Free & Clear: May 2014

Sovereign states
These 14 (and D.C.) rule when it comes to higher-than-average growth in both GDP and per capita income since 2000. North Carolina is not among them.

By John Hood

Does Oregon have a sizzling economy? By one measure — gross domestic product — the Beaver State has built an impressive record since the start of the 21st century. Its real, inflation-adjusted GDP growth has averaged 3.7% a year since 2000. That’s second-highest among the 50 states and District of Columbia and far above the national average of 1.5%. 

That’s not the only way to measure economic performance. GDP is an abstraction — a tally of goods and services produced and traded in dollars. As individuals, we care less about the abstract than personal experiences such as employment or income gains. According to another measure — per capita income growth — Oregon ranks 45th since 2000.

Arguments on the merits of economic metrics are more than academic. They affect public perception and shape policy. Tar Heel officials are looking to other states and localities for ideas and inspiration as North Carolina continues its slow recovery from the Great Recession. That’s healthy. Benchmarking is a wise practice for any organization, but its success depends on choosing the right subjects for comparison.

For example, high rates of GDP growth can reflect not only real gains in workplace productivity but also in-migration of retirees, college students or illegal immigrants. On the flip side, high rates of income growth may signify the out-migration of groups with low incomes. Instead of choosing a single indicator of economic growth, we would be better off comparing our state against those that perform well in a range of measures.

Using the latest data from the U.S. Bureau of Economic Analysis, I found 15 places that have enjoyed higher-than-average growth in GDP and per capita income in the 21st century: Alaska, Arkansas, D.C., Hawaii, Iowa, Kansas, Maryland, Montana, Nebraska, North Dakota, Oklahoma, South Dakota, Texas, Virginia and Wyoming. North Carolina wasn’t even close. While our GDP growth since 2000 ranked 19th, our growth in per capita income was an abysmal 47th. North Carolina exceeded the national average in both measures during the last three decades of the 20th century.

There is no common denominator across all 15 pacesetters, though there are interesting patterns. Nine have Republican-majority legislatures, three have Democratic ones, two are split, and one — Nebraska — is officially nonpartisan. Ten form a continuous belt stretching from Texas to Montana, Alaska and Hawaii touch the Pacific, and Virginia, Maryland and D.C. form a clump on the Mid-Atlantic.

What about the role of state services such as education and infrastructure? These 15 pacesetters have somewhat higher proportions of workers with high-school diplomas and college degrees than the rest of the country but differ little from the rest of the states in high-school graduation rates or reading and math scores. The link between education and economic growth consists of arrows pointing in both directions. Good schools are a plus. But fast-growing economies tend to attract skilled workers who were educated elsewhere.

The case for quality infrastructure as an explanation is a bit stronger. On average, pacesetters were significantly higher than nonpacesetters on an annual ranking of the quality and cost-effectiveness of state highway systems by the California-based Reason Foundation. Pace-setters fared better on two rankings related to economic freedom, from Fraser Institute in Canada and the Mercatus Center at George Mason University in Virginia. The 15 fastest-growing places had, on average, smaller government budgets, lower and flatter tax burdens, and a lighter regulatory burden than other states.

Perhaps the most revealing differences emerge when you examine industry mix. The natural resources and mining sectors — including agriculture, forestry, mining and especially oil and gas production — play a higher-than-average role in 11 pacesetter economies. In the other four, something else is going on. The post-9/11 growth in federal spending essentially has redistributed resources from the rest of the country to the region around the nation’s gluttonous capital (D.C., Virginia and Maryland) and to the country’s key Pacific outpost (Hawaii).

The latter is not a model that can be replicated elsewhere in the country, though Tar Heel leaders ought to make a spirited case for the continuing value of military bases such as Camp Lejeune and Fort Bragg. But when it comes to the safe, efficient transformation of natural resources into valuable exports, North Carolina may have the ingredients for success. State policymakers are setting up the regulatory process to permit exploration for oil and natural-gas reserves. And a combination of technological progress, managerial innovation and a new round of free-trade agreements could play to North Carolina’s strengths in swine, poultry and other agricultural products.

Naturally, state leaders should craft broad policies that make North Carolina a better place to do whatever business individuals might want to do here. But fascination with the “creative class” and other economic-development fads shouldn’t blind us to an important truth about the 21st century economy: It still runs on food, fiber and fuel. If you want rapid growth in both output and incomes, don’t ignore the economic potential of farming and fracking.

John Hood is chairman and president of the John Locke Foundation. You can reach him at jhood@johnlocke.org.