RALEIGH – Earlier this week, I wrote about North Carolina’s lack of economic diversity and a resulting downside risk in time of recession. Click here to catch up.

Little did I know that there was actually some published research backing up my claim (but, hey, when has that ever stopped me, before?). In the Winter 2002 newsletter of the Federal Reserve Bank of New York’s Buffalo branch, economists Richard Deitz and Ramon Garcia report the results of their recent study of the diversity issue.

They write that, all other things being equal, state economies with greater economic diversity grow faster than states more reliant on a few big industries. The effect persists even when you consider cases like California, with growth supercharged until recently by Silicon Valley. Deitz and Garcia argue that a more diverse mix of industries in a state serves to provide better access to inputs such as raw materials and business services while encouraging productivity through greater specialization of labor.

More to the point, they suggest that diversity in a state economy, just like diversity in an investment portfolio, serves as a buffer against excessive risk. “A highly concentrated economy in which the vast majority of workers are employed in a few key industries is susceptible to shocks in those industries,” Deitz and Garcia write. “But if an economy has many different types of businesses, it is less likely to experience vast swings. Indeed, research shows that more diverse economies experience less volatility than economies with concentrations in a small number of key industries.”

Although their paper does not specifically talk about the North Carolina experience, Deitz and Garcia are making the same argument I did about why the recession is hitting states like ours so hard. And their “industrial diversity index” drives the point home. They rate North Carolina’s diversity at .58, compared to the national mean of .68. Regionally, North Carolina’s diversity index ranks our state 8th out of 11 Southern states.

We need new business investment, more entrepreneurial activity, and a tax and regulatory climate more favorable to enterprise if North Carolina is to diversify and stabilize its economy.