk factor for Wisconsin. There just aren’t enough new companies in the pipeline. That’s a familiar critique. And it stings because it lends credence to the most dismaying ranking the Wisconsin business environment has received. The well-regarded Ewing Marion Kauffman Foundation has ranked Wisconsin dead last in startup activity for three straight years. Even Alabama is ahead of us.

The state’s vocal tech advocates, with perhaps a bead or two of flop sweat on their brows, cite other benchmarks showing Wisconsin doing better. But whether Wisconsin is in 50th place or 33rd place, certain stubborn facts remain. The state’s job creation rate has trailed the national average for more than two years. Salaries lag the national average in key sectors. Manufacturing jobs actually declined in 2016 despite a massive income tax cut for factory owners that will cost, literally, hundreds of millions of dollars in the years to come.

Now Wisconsin is doubling down on its manufacturing strategy with a proposed $3 billion Foxconn subsidy. How smart is that? Not very if you believe venture capitalist Mark Bakken.

Bakken, who is a serial entrepreneur (Goliath Networks, Nordic Consulting Partners, etc.) turned investor in health info-tech startups, rolled into Ancora Coffee Roasters on King Street with a full head of steam and a great “what if” scenario.

What if the state of Wisconsin invested $3 billion in startups instead of Foxconn? He chortles at the prospect and quickly runs through an almost plausible scenario where a billion bucks could be quickly raised if the State of Wisconsin Investment Board, which manages the public employee pension fund, committed only 1 percent of its $104 billion investment portfolio.

I can barely keep up as Bakken sketches out how the state could run a national competition — offer $100,000 to $200,000 for the 1,000 most promising startups in the country to settle in Wisconsin. Bribe ‘em in other words, he says. Sure, most will pack up and leave when it makes sense to do so. But some will stick.

They could be scattered all over the state. Might the next Epic or Promega or Nordic or Kohler or Johnson Wax be among them, he asks rhetorically. Yeah, probably. For the purpose of diversification, Bakken tells me this strategy made a lot more sense than pouring $3 billion into a lone foreign-based manufacturer.

“For me it comes down to that two-thirds of all net new jobs come from startups,” he says.

As for Foxconn, it could create a whole ecosystem of advanced manufacturing in Wisconsin that would never arise without the subsidy, he admits. “It’s a huge, huge gamble — way more of a gamble than investing $3 billion in a thousand startups.”

Bakken, who briefly considered a run for governor as a Democrat earlier this year, offers a development plan that does not have a snowball’s chance in hell in the Republican-controlled state Legislature. Still, it’s important because Bakken’s idea signals there are other creative, if not more practical, ideas on how to create a thriving Wisconsin economy in the 21st century. 

Part two of this series will look at those ideas and how current policies hobble progress.