What do Colorado, Texas, Utah, Massachusetts, and North Carolina have in common?
Not much, it would seem. Yet according to the latest data, they are among the states leading the national pack in economic performance. The closer you look at the list of top performers, the more you start to see patterns that help explain why some states are faring well and others aren’t within America’s historically lackluster economic recovery.
To create my top-performers list, I used the “coincident index” of economic activity produced each month by researchers at the Federal Reserve Bank of Philadelphia. It uses four variables — payroll employment, the unemployment rate, wages, and hours worked — to construct an index that, over time, tracks with the gross domestic product of each state. The latest month for which the data were available was October.
Using this measure, 14 states have experienced economic growth at least a percentage point higher than the national average since the beginning of this decade. But two of them have recently faltered, posting below-average growth since the beginning of 2014. So here are the remaining 12 states that have been consistent top performers: Colorado, Idaho, Indiana, Massachusetts, Michigan, North Carolina, North Dakota, Ohio, Oregon, Rhode Island, Texas, and Utah.
Notice the geographical dispersion. Only two, Texas and North Carolina, are in the South. Massachusetts and Rhode Island form a rump group in the Northeast. Michigan, Indiana, and Ohio ring the Great Lakes. The remaining states are sprinkled across the Great Plains, Mountain West, and Pacific Northwest.
Resource extraction — oil, natural gas, timber, and mining — plays an outsized role in the economies of half the top performers. (North Dakota and Texas are far ahead of the rest in economic growth, by the way.) So the recent worldwide boom in such commodities is clearly a relevant trend. But keep in mind that other states have bountiful natural resources, as well. Some of them have less-favorable regulatory climates that limit the ability of private firms to tap these resources. On the other hand, some states with massive resource-extraction industries, such as Alaska and Louisiana, have not been top performers of late. So other factors must be at work.
Public policy is likely to be one of them. Decades of peer-reviewed studies have found a statistically significant relationship between economic freedom (measured with tax rates, spending levels, and regulatory burdens) and state economic performance. Interestingly, the latest Economic Freedom of North America study by the Canada-based Fraser Institute shows that eight of the 12 top-performing states — Texas, North Dakota, Indiana, Utah, North Carolina, Colorado, Massachusetts, and Oregon — ranked above the U.S. average in economic freedom for the most recent year, which was 2012. That’s suggestive. But obviously economic freedom can’t be the whole story, either. Other jurisdictions with relatively low taxes and small governments haven’t been doing as well lately. And Rhode Island, which ranks 45th in economic freedom, has experienced an economic upswing.
Economies are complex networks of institutions, personal decisions, and unexpected changes. No one explanation will suffice. Michigan, Indiana, and Ohio are experiencing rebounds in durable-goods manufacturing. Research-based firms continue to thrive in Massachusetts, Utah, and North Carolina. As social scientists gather more data from the post-Great Recession period, there’ll be more empirical research with which to draw firmer conclusions.
Still, you won’t go far wrong by observing that freer states where entrepreneurs have good opportunities to drill, mine, manufacture, and start new firms are likely to outperform other states in job creation and wage growth over time. Geography isn’t destiny any more. Neither is weather. High levels of education are certainly a plus, but there is no consistent relationship between government spending and educational outcomes.
North Carolina may not float on a pool of oil. But the other building blocks of superior economic performance are either already present in our state or available to us if state and local policymakers continue to make wise decisions. Right now, we are leading our region in many measures of economic growth. Since the Southeast is no longer an economic pacesetter, however, it’s time to set our aspirations higher.
John Hood is chairman of the John Locke Foundation.