• WisBusiness

Ludeman: Retiring Economist Questions Value of Tax Breaks for Businesses
2/3/2006

By Brian E. Clark
WisBusiness.com

Terry Ludeman, the recently retired chief labor economist for the state, has been known for speaking his mind.

Apparently retiring from state service isn't changing that. In an exit interview with WisBusiness.com, Ludeman said he's not sure if giving companies tax breaks to locate in Wisconsin is a good idea.

"It's kind of a zero-sum game," said Ludeman, whose last day at the Department of Workforce Development was Jan. 10. "When one state gives away its resources that way, well, other states will do that, too, just to compete.

"We give something to lure a plant from Minnesota with some kind of investment and then they do the same," said the 66-year-old Ludeman, who worked for the state for 18 years.

He said he believes it would make more sense for Wisconsin to invest money in developing its infrastructure and its workforce and better educate its young people.

"I suppose you can make a case that it's wise to help a company that can't get financing to develop an innovative new product," he said.

"But I'm not sure if politicians and the people they appoint are smart enough to make those decisions," he said bluntly.

"As an economist, I generally believe that the market should prevail. Stepping in to help companies interferes with the marketplace. Like I said, I'm not sure we are bright enough to know how to do that."


WisBusiness Editor Brian Clark interviewed Ludeman in late January.

Clark: How has the Wisconsin economy changed during the nearly two decades you worked for the DWD?

Ludeman:
Actually, there have been two cycles during that time and this is the third ďup.Ē We had two down cycles; one was in the early '90s and the second one from 2001 to 2004.

The economy was pretty good when I first came, recovering from a modest recession in the mid-80s and a real bad one in the early '80s. Then there was a real strong and long recovery in the '90s that lasted through the decade. After Clinton took over, there was a long, unprecedented up cycle.

Clark: Was that reflected here in Wisconsin as well?

Ludeman:
Oh yes, we have very strong job growth during that period. Governors like to take credit for whatever goes on, no matter who the governor is. Tommy Thompson, a Republican, wanted to take credit for the economy doing well back then, too

Clark: Was there anything Clinton did right, or was it all Federal Reserve Chairman Alan Greenspan?

Ludeman:
Well, there were a couple of things that he did that were important, including keeping the federal deficit low. And Greenspan kept interest rates low. There was also a lot of confidence there. It was not a time marked by a lot of anxiety as there is currently. There was some worry over whether Clinton had an affair with a young woman, but not the kind we have now over war in Iraq and terrorism.

Clark: Did we fall off the track in 2001?

Ludeman:
It looked like we were heading toward a slight recession or a flat spot prior to 9/11. But that attack shattered investorsí view of the world. American investors lost a lot of confidence in future at the same time we were beginning to run up a big deficit again.

Clark: Was it because American investors felt vulnerable?

Ludeman:
I think that was part of it. They didnít know what was going to happen next. It should have been a great time for investment because interest rates were extremely low. But there was just too much anxiety. A lot of money went into real estate. The housing market has been exploding since 2001. Americans also began investing overseas. We began to see a lot of U.S. companies building plants overseas.

Clark: Are those Wisconsin jobs that have been outsourced abroad ever coming back?

Ludeman:
I would never say never, but I donít think we will ever get back up to about the 600,000 manufacturing jobs that we had in 2000 here in this state.

We are at about 510,000 now. Iíd guess weíll get up to 525,000 at the maximum. So some have been lost for good. But on the other hand, it looks like our labor market will hit very close to the highest itís ever been at 2.83 million jobs. Weíve recovered, but weíve moved to a different kind of job market.

Clark: Are the jobs that have replaced those manufacturing jobs as good?

Ludeman:
Yes, generally they probably are. A lot of the new jobs are in health care and a lot in business services. They are modest to higher end in terms of pay, rather than the bottom. Certainly some of them are service occupations. And those are not the good jobs, they are menial jobs.

A lot of the new jobs are what author Richard Florida says the ďcreative classĒ does.

Clark: Should we worry that a lot of our manufacturing jobs have gone away? Or does it matter since they have been replaced by better paying jobs?

Ludeman:
Well, we should always worry about whether we are manufacturing. But in Wisconsin, we had a lot of low-productivity factory jobs that did not pay that highly. So replacing them with better jobs is not necessarily a bad trade.

When technology is invested in manufacturing you get good jobs that are supported with considerable technology and tooling. Then you get high productivity. We have seen a lot really good growth in productivity in Wisconsin the last three or four years.

Clark: In any specific segments?

Ludeman:
Really throughout the economy. And manufacturing has seen some of the biggest gains in productivity. Part of that is because some of the jobs that we lost were low productivity. As an economist, I hate to think of bad jobs vs. good jobs. They donít look that way to me.

But we had a lot of fabricated jobs that were in pots and pans over in the Manitowoc area. The product wasnít high value work. Therefore you canít make it very productive. When you lose those jobs, they are not long-term good jobs. Thatís the best way to put it.

Clark: Why is there a difference between pay in Minnesota and Wisconsin? Did Minnesota do something different to cause pay there to be somewhat higher?

Ludeman:
We are more manufacturing-oriented. Over the past 10 to 15 years, weíve been near 20 percent. Minnesota is around 12 percent. They have a high level of jobs in information technology and business services that pay well. A lot of home offices are located in Minnesota. We donít have that so much anymore in Wisconsin.

One thing they did right was that they made Minneapolis the best-connected city in the United States. The Twin Cities is also very attractive to young people. Demographic changes that are going on throughout the United States make these ďsupermetrosĒ important. Minneapolis-St. Paul is growing like crazy.

Madison is like the Twin Cities, but smaller. Madison is a dynamic metro.

Clark: Is Milwaukee changing to be more attractive?

Ludeman:
I think it is, but not like the Twin Cities. It hasnít changed enough in the past 20 years and that may hurt it in the long run. I can look back 30 years ago to when Milwaukee was more attractive than Minneapolis-St. Paul. But things change.

Minnesota had companies that are more future-looking. 3M has really reinvented itself three or four times. It is a risk-taker. Wisconsin companies are generally more conservative and hold on to what they have been doing. You see that in Milwaukee with its old factories dating from the 1880s. They are ghosts of what the were, but take up a lot of landscape in the Milwaukee area.

I have this idea that three or four war situations have put some of Wisconsinís dying industries Ė which were strong in machinery and metal manufacturing Ė back on the front burner and saved the Wisconsin economy.

If we had run into the wall, we might have reinvented ourselves. Instead, the wars made machinery important and helped out marginal industries. Iím not a warmonger economist, but the need for equipment in World War I, WWII, Korea and Vietnam helped our economy and pulled us out of the fire.

The late congressman Les Aspin brought in contracts for Oshkosh Truck and other Wisconsin companies. My hometown of Racine is a perfect example with lots of machinery and metal manufacturing. It went through recession and recovery without really having to change.

Clark: Ford recently announced 30,000 coming layoffs. General Motors did the same thing in November. What do you think the future holds for the GM plant in Janesville?

Ludeman:
I think it may keep operating for a considerable amount of time. But that kind of manufacturing in the United States is moderately vulnerable, though I hate to say that. The marketplace for GM is saturated in U.S. I see sales growth in Asia. To do that, must have presence in those marketplaces. But the reality is that most vehicles can be made more cheaply elsewhere, so we will have difficulty competing with that in long term.

Clark: What kind of a job is Wisconsin doing to prepare young people for the workforce?

Ludeman:
Generally, itís OK. And in some ways, itís excellent. But Iím embarrassed that such a large part of Milwaukeeís minority community Ė Latinos, blacks and native Americans - live in extraordinary poverty. So many of their children do poorly.

I am absolutely struck by the notion that Wisconsin does the worst job of any state getting young African American children through high school. That is shameful. Itís not so much a school problem because those schools have some of the brightest kids coming from it. But another 35 to 40 percent are not even finishing.

It is a preparation problem. Children are coming from homes that donít work and with life situations that donít give them the tools. If welfare is over and parents have to work Ė and Iím not saying that is bad - it seems to me it would be wise to have good child care and early childhood education so those kids are getting the care and help they need. We need to find a way to prepare those kids so they can succeed.

Clark: How long will the economy continue to improve here in Wisconsin?

Ludeman:
I think there will be another 18 months of moderate expansion. But there are some frightening things on the horizon. One is the huge trade deficit we have with other countries. We are importing an incredible amount. We are spending way more than we make.

Our money is also being supported by other countries. I like to use the analogy of the gambler who has to keep borrowing so he can keep playing. China is propping up our currency. And at some point, it will pull the plug on our currency. When they do, we will run into some real problems.

Clark: Can you explain that?

Ludeman:
Basically, when we sell our money on the marketplace, China moves in to buy it to keep it at a high level to make sure that money is worth something. If they were not purchasing our bonds from the government, that money would drop in value. They donít want that to happen because they want to make sure that we can continue to pay them enough money to support the products they are shipping us.

Clark: Is that the flip side of their currency being artificially low?

Ludeman:
No. This is a switch from that. They keep our currency artificially high. Ours has a high value because we are the world marketplace for currency. They are purchasing it to keep it at a high level. The value of currency, like any other product, is based on supply and demand.

They also do not want their currency to float high enough so that we buy less from them either. They are holding their currency down.

Clark: If they stopped supporting our currency, our dollar would drop and we couldnít buy as much from them, right?

Ludeman:
Right. So they keep loaning us money.

Clark: What is the answer?

Ludeman:
The answer is to get ourselves off of the dependency on other peopleís products and goods. And then find a way to prop up our own money. That will be difficult.

Clark: If so much of manufacturing has gone abroad, do we have to reinvent it here?

Ludeman:
Well, yes. We are actually producing more stuff than we probably ever have. It is just that we have fewer jobs supporting it. It is not as though all of our manufacturing went away. The fact is Wisconsin consumers have insatiable appetites for products.

We run to the store at the drop of a hat. If our clothes get dirty, we buy new clothes rather than wash them. Americansí role in the world marketplace is to consume and we do that very well.

Maybe we donít need so many clothes. Maybe we donít need to consume so much. We could save and invest and it might show up in a different kind of economy.

People say they canít afford health care, but they are buying new clothes all the time. Wouldnít we be better off paying for it now instead of passing the costs on to future generations?

Clark: What other road bumps are on the horizon?

Ludeman:
Our continuing role in the Middle East. We may be in a war in Iran after we get done with Iraq. That causes considerable anxiety among investors.

The other issue is that the federal government is increasing its own debt by an extraordinary amount. I wonder how we will pay for Medicare and Medicaid and the new health care plans we are borrowing money to pay for. They are already bankrupt before they get going.

Certainly there has been an attempt to move Social Security to a less secure footing because the government is decreasing its role as much as possible.

Clark: A lot of people think biotechnology will boost the Wisconsin economy. What do you think?

Ludeman:
It might, to some extent. Iím not sure itís the solution for every kind of thing, though it has great potential. Iím not sure Wisconsin is in the right position to exploit that. We will see some growth. But it wonít save the state or be the big industry of future. It wonít recreate our economy.

Clark: Will Madison continue to thrive?

Ludeman:
I think so. It has the university, state government and spin-off industries growing here. Generally, Madison works well.

Clark: Any other growth spots in the state?

Ludeman:
The Fox Valley is thriving. Appleton and Green Bay will be dynamic. Fond du Lac and Oshkosh will be their own kind of center. There also is extraordinarily strong growth in St. Croix-Pierce-Menomonie area in northwest Wisconsin coming out of the Twin Cities. Kenosha is doing well coming out of Chicago. There is a lot to be positive about. Iím not a doomsday person, I just think we have to figure out what we want to become and start working towards it.

Clark: What are you going to do now?

Ludeman:
Iíve been watching a lot of economic development around the state and Iíd like to be part of the dialog. Iím not sure how to do that, though I may be speaking to a lot of counties. Iím interested in rural economic development. In a lot of ways, Wisconsin remains a very rural state.

Clark: Any other thoughts on the economy?

Ludeman:
I think Wisconsin is in a position to begin discussing economic development that is centered not on each community but on what kinds of things that can help the overall state. We need to do that. Itís a matter of pulling and pushing together in the same direction.

Clark: There have been regional efforts in recent months. What do you think of them?

Ludeman:
I think they are extremely good. We have a number of communities around the state that do not cooperate with each other. Iím struck by Wausau, Stevens Point and Wisconsin Rapids Ė which all want to go it alone. But if they linked up, that would be a sizable area.

In the ďNew NorthĒ area, Green Bay and Appleton Ė because of the marketplace up there Ė are getting drawn towards each other more and more. You can push those things, but they have to cooperate with each other.


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