Rich States Get Richer, Most of the Time

(Bloomberg Opinion) -- In 1929, the six richest states in the U.S. were, in descending order, New York, Delaware, Connecticut, California, Illinois and New Jersey. Four of those are still in the top six (Illinois missed the cut by a few places, while Delaware has fallen to 22nd; Maryland and Massachusetts replaced them).

Rich States Get Richer, Most of the Time

The six poorest states in 1929 were, starting at the bottom, South Carolina, Mississippi, Arkansas, Alabama, North Carolina and Georgia. Mississippi, Arkansas and Alabama are still in the bottom six. South Carolina (only barely; it’s now seventh-poorest), North Carolina and Georgia have escaped, to be replaced by West Virginia, New Mexico and Kentucky.

Rich States Get Richer, Most of the Time

Per-capita personal income is admittedly not the most closely watched of economic indicators. In the short term, it can give some pretty strange results: West Virginia had the fastest-growing per-capita income of all the states in 2018, according to preliminary data released late last month by the Commerce Department’s Bureau of Economic Analysis, but that was partly because its population shrank by an estimated 11,216. Per-capita income also doesn’t tell us anything about the distribution of income. The Census Bureau’s median household income estimates do that, but those come with big margins of error and are only readily available back to the mid-1980s. Which leaves per-capita personal income as a quite useful measure of the changing fortunes over time of American states and localities (it’s available down to the county level).

As is apparent in the above charts, one thing that the state per-capita personal income data show is that there was a huge interstate income gap in the early 20th century that shrank rapidly until about 1980, and then stabilized — and in some cases grew again. This has not gone unremarked by economists. In his 2012 book “The New Geography of Jobs,” Enrico Moretti described a “Great Divergence” since the 1980s in which

A handful of cities with the “right” industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the “wrong” industries and a limited human capital base, are stuck with dead-end jobs and low average wages. 

While in the past Americans have often moved from struggling areas to boomtowns, thus evening out such regional wage disparities, this has gotten harder in recent decades because of  “tight land use regulations in wealthy areas” that drive up housing costs, Peter Ganong and Daniel Shoag wrote in 2016. State-to-state moves were less than half as common in 2018, as a share of U.S. population, as they were in the 1940s through 1970s. Those with the least education are least likely to move, partly because of those high housing costs, but also, as new research from David Autor has revealed, because the wage premium for moving to a more densely populated area, while still high for those with college educations, has declined a lot for those with high school degrees or less.

Amid those big-picture trends, though, the charts above do hint at some smaller, more state-specific stories. There’s the recent decline in Connecticut’s fortunes apparent in the top chart, which I wrote about a few weeks ago. There’s formerly rich Delaware’s long and seemingly unabating decline, which seems like something I ought to write about. There’s the case of formerly poor Georgia and North Carolina, which came so close in the 1990s to breaking into the ranks of richer-than-average states, then fell back.

Here’s another way of looking at the pre- and post-1980 trends that (1) backs up the big-picture theories but (2) also reveals some interesting state sagas. These are the states that saw the biggest gains in per-capita income from 1929 to 1980, and what’s happened to them since: 

Rich States Get Richer, Most of the Time

North Dakota is the real standout here, and while some of its recent gains have been related to the shale oil boom of the past decade, its oil-poor neighbor South Dakota has followed a similar trajectory. And while their 1929-1980 income increases were accompanied by zero population growth in South Dakota and actual decline in North Dakota, since 1980 the Dakotas have gained population, albeit at a slower pace than the country as a whole — indicating that something about their combination of solid educational systems and business-friendly policies (and perhaps weather that keeps all too many people from migrating there to take advantage of them) really does work. Oil-rich Oklahoma, Texas and Louisiana, meanwhile, still suffer from comparisons with the boom times of 1980. And Texas and Florida, which together accounted for 26 percent of U.S. population growth from 1980 through 2018, have found that it can be hard to outpace the rest of the country in per-capita income growth when the capita keeps rising so quickly. Florida, though, actually did catch up with the national average per-capita income in the early 1970s and stayed about even with it amid lots of population growth until 2006, only to lose ground amidst the housing bust that it has yet to regain.

Now here are the states — plus the District of Columbia, which I left out of the top chart but opted to include here — that saw the biggest relative losses in per-capita income from 1929 to 1980, and what’s happened to them since:

Rich States Get Richer, Most of the Time

The District of Columbia has been through the most spectacular turnaround, which won’t be a surprise to anyone who’s been to the nation’s capital lately, although it should be noted that even in the tough times of the 1970s and 1980s, its per-capita income was still well above the national average (in 2018, it was $81,882, or 152.4 percent of the national average, compared with $74,561, or 138.8 percent, for the richest state, Connecticut).

Then there’s Nevada, where incomes have been going mostly downhill relative to the rest of the country since 1929. This is largely because in 1929 Nevada was an underpopulated desert with 90,000 human inhabitants and a bunch of mines, while now it has 3 million people and an economy that revolves around low-wage services. Another big story is the contrast between the New England states and the Great Lakes states, two slow-population-growth regions that followed nearly identical trajectories in the post-World War II decades, then took very different paths after 1980. Here’s another view of that divergence:

Rich States Get Richer, Most of the Time

Finally, here are the 19 states where income gains outpaced the country as a whole over the past decade:

Rich States Get Richer, Most of the Time

This is a mix of states bouncing back from a really terrible 2000s (Michigan most of all, but also Colorado and Indiana), a state gaining in per-capita income as its population shrinks (Illinois), and states that are genuinely booming (Washington, Massachusetts, Oregon and others). What really stands out, though, are leaders California and New York, two wealthy states with superstar cities and not enough new housing construction that more or less epitomize the big-picture economic trends of income divergence, land-use constraints and reduced mobility.

In case you were wondering, I chose to look at the top six states because six is how many lines Bloomberg's charting app can comfortably accommodate.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

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