Chapter 1
Champions of the State Growth League
The economic history of the United States in the twentieth century
reBects enormous progress. Living standards more than quadrupled
between 1929, the year of the infamous stock market crash and the
beginning of the Great Depression, and 1999. Income per capita rose
to just above $29,500 in 1999 from about $7,000 in 1929 (both de-
nominated in 2000 dollars). Figure 1.1 shows the powerful upward
trajectory in U.S. living standards over the course of these seven
decades.
What dampens the optimism about future economic progress is
that the U.S. economy grew at an increasingly slower pace in the clos-
ing decades of the twentieth century in comparison to earlier decades.
Figure 1.2 illustrates this diminishing performance of the U.S. econ-
omy, breaking down the average annual growth rate by decade.1 In the
depression-wracked 1930s real per capita incomes declined slightly,
followed by the roaring 1940s, when real per capita income grew at an
average annual rate of 3.8 percent. World War II clearly pulled the
U.S. economy out of its Great Depression and fueled the best decade
of growth in the twentieth century. In the postwar 1950s, growth mod-
erated but remained at a healthy 2.6 percent annual rate before ac-
celerating once again in the 1960s to 3.3 percent. Then came the slow-
down: growth rates fell to 1.9 percent in the 1970s, to 1.6 percent in the
1980s, and even lower to 1.3 percent in the 1990s.
A rigorous analysis of the U.S. income data during these seven
decades conArms this thesis of a national slowdown. Estimating the
regression model speciAed in equation (1.1) over various subperiods
provides a basis for identifying signiAcant differences, both in statis-
tics and in magnitude, in the national income growth rates.
ln (Real Income per Capitat) constant (Trendt) �t, (1.1)
where ln stands for the natural logarithm, Trendt stands for a linear
time trend, and �t represents the regression error term. Using this
regression model, the estimated coefAcient for reBects the annual
5
6 Volatile States
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1920 1930 1940 1950 1960 1970 1980 1990 2000
Fig. 1.1. Trajectory of U.S. living standards
growth rate in real per capita income in a given time period. The re-
sults of estimating equation (1.1) for the 1929 to 1999 time period
and two subperiods, 1950 to 1999 and 1970 to 1999, are shown in
table 1.1.2
The relevant results from the regression analysis in table 1.1 that
test for growth rate declines are summarized in table 1.2. As shown
in the Arst row, real income per capita grew annually by 3.0 percent
between 1929 and 1969. This growth rate equals exactly twice the 1.5
percent annual growth rate for the 1970 to 1999 period (the differ-
ence is signiAcant at the 1 percent conAdence level). The estimated
growth rate for the period 1950 to 1969 is 2.6 percent, which is also
Real Income per Capita (2000 $)
Champions of the State Growth League 7
4.0%
3.8%
3.5%
3.3%
3.0%
2.6%
2.5%
1.9%
2.0%
1.6%
1.5%
1.3%
1.0%
0.5%
0.0%
1930s 1940s 1950s 1960s 1970s 1980s 1990s
-0.2%
-0.5%
Fig. 1.2. Decline of U.S. income growth rates in the twentieth century
greater than the 1.5 percent growth rate in the 1970 to 1999 period
(this difference is again signiAcant at the 1 percent conAdence level).
The second row of table 1.2 computes the relative differences in eco-
nomic growth during these three epochs. The annual growth rate was
100 percent higher in the 1929 to 1969 period compared to the 1970
to 1999 period and was 73 percent higher in the 1950 to 1969 period
compared to the 1970 to 1999 period. In short, while the U.S. living
standards continued to grow in the last three decades of the twenti-
eth century, this growth slowed signiAcantly compared to the preced-
ing decades.
Annual Growth Rate, Real Income per Capita
8 Volatile States
As a Anal gauge of the U.S. economic slowdown, table 1.3 presents
a simple regression that estimates the growth rate in the last half of
the twentieth century. Here the dependent variable is the annual
growth rate (continuously compounded), and the dummy variable
breaks the sample at its midpoint, equal to zero for the years 1950
through 1974 and equal to one for the years 1975 through 1999. The
constant term, 0.027, indicates a growth rate of 2.7 percent in the
1950 74 period, and the dummy variable indicates that the growth
rate dropped by 1.2 percentage points in the 1975 99 period. This es-
timated coefAcient on the dummy variable is signiAcant at the 5 per-
cent level, rejecting the thesis that economic growth in the United
States remained unchanged over the 50 years.
TABLE 1.1. U.S. Income Growth Rates, Comparison of Time Periods
Dependent Variable ln
(Real Income per Capita)a
Independent Variables 1929 99 1950 99 1970 99
Linear time trend 0.030 0.026 0.015
(15.61)** (16.61)** (26.32)**
Post-1969 linear time trend 0.015 0.011
( 7.42)** ( 6.64)**
Dummy variable for World War II years 0.270
(6.58)**
Dummy variable for post-1969 period 0.636 0.507
(9.50)** (9.28)**
Constant 8.56 8.69 9.20
(148.3)** (191.7)** (271.7)**
F-statistic 925** 1658** 693**
Number of observations 71 50 30
Note: t-statistics are shown in parentheses.
a
The dependent variable is entered as a natural logarithmic transformation, denominated in real
(2000) dollars. The model estimations use Newey-White standard errors with an AR(1) lag structure.
** Indicates significance at the 1 percent level for a two-tailed test.
TABLE 1.2. Significant Decline in U.S. Economic Growth
1929 69a 1950 69 1970 99
Income per capita growth rate
(in % annualized, real dollars) 3.0 2.6 1.5
Percentage difference in growth
rate compared to 1970 99 100 73
a
This value excludes the World War II years, which were significantly higher than the other years in
the period.
Champions of the State Growth League 9
TABLE 1.3. U.S. Economic Growth Rates in Last Half of the Twentieth Century
Dependent Variable Growth Rate in
Independent Variables Real Income per Capita, 1950 99a
Dummy variable for post-1974 periodb 0.012
(1.97)*
Constant 0.027
(6.16)**
F-statistic 3.9*
Number of observations 50
Note: t-statistics are shown in parentheses.
a
The dependent variable is the annual compound growth rate, denominated in real (2000) dollars.
The model estimation uses Newey-White standard errors with an AR(1) lag structure.
b
The dummy variable for the post-1974 period is selected to divide the 50-year sample at its
midpoint.
* Indicates significance at the 5 percent level for a two-tailed test. ** Indicates significance at the 1
percent level for a two-tailed test.
The Deceptive Big Picture
These various metrics conArm the conventional wisdom: the aggregate
growth rate for the United States began a steady decline in the 1970s
that shows no sign of abating at the turn of the twenty-Arst century.
What is less well known is how accurately this aggregate slowdown in
U.S. growth characterizes the economic experience of the individual
American states. When the model used for table 1.3 is estimated for
each of the 50 state economies for the 1950 to 1999 period, an inter-
esting pattern emerges. In only 13 of the states (roughly 1 in 4) do we
And a statistically signiAcant decline in the income growth rate using
the 5 percent conAdence level as the cutoff criterion.3 If we use a less
stringent 10 percent conAdence level as the cutoff criterion, we still
And a statistically signiAcant drop in economic growth in only 22 states
(less than half the nation).4 Growth rates showed no statistically signi-
Acant decline in more than half of the states. To put these results an-
other way, the economies of 28 American states departed from the
national pattern and showed no signiAcant slowdown in the last half
of the twentieth century.
With this initial piece of empirical analysis we begin to dispel the
notion of the U.S. economy. The big picture provided by the aggre-
gate data fails to represent adequately the experiences of individual
states, and in some cases, as we shall see, the aggregate U.S. data
grossly misrepresent state-level circumstances. That major subna-
tional pockets depart from the presumed national picture suggests the
importance of state-speciAc determinants of economic performance.
10 Volatile States
Traditional Measures of State Economic Performance
To pursue this point further, consider the dissimilarity in economic
performance among the American states in the last three decades of
the twentieth century. Figure 1.3 ranks the 50 states based on growth
rates for the 1969 99 period. The values reBect the average annual
growth in real income per capita (using the continuously compounded
method described in note 1).
As a benchmark, in the 1970s through the 1990s income per capita
for the total United States grew at a 1.63 percent rate using this mea-
surement method, which is close to the growth rate in the median
state of 1.69 percent. (Given an even number of American states,
Nebraska and Kansas both claim the median position and rank as
twenty-Afth and twenty-sixth in Ag. 1.3.) North Carolina sits on top of
the distribution with an annual growth rate of 2.15 percent. Alaska
comes in dead last with a 0.94 percent rate, less than half of the
growth rate in North Carolina. Figure 1.3 indicates that many of the
fastest growing states tended to be in the South; six of the ten fastest
growing states were southern. The slowest growing states tended to
be in the West and Midwest.
A casual glance at Agure 1.3 shows that state growth rates for the
most part ranged between 1.3 percent and 2 percent. This visual in-
spection comes quite close to a statistical characterization of the data.
The range in growth rates represented by the mean value plus and
minus one standard deviation is 1.4 percent to 2 percent; two-thirds of
the states lie within this range of growth rates. Growth rate differences
of less than 1 percentage point might appear trivial, hardly worth no-
tice. Yet, seemingly small growth rate differences yield major eco-
nomic consequences over time. As a demonstration, compare the his-
torical path of living standards in Missouri and Virginia over these
three decades. In 1969, Missouri and Virginia had virtually identical
living standards, and both states nearly matched the median income
across states in that year ($16,800 in 2000 dollars). Subsequently, Vir-
ginia grew at a 2.04 percent annual rate and Missouri grew at a 1.64 an-
nual rate, a difference of 0.4 percentage points. How did their living
standards compare 30 years later? In 1999, per capita income rose to
$30,809 in Virginia and to $27,196 in Missouri (again in 2000 dollars).
Thus, starting with income parity in the late 1960s, Virginia income ex-
ceeded Missouri income by $3,500, or 13 percent, in 1999. The lesson,
of course, is that seemingly small differences in growth rates pile up
2.2%
NCGA
TNMS
CO
2.1%
AR
MA
VANH
SD AL
SC
2.0%
CT
MN
1.9%
TX
LA NJ
ME
KY
1.8%
MD
VT ND
FL
RI
NE
1.7%
KS
UT PA
WV
NM
MO WA
NY
WY
1.6% OR
WI
AZ
OK
IL
1.5%
IN
IA
ID
DE
1.4% OH
NV
MI
1.3%
MT
CA
1.2%
1.1%
1.0%
HI
AK
0.9%
0 5 10 15 20 25 30 35 40 45 50
Rank
Fig. 1.3. Comparison of state economies, 1969 99 (ranked by growth rate in real income
per capita)
Annual Growth Rate, Real Income per Capita
12 Volatile States
and over the years result in meaningful differences in the well-being of
the typical family.
Table 1.4 presents state growth estimates using two alternative
measurement techniques, the least squares method and the continu-
ously compounded method.5 The table orders the states from fastest
growth (equal to 1) to slowest growth (equal to 50). For comparison,
table 1.4 also lists the continuously compounded growth rates (the
same values plotted in Ag. 1.3) and the state rankings based on that
value.
Using the least squares method New Hampshire has the highest
growth rate (2.14 percent annually) followed by Connecticut and
Massachusetts (2.11 percent). Note that the frequent assertion that
the economies of the southern states lead the nation depends upon
which growth measure is used. New England states claim the top
three spots using the least squares method. In addition, the eco-
nomic performance of other New England and Mid-Atlantic states
ranks considerably higher using the least squares method compared
to the continuously compounded method. New Jersey moves into
the number 10 spot, and Rhode Island moves into the number 11
spot, whereas these two states appeared near the middle of the pack
based on the compound growth metric. New York and Delaware
also improve their relative performance rankings substantially. For
the United States as a whole income per capita grew at a 1.52 per-
cent rate using the least squares method, right at the growth rate in
the median states of 1.51 percent (South Dakota and Missouri).
Alaska again Anishes last with a 0.33 percent growth rate, which is 85
percent less than New Hampshire s growth rate. Overall, the simple
correlation coefAcient between the continuously compounded
growth rate and the least squares growth rate is 0.86; in other words
the two measures are closely, but not perfectly, related.6
Figure 1.4 depicts the extensive variation among state economies
during the 1969 99 period. This Agure provides a frequency distribu-
tion, which divides income per capita growth rates into bands of 25
basis points. For example, seven states grew at an annual rate be-
tween 1 percent and 1.24 percent, and six states grew at an annual
rate between 2 percent and 2.24 percent.
A slightly different way to assess economic performance is to
gauge the change in income relative to the change in the state s work
force.7 Figure 1.5 ranks the 50 states based on this indicator. There
the values reBect the average annual growth in real income per
worker growth rates for the 1969 99 period (using the continuously
TABLE 1.4. State Rankings for Real Income per Capita Growth, 1969 99
Continuously Compounded
Least Squares Methoda Methodb
Growth Rate (%) Rank Growth Rate (%) Rank
New Hampshire 2.14 1 2.03 9
Connecticut 2.11 2 1.95 13
Massachusetts 2.11 3 2.07 7
North Carolina 2.10 4 2.15 1
Georgia 2.05 5 2.14 2
Tennessee 2.04 6 2.13 3
Virginia 1.97 7 2.04 8
Alabama 1.91 8 2.03 11
South Carolina 1.90 9 2.02 12
New Jersey 1.89 10 1.83 17
Rhode Island 1.79 11 1.71 24
Mississippi 1.79 12 2.12 4
Arkansas 1.78 13 2.08 6
Maine 1.77 14 1.81 18
Vermont 1.75 15 1.73 21
Minnesota 1.74 16 1.94 14
Colorado 1.70 17 2.11 5
Maryland 1.69 18 1.77 20
New York 1.67 19 1.61 33
Florida 1.63 20 1.71 23
Louisiana 1.62 21 1.83 16
Kentucky 1.62 22 1.81 19
Pennsylvania 1.59 23 1.67 28
Texas 1.53 24 1.87 15
South Dakota 1.53 25 2.03 10
Missouri 1.50 26 1.63 31
Washington 1.48 27 1.63 32
Nebraska 1.46 28 1.70 25
Delaware 1.43 29 1.41 43
New Mexico 1.42 30 1.66 30
Wisconsin 1.37 31 1.58 36
Kansas 1.35 32 1.68 26
Indiana 1.35 33 1.46 40
Illinois 1.34 34 1.51 39
West Virginia 1.34 35 1.66 29
Ohio 1.33 36 1.40 44
Oregon 1.32 37 1.59 35
Utah 1.30 38 1.67 27
Arizona 1.28 39 1.54 37
Michigan 1.25 40 1.33 46
Oklahoma 1.23 41 1.52 38
Iowa 1.18 42 1.44 41
Nevada 1.15 43 1.37 45
Idaho 1.13 44 1.44 42
California 1.09 45 1.23 48
Hawaii 1.01 46 0.96 49
North Dakota 1.00 47 1.72 22
Wyoming 0.95 48 1.61 34
Montana 0.88 49 1.29 47
Alaska 0.33 50 0.94 50
a
The least squares method uses the regression model specified in equation (1.2a) in note 5.
b
The continuously compounded method uses the formula shown in note 1.
14 Volatile States
16
14
14
12
11
10
9
8
7
6
6
4
2
1 1 1
0
0
0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%
0.24% 0.49% 0.74% 0.99% 1.24% 1.49% 1.74% 1.99% 2.24%
Annual Growth Rate, Real Income per Capita
Fig. 1.4. Distribution of state growth rates, 1969 99
compounded method described in note 1). As a benchmark, in the
1970s through the 1990s income per worker for the entire United
States grew at a 0.67 percent rate using this measurement method,
which exactly equals the median growth rate per worker among states.
(Missouri and Illinois occupy the median position in Ag. 1.5.) North
Carolina returns as the growth champion, with an annual growth rate
of 1.28 percent. Alaska Anally moves out of the cellar, replaced by
Montana, which experienced an annual growth rate in income per
worker of 0.04 percent. Figure 1.5 places eight southern states among
the top ten in terms of income per worker growth; all of the bottom
ten states are from the Midwest and West.
Number of States
1.3%
NC
GA
MS
1.2%
SC
1.1%
TN
AL
RI
VA
MA
1.0%
AR
NY
NH
TX
CT
0.9%
NJ
PA
0.8%
LA
FL
WV
MD
ME
COWA
KY
0.7%
MO
IL
SD
0.6%
HI
VT
NM
MN
OK
0.5%
WY
DE
CA
KS
OR
NV IN
AZID
NE
0.4%
OH
WI
UT
MI
0.3%
0.2%
ND
IA
0.1%
AK
MT
0.0%
0 5 10 15 20 25 30 35 40 45 50
Rank
Fig. 1.5. Comparison of state economies, 1969 99 (ranked by growth rate in real income
per worker)
Annual Growth Rate, Real Income per Worker
16 Volatile States
Table 1.5 ranks the states based on growth in real income per
worker. Based on the least squares method, North Carolina, the
leader, has a growth rate of 1.12 percent, followed by South Carolina
(1.09 percent) and Georgia (1.03 percent). Five states experienced
negative growth in income per worker: North Dakota, Alaska, Mon-
tana, Iowa, and Utah. Income per worker remained unchanged in
Wyoming over the three decades.
It is important to note that the growth rates in income per worker
run much lower than the growth rates in income per capita. The me-
dian growth rate in income per worker is 0.43 percent, compared to
the 1.51 percent median growth rate in income per capita. This differ-
ence reBects the fact that labor force growth outstripped population
growth by a wide margin. The rise of the proportion of women who
worked outside the home during these three decades accounts for
most of this demographic shift. Also noteworthy are some signiAcant
changes in how particular states rankings differ under the alternative
growth metrics. Mississippi provides a telling example. Gauging per-
formance in terms of income per worker growth, Mississippi ranks
Afth (using the least squares method in table 1.5), whereas it ranks
twelfth in terms of income per capita growth (table 1.4). Florida
ranks a respectable fourteenth in terms of per worker growth,
whereas it ranks a mediocre twentieth in terms of per capita growth.
California ranks twenty-ninth in per worker growth, fairly near the
median value, whereas it ranks forty-Afth in terms of per capita
growth. Finally, with regard to the income per worker measures, the
simple correlation between the continuously compounded growth
rate and the least squares growth rate is 0.95, indicating that these
two measures yield quite consistent performance rankings.
The Dispersion of State Living Standards
The analysis now turns to a second performance measure, the level of
real income, which is the traditional indicator used to assess living
standards. First, table 1.6 ranks the states based on the level of real
income per capita. Per capita incomes and state rankings are shown
for two four-year intervals, 1996 99 and 1969 72. Here the analysis
uses the four-year average for each state at the beginning and the end
of the period to dampen the importance of a random downturn or up-
turn that may have occurred in a single year. However, comparing the
state income rankings in 1999 to 1969 yields basically similar results.
At the close of the twentieth century (the 1996 99 period), real per
capita income in the median state (Oregon and Kansas) equaled
TABLE 1.5. State Rankings for Real Income per Worker Growth, 1969 99
Continuously Compounded
Least Squares Methoda Methodb
Growth Rate (%) Rank Growth Rate (%) Rank
North Carolina 1.12 1 1.28 1
South Carolina 1.09 2 1.19 4
Georgia 1.03 3 1.22 2
Connecticut 0.99 4 0.95 14
Mississippi 0.98 5 1.20 3
Rhode Island 0.97 6 1.04 7
Tennessee 0.92 7 1.09 5
New York 0.92 8 0.97 11
Massachusetts 0.91 9 1.01 9
Virginia 0.89 10 1.03 8
Alabama 0.86 11 1.04 6
New Hampshire 0.86 12 0.96 12
New Jersey 0.82 13 0.89 15
Florida 0.73 14 0.77 18
Pennsylvania 0.70 15 0.83 16
Texas 0.68 16 0.95 13
Louisiana 0.67 17 0.78 17
Arkansas 0.63 18 0.98 10
Maine 0.56 19 0.75 21
Maryland 0.56 20 0.75 20
West Virginia 0.52 21 0.76 19
Kentucky 0.49 22 0.70 24
Missouri 0.47 23 0.68 25
Illinois 0.44 24 0.67 26
Hawaii 0.44 25 0.55 28
Delaware 0.43 26 0.49 34
Colorado 0.36 27 0.72 22
Vermont 0.36 28 0.54 29
California 0.35 29 0.48 35
Nevada 0.34 30 0.45 38
Oklahoma 0.33 31 0.51 32
Washington 0.31 32 0.71 23
New Mexico 0.29 33 0.51 30
Minnesota 0.29 34 0.51 31
Ohio 0.26 35 0.38 43
Indiana 0.21 36 0.45 39
Oregon 0.20 37 0.46 37
Nebraska 0.19 38 0.42 42
Idaho 0.18 39 0.43 41
Arizona 0.18 40 0.44 40
Kansas 0.17 41 0.46 36
Wisconsin 0.11 42 0.32 44
Michigan 0.09 43 0.30 46
South Dakota 0.09 44 0.61 27
Wyoming 0.00 45 0.49 33
Utah 0.01 46 0.32 45
Iowa 0.06 47 0.18 48
Montana 0.30 48 0.04 50
Alaska 0.36 49 0.08 49
North Dakota 0.43 50 0.18 47
a
The least squares method uses the regression model specified in equation (1.2b) in note 5.
b
The continuously compounded method uses the formula shown in note 1.
TABLE 1.6. State Rankings Based on Real Income per Capita (in 2000 $)
1996 99a 1969 72b
Income per Capita Rank Income per Capita Rank
Connecticut $38,964 1 $22,843 2
New Jersey 35,368 2 21,816 6
Massachusetts 34,547 3 20,225 11
New York 33,499 4 22,039 5
Maryland 32,038 5 20,669 10
Illinois 30,996 6 20,799 9
Nevada 30,906 7 22,077 4
Colorado 30,740 8 18,454 15
New Hampshire 30,473 9 17,636 23
Minnesota 30,336 10 18,247 18
Delaware 30,322 11 20,967 8
Washington 29,541 12 19,008 13
California 29,382 13 21,640 7
Virginia 29,378 14 17,360 30
Alaska 29,194 15 23,445 1
Rhode Island 29,028 16 18,432 16
Pennsylvania 28,451 17 18,393 17
Hawaii 28,265 18 22,532 3
Florida 27,955 19 18,141 19
Michigan 27,918 20 19,421 12
Wisconsin 27,121 21 18,062 20
Ohio 27,110 22 18,602 14
Georgia 27,032 23 15,535 37
Nebraska 27,026 24 17,451 26
Oregon 26,995 25 17,932 22
Kansas 26,550 26 17,558 24
Texas 26,448 27 16,428 31
Missouri 26,396 28 17,388 29
North Carolina 26,341 29 14,975 41
Indiana 26,027 30 17,541 25
Wyoming 25,856 31 17,946 21
Iowa 25,804 32 17,439 27
Vermont 25,624 33 16,412 32
Tennessee 25,523 34 14,614 42
Arizona 24,928 35 17,389 28
South Dakota 24,702 36 15,079 40
Maine 24,401 37 15,287 39
North Dakota 23,413 38 15,559 36
South Carolina 23,380 39 13,911 47
Kentucky 23,136 40 14,455 44
Utah 23,060 41 15,393 38
Louisiana 23,060 42 14,091 46
Alabama 23,032 43 13,610 48
Oklahoma 22,996 44 15,700 35
Idaho 22,880 45 16,059 34
Arkansas 22,128 46 13,046 49
Montana 22,048 47 16,392 33
New Mexico 22,014 48 14,499 43
West Virginia 21,047 49 14,129 45
Mississippi 20,647 50 12,110 50
a
Figures use the mean value in real income per capita for the years 1996 through 1999, in 2000
dollars.
b
Figures use the mean value in real income per capita for the years 1969 through 1972, in 2000
dollars.
Champions of the State Growth League 19
$26,773 and ranged from $38,964 in Connecticut to $20,647 in Missis-
sippi, a spread of almost two to one. Alaska topped the rankings and
Mississippi bottomed the rankings in the 1969 72 period, and there
again the income spread was about two to one. While the proportion-
ate distance between the richest and poorest states remained about
the same, the pecking order in living standards was substantially
reshufBed. Starting at the extremes, among the ten states at the bot-
tom of the income ladder in the 1969 72 period, four had climbed out
by the 1996 99 period (South Carolina, Tennessee, North Carolina,
and South Dakota). Among the ten richest states in the 1969 72 pe-
riod, four had fallen out of this coveted category by the end of the
twentieth century (Alaska, Hawaii, California, and Delaware).
Table 1.7 further displays the considerable dispersion in the state
incomes, assessed this time in terms of the level of real income per
worker. These results follow the format used in table 1.6, reporting
the mean per worker income levels and state rankings at the begin-
ning and end of the three decades. Based on this indicator of living
standards, New Jersey and Connecticut topped the rankings at the
beginning and at the end of these three decades. North Dakota and
Montana ranked lowest in the 1996 99 period, replacing South Car-
olina and Mississippi, which had the lowest incomes per worker in the
1969 72 period. Among the poorest ten states by this ranking, seven
changed between 1969 72 and 1996 99. Among the ten richest states,
three fell from grace during these three decades.
Figure 1.6 provides a visual look at these relative state income
data using income per capita as the performance indicator. The lay-
out in Agure 1.6 indicates the extent to which the relative well-being
among the states remained constant over the 1969 99 period. The
states rankings in terms of income per capita in the late 1960s to
early 1970s period are shown on the vertical axis, and the states
rankings in the late 1990s are shown on the horizontal axis. The rich-
est state ranks as 1, and the poorest state ranks as 50. This setup eas-
ily identiAes those states whose relative economic conditions re-
mained unchanged over these three decades; such states will fall
along the 45 degree line in Agure 1.6. For example, Mississippi ranks
as the poorest state throughout the three decades. Only three other
states maintained the same relative income per capita ranking:
Rhode Island, Pennsylvania, and Florida.
The distance to the left of the 45 degree line indicates the extent to
which a state s income per capita improved relative to other states.
Virginia tops the list of outperforming states over the period, followed
TABLE 1.7. State Rankings Based on Real Income per Worker (in 2000 $)
1996 99a 1969 72b
Income per Worker Rank Income per Worker Rank
New Jersey $63,006 1 $50,487 1
Connecticut 62,421 2 49,328 2
New York 60,677 3 47,871 5
Maryland 55,706 4 47,717 7
Massachusetts 53,893 5 43,210 10
Illinois 52,185 6 45,106 8
California 52,164 7 47,832 6
Rhode Island 51,107 8 39,953 21
Pennsylvania 50,756 9 41,705 16
Florida 50,448 10 41,746 15
Michigan 50,381 11 47,919 4
Washington 49,289 12 43,508 9
New Hampshire 48,550 13 39,207 24
Virginia 47,627 14 37,340 29
Delaware 47,269 15 41,805 14
Nevada 47,010 16 43,013 11
Alaska 46,722 17 48,242 3
Ohio 45,822 18 42,459 12
Texas 45,222 19 36,489 33
Hawaii 45,031 20 40,362 19
Georgia 44,788 21 33,496 43
Arizona 44,744 22 41,815 13
Colorado 44,742 23 39,472 23
Minnesota 44,690 24 40,578 18
West Virginia 43,868 25 37,425 28
Oregon 43,620 26 40,170 20
Indiana 43,234 27 39,513 22
Louisiana 43,184 28 35,795 38
Wisconsin 42,862 29 40,768 17
Alabama 42,456 30 33,146 44
Missouri 42,302 31 36,899 31
North Carolina 42,163 32 30,828 48
Tennessee 41,411 33 31,832 46
Kansas 40,874 34 38,293 25
South Carolina 40,869 35 30,297 49
Kentucky 40,867 36 34,840 40
New Mexico 40,656 37 36,601 32
Maine 40,528 38 34,596 41
Oklahoma 39,823 39 35,866 36
Vermont 39,336 40 35,849 37
Iowa 39,286 41 38,066 26
Wyoming 39,281 42 36,997 30
Mississippi 39,123 43 29,151 50
Nebraska 39,039 44 36,068 34
Arkansas 38,732 45 30,932 47
Idaho 38,459 46 35,639 39
Utah 36,942 47 35,998 35
South Dakota 36,209 48 33,079 45
Montana 35,957 49 37,724 27
North Dakota 34,002 50 34,451 42
a
Figures use the mean value in real income per worker for the years 1994 through 1997, in 2000
dollars.
b
Figures use the mean value in real income per worker for the years 1969 through 1972, in 2000
dollars.
MS
50
AR
AL
SC
States above the 45 degree line rose in ranking. LA
45 WV
KY
NM
TN
NC
SD
40
ME
UT
GA
ND
OK
35
ID
MT
VT
TX
30 VA
MO
AZ
IA
NE
IN
25
KS
NH
OR
WY
WI
20
FL
MN
PA
RI
15 CO
OH
WA
MI
MA
10 MD
States below the 45 degree line fell in ranking.
IL
DE
CA
NJ
NY
5
NV
HI
CT
AK
0
0 5 10 15 20 25 30 35 40 45 50
State Rank, Avg. Income in 1996 99
Fig. 1.6. Changes in relative living standards over three decades (1 highest income per
capita; 50 lowest income per capita)
State Rank, Avg. Income in 1969 72
22 Volatile States
by New Hampshire, Georgia, North Carolina, Massachusetts, Min-
nesota,Tennessee, and South Carolina.The extent to which a state lost
ground in relation to other states is gauged in Agure 1.6 by the dis-
tance to the right of the 45 degree line. The biggest losers are Hawaii,
Montana, Alaska, Idaho, Wyoming, Oklahoma, Ohio, and Michigan.
The fate of several of these state economies is clearly tied to the de-
cline in oil and gas prices.The correlation between the states incomes
per capita at the beginning and end of the period is 0.84, and correla-
tion in the states rankings is 0.88.
Figure 1.7 illustrates the dispersion in living standards based on
the results of the level of income per worker. The two richest states
by this measure, New Jersey and Connecticut, maintained dominance
throughout the period. The rankings of only two other states re-
mained unchanged, Colorado and Missouri. Topping the list of gain-
ers are Georgia, North Carolina, Virginia, Texas, Alabama, South
Carolina, Rhode Island, and Tennessee. Clearly southern states dom-
inate the group of most-improved states by this performance indica-
tor. Again in Agure 1.7 the distance to the left of the 45 degree line
depicts the strength of a state s increase in relative income status.The
distance to the right of the 45 degree line depicts the strength of a
state s decrease in relative income status. In terms of the income per
worker indicator, Montana heads the list of underperformers, fol-
lowed by Iowa, Alaska, Utah, Wyoming, Wisconsin, Nebraska,
Kansas, Arizona, and North Dakota. The farm states of the Midwest
are obviously overrepresented in this group of underperforming
states. The correlation between the states income per worker at the
beginning and end of the period is 0.81, and the correlation in the
ranks is 0.79.
The results summarized in Agures 1.6 and 1.7 indicate consider-
able differences among states in changes in living standards over
these decades. Rather than revealing a consistent secular rise in in-
comes that affected all states relatively evenly, the data reveal that
economic performance widely varied in terms of relative income
gains and losses.
Commentary
Every fall the Virginia Governor s Advisory Board of Economists
convenes in Richmond for its annual task of forecasting the state s
three-year economic outlook. The board s economic forecasts nail
down the main parameters used to project future tax revenues and
therefore the available resources for the governor s proposed state
Champions of the State Growth League 23
MS
50
SC
NC
AR
TN
SD
45
AL
GA
ND
ME
States above the 45 degree line rose in ranking.
40 KY
ID
LA
VT
OK
UT
35
NE
TX
NM
MO
30 WY
VA
WV
MT
IA
KS
25
NH
CO
IN
RI
OR
20
HI
MN
WI
PA
15 FL
DE
AZ
OH
NV
MA
10
WA
IL States below the 45 degree line fell in ranking.
MD
CA
5 NY
MI
AK
CT
NJ
0
0 5 10 15 20 25 30 35 40 45 50
State Rank, Avg. Income in 1996 99
Fig. 1.7. Changes in relative living standards over three decades (1 highest income per
worker; 50 lowest income per worker)
budget. Like many states, Virginia s forecasting process starts with a
forecast for the U.S. economy, with projections for the national growth
rate in such factors as income, employment, corporate earnings, and
inBation. These national projections drive the state s econometric
models, a so-called top-down forecasting process. This conventional
process of state economic and Ascal forecasting, while reasonable,
State Rank, Avg. Income in 1969 72
24 Volatile States
glosses over a major fact: Virginia s economy bears little resemblance
to the national economy. In the last three decades of the twentieth
century Virginia s economy increased nearly 30 percent faster than
the U.S. economy.
The enormous variety in the economic experiences of the Ameri-
can states does not yield easily to the construct of a national U.S.
economy. The evidence using traditional measures of economic
growth and living standards indicates that state economies march to
disparate beats. Even the often-voiced fact of a U.S. economic slow-
down fails to capture the reality in over half of the states.
This overview of state economic developments during the twenti-
eth century and especially during the closing three decades lays the
framework for the analysis in subsequent chapters. There the focus is
on the extent to which the mobility of productive resources, eco-
nomic volatility, and speciAc Ascal policies affect the course of state
economic events.
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