September 22, 2011

Winning and Losing States of America

Experts weigh in on North Dakota’s and Utah’s success, Michigan’s and Nevada’s failure.

The economic laboratories at work in the 50 states have produced disparate results according to new government data, and experts say the success of states like North Dakota and Utah and poor performance of Michigan and Nevada have national implications.

Data from the Commerce Department’s Bureau of Economic Analysis show that second quarter personal income in North Dakota, Texas and Iowa enjoyed the largest gains year over year; on a quarterly basis Nebraska came out on top.

In an interview with AdvisorOne, American Enterprise Institute scholar Mark Perry, author of the widely followed economics blog Carpe Diem, noted that the quarterly emphasis of the BEA report, which put Nebraska in the top spot, obscured the big story that personal income in North Dakota rose a whopping 13.31% on an annual basis–about twice the level of second- and third-place states Texas (7.27%) and Iowa (7.17%) and more than twice the national average of 5.47%.

mark perry“That huge increase in oil production has really stimulated their economy,” Perry (left) said about North Dakota. “They have a huge tax surplus; they just cut income tax rates; they’ve had the lowest unemployment rate in the country.” The state has also led the way in job growth, personal income growth and state GDP expansion, he added.

“It all really comes back to the energy story–how they’ve done so well by developing energy in the western part of the state. They just set a new record in July: They’ve been increasing oil production at such a fast rate that they’ll surpass Alaska and California and be No. 2 behind Texas,” Perry said. “It’s clearly the most successful state in the country.”

In a separate interview with AdvisorOne, Kevin Klowden, managing economist of the Milken Institute, an economic think tank in Santa Monica, Calif., agreed with Perry that energy is a “huge factor” in the economic performance of the top-ranked states, but added that crop revenues was the other key factor. “Food is definitely a big deal” for Iowa, Kansas and Nebraska, he said.

Klowden singled out Utah as a particularly instructive state success story. “A number of industries in Utah are rebounding very well. Utah has been seeing some very consistent growth in terms of personal income”–all despite having suffered a housing bubble and ongoing high foreclosure rate, he said. “It seems to have weathered the housing bubble a lot better than its neighbors.” The reason for the state’s resilience? “Utah pushed attracting high-tech knowledge-based industries,” Klowden says.

As for the worst performing states, Klowden says the volatility of the BEA’s quarterly data is what accounts for Washington, Oregon and Georgia falling to the bottom. These are states where bonuses paid last year were reported in the first quarter, making Thursday’s second quarter data exhibit fallout disproportionate to actual economic performance. Adjusting for this seasonality, Klowden would identify Michigan, Indiana and Nevada as the worst performing states.

He says Nevada has the dubious distinction of having the highest unemployment rate, at 13.4%; its tourism industry has not yet recovered; and it is still reeling from the bursting of its housing bubble. Indiana is still reliant on ailing industries and Michigan is “still hurting horribly.”

The American Enterprise Institute’s Perry, a professor of economics and finance at the University of Michigan as well, also singled out his home state as an instructive example of failure. “Resources in Michigan are comparable to what we have in North Dakota, but they’re off limits because of government restrictions on exploration.”

Perry blamed what he described as overweening environmental regulations for the failure to recover economically productive energy resources. Citing the large ANWAR field in Alaska, Perry said the area impacted by drilling is the size of the Washington, D.C.-area’s Dulles airport while the entirety of the ANWAR wildlife reserve is the size of Texas.

Perry emphasized that energy exploration has lots of salutary knock-on effects. “Oil and natural gas generate government revenue because of taxes on extraction and sale.” In contrast, solar and wind energy production costs the government because of required subsidies.

Retail sales and housing demand are also on a tear in North Dakota, he said, because of energy industry activity in the state’s Bakken shale–similar to growth now being seen in Pennsylvania because of drilling in the Marcellus shale.

Perry says there is still another benefit to drilling besides the job growth and state and federal revenue benefits. “With all the natural gas we’ve been finding and drilling for in the U.S., it’s brought the cost of natural gas to a 10-year low; that’s a very important input in manufacturing in the U.S.”

On a national level, both economists agreed that current policies had the effect of stifling investment.

According to the Milken Institute’s Klowden, “the main thing that needs to be done is find a way to stimulate hiring. It’s got to come from small to midsized businesses. Large companies are hoarding cash because they don’t have a lot of confidence in the economy.”

Klowden says that switching to a territorial corporate tax structure would help. “All we’ve done is encourage pushing manufacturing to locations outside the country. People are not willing to invest in equipment. They’d rather invest overseas.” Under the current system, Klowden says, “when they earn money overseas, they keep it overseas; if they bring it back to the states, they [the government] tax it.”

Perry agrees that government discourages investment, and adds that its policies also result in economic uncertainty.

“Corporations are profitable and sitting on lots of cash. Consumption is back but investment spending is way down. A strong recovery happens when you have strong investment growth,” which won’t happen, he says, while money remains on the sidelines.

“Every couple of months there’s a tax and spend plan. Companies are never quite sure what the regulatory environment will be,” he says.

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