USA Today published a piece from 24/7 Wall St. on the best and worst state economies. The Drudge Report linked to the piece, likely multiplying its readership manifold. Unfortunately, the ranking is fundamentally flawed for two key reasons which will be explained below.
Colorado, Utah, Massachusetts, New Hampshire and Washington captured the top-5 in the ranking. Among the five most-populous and diverse states, California came in at #8 overall, followed by Florida (#13), Texas (#21), New York (#31) and Illinois (#32). Bringing up the bottom of the roster were New Mexico (#46), Mississippi (#47), Louisiana (#48), Alaska (#49), and West Virginia (#50).
The ranking, by 24/7 Wall St. senior editor Michael B. Sauter and analysts Samuel Stebbins and Evan Comen, used five factors to score states’ economic performance: economic growth from 2012 to 2017, the official poverty rate in 2016, the official unemployment rate in June 2018, employment growth from 2012 to 2017, and the share of adults with bachelor’s degrees.
Of their survey, the authors’ write:
The best ranked states tend to have fast-growing economies, low poverty and unemployment rates, high job growth, and a relatively well-educated workforce, while the opposite is generally the case among states with the worst ranked economies.
The challenge with any rankings is the data included, the data left out, and the weighting of the data used.
In their ranking the authors’ use economic growth from the last five years. But the issue with that data is that the Great Recession hit some states far harder than others. For instance, California’s housing bubble was particularly large compared to Texas’ due to a variety of factors, including state law and the effect of California’s restrictive regulations which artificially reduced new supply thus inflating the value of existing housing. As a result, from 2007 at the onset of the last recession to 2009, California’s real economic output declined 4.4% vs. 3.2% for the U.S. as a whole while the Texas economy contracted an imperceptible 0.01%. Thus, as the economic recovery took hold, California was initially slow to recover, but then it outpaced most of its rivals for a few years with its economic growth only recently slowing.
A better gauge of consistent, sustained growth is a 10-year window, beginning in 2007 before the recession and continuing until 2017, the last year for which data from the U.S. Bureau of Economic Analysis is available.
Over the past decade, the top states by GDP growth are: North Dakota, Texas, Nebraska, Washington, and Oregon. The slowest growing states are: New Jersey, Louisiana, Wyoming, Nevada, and Connecticut with the latter two seeing a decline in real GDP of 2.2% and 9.1%, respectively.
The other factors used in the USA Today ranking have issues as well. The greatest determiner of poverty is employment, not government benefits. People with jobs are far less likely to be in poverty. Further, job growth is closely linked to economic growth and is inversely related to unemployment—the more job growth, the lower unemployment generally is. Thus, of the five factors used in the survey, four are largely redundant with economic growth having a high correlation to both the unemployment and job growth while poverty is closely correlated with the unemployment rate. The share of adults with bachelor degrees has little statistical correlation to economic growth or poverty but is predictive of demographics as well as the kind of industry in a state.
Lastly, the use of the U.S. Census Bureau’s Official Poverty Measure is itself highly problematic because the official poverty measure, in use for more than 50 years, does not account for the large variations in states’ cost of living—it assumes rents in New York are the same as rents in Mississippi. As a result, the Official Poverty Measure significantly understates real poverty in high cost of living states such as California and New York while overstating poverty in low cost states such as Texas and most of the Midwest and South.