You Decide: Why have some states recovered faster?

Dr. Mike Walden

North Carolina Cooperative Extension

The economic world doesn’t treat everyone and everything equally. We clearly see this in the on-going debates about income inequality, CEO pay, the minimum wage and taxes. Another way we see this is in economic geography. For example, in North Carolina, for several decades we have watched urban counties adding jobs and incomes at a much higher rate than rural counties.

Another area of economic inequality that has been observed is in the speed of recovery from the Great Recession. The economy has been improving during the last five years, but it hasn’t been improving at the same pace for all states. States like North Dakota and Texas have been gaining much faster than states like Nevada and Maine. Fortunately, North Carolina’s gains have been above average on several economic measures.

This is good news for our state, but it raises the question of why. Why has the speed by which states have come back from the recession varied? How much of a state’s recovery is “baked in” by its economic structure? How much can be influenced by state spending and tax policies? And, for this particular recovery, how much was influenced by spending from the American Recovery Act (aka, the $900 billion stimulus)?

These are questions important to everyone – but particularly to policymakers – so I tried to answer them. My results are published in The Journal of Regional Analysis and Policy. Here I will summarize the major findings and implications and let you judge their relevance.

I looked at the first four years of the economic recovery (2009 to 2013), which was the latest time period when I began the research. I analyzed two measures of economic improvement: the growth rate in payroll jobs and the growth rate in total income (“gross domestic product” in economics lingo).

My first discovery confirmed an idea that economists have had for a long while – that the kinds of businesses and industries in a state have a major impact on the state’s economic path. Specifically, states with a large proportion of their economy in energy production, financial services and motor vehicle and parts production had a faster recovery in total income, and states with a larger proportion of their economy in financial services and motor vehicle and parts production had a faster recovery in payroll jobs. The energy sector impacted income but not jobs, because of the sector’s relatively low usage of labor.

These findings help explain why North Carolina’s recovery has been better than in many other states. While the state does not have a developed energy exploration sector, it is ranked high on financial services and motor vehicle parts. Both of these economic sectors suffered mightily in the recession, but they have bounced back very robustly.

It’s not a surprise that I found states with faster population growth during the recession had a better economic recovery after the recession. This makes logical sense. People are the fuel behind economic growth. States adding people – even in lean economic times – will need more businesses and jobs serving their needs.

Again, this revelation is part of the reason behind North Carolina’s rebound. For several decades the state has been a leader in attracting households from other states. Although the number of people making interstate moves slowed during the recession, North Carolina was still among the top states in attracting new residents.

There has been much debate about how changes in tax and spending policies impact a state’s turnaround from a recession. Some say cutting taxes will speed a recovery, while others say additional government spending will accomplish the same goal.

My results were very clear on these questions. I found that states which enacted income tax reductions – both individual as well as corporate – had faster rebounds from the recession. But I also found that states receiving a larger amount of federal stimulus funds had faster recoveries. I did not find that changes in state sales or gasoline taxes had any impact on the rate of economic growth from the recession.

Many economists say this is exactly what would be expected. Cutting income taxes puts more money in the pockets of households and businesses and thus gives them greater confidence to spend. Also, federal money spent supporting public salaries or business activity can help re-ignite an economy.

North Carolina received the 12^th highest amount of federal stimulus money, which – based on my results – helped the state’s recovery. But there were some changes from 2009 to 2012 that resulted in modest increases in the state’s income taxes as North Carolina worked to balance its budget and maintain essential services.

My study is certainly not the last word on why states snap back from recessions at different rates. The next recession may be entirely different than the Great Recession, so other factors may be at work then. Still, my general conclusions that economic structure, population growth, income tax policy and federal spending programs are the main determinants of a state’s economic rebound have a reasonable ring to them. But – as always – you decide.

Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.

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