Economic Prospects by State

So, on Twitter the other day, I “engaged” with another person who disagreed with my observation data did not lead one to believe that blue state economic policies were positive long term for blue state economics.

So, essentially, the question on the table became “What data can be offered to support the red state economic outlook going forward”.

Before I start, let’s talk for a moment about the paucity of reasoning behind this “red state/blue state” disparity:

  1. Each state, regardless of its politics, is a subeconomy which is heavily linked to the federal economy; the economics of California and Texas, therefore, are not entirely independent of another. Therefore, the ability we have to categorically state that “X is better than Y” is very limited, because traditional metrics of economic health are not independent from state to state.
  2. Further, the definitions of “red state/blue state” are somewhat fluid. We know that California, since 1992, is a “blue state”; Texas became a “red state” in he late 1990’s. But a rather large number of states are fluid in their politics; is pre-2016 Michigan a “blue state”? Their national politics were certainly blue, but they switched governors from Dem to GOP almost every time they could.
  3. Even worse, that fluidity screws up time-based metrics. I can’t, for example, take a GDP growth chart and compare “blue” California and “red” Texas since 1980, because in 1980, California was very mixed politically and Texas was pure Democrat.
  4. And then on top of it all……governance policies at the state level are tend not to be “ideologically pure”. Almost all states have an “incubator” fund which helps fund new business; an incubator fund runs contrary to the “let the market decide” instincts of conservative economics. And on the other hand, we always see (and just did see, in the case of NY City and Amazon) left-leaning politicians tax abatements to attract new business; tax abatements are anathema to left-leaning economics.

So, that’s a longwinded way of saying that metrics that compare state economic policies have to be carefully chosen, not be very sweeping in the time horizons they use, and keep in mind that politicians often abandon their ideologies in order to get an economic leg up.

That all said, let’s step through the future prospects for the two types of governance we see at the state level, and why I believe that the pattern of red states to continue growing at faster rates than blue will continue, using some pretty vanilla metrics.

SMALL BUSINESS STARTUP ENVIRONMENT

70% of economic and job growth in the US comes from the small business sector. Therefore, it’s rational to point out that the ability of an entrepreneur to get the doors open and established in a particular state will be relevant to the state’s long term economic prospects.

Specifically:

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Everyone above the age of reason can eyeball that map and see the correlation small business outlook and state governance. The “best states” list contains only 1 blue/blue state; the rest are either red/red or are in some arguable shade of purple.

And, the obverse: Five of those states are blue/blue, three are “purplish”, and two are red/red; and interestingly, they are two of the three worst economic performers on the “red/red” side.

So, the question then becomes “who did this survey, and is the survey reasonable?”

Fair enough. Here’s who did the survey, and how they did it. The important point to be made is that this was (a) a data-based evaluation which (b) included an unbiased set of metrics aggregated by (c ) university professors, as opposed to a biased organization.

It’s of course relevant to ask WHY this is the case, and that’s a topic for another day. However, it’s important to point out that this evaluation did *not* consider the third rail of regulation, which is generally the go-to assumption that would be made by a conservative observer as to why Texas is better for a startup than New Jersey, despite NJ’s obvious advantages in educated workforce and proximity to the largest metropolis in the country; nor did it consider taxes, which would be the other natural advantage of a low-tax state over a higher taxed one.

OVERALL BUSINESS CLIMATE

So, now that we’ve gotten your business off the ground, how about it’s long term growth prospects? Let’s use the CNBC evaluation, which over the years has become accepted as authoritative on the topic by many:

The “Best States for Business” is a bit more nuanced, since blue state politicians are not stupid; if they see businesses leaving their state for a reason, they tend to swallow their ideological pride and make the change. To wit:

The Top 10 contains four red/reds, three blue/blues, and three shades of purple; the Bottom 10 contains six red/reds and four blue/blues.

So, on the Best States list, there’s something for everyone to like and dislike. A glance at the methodology shows you that the highest weighting is on skilled/educated workforce, which red/reds often suffer from, as they still have a high percentage of their workforce engaged in agriculture, where higher education is not of great benefit. The second weighted factor is infrastructure (which tends not to benefit any state in particular, as so much of it is federally apportioned), but the third highest weighting is cost of doing business, which includes taxes, and benefits red states.

Texas tends to win out, obviously, because it has risen above its ranching/agriculture/energy roots to have a highly diversified economy which includes technology and arguably the best medical/life science research in the world, plus a large number of top universities that churn out graduates to feed those industries. And, in the process, has done so without resorting to state income taxes and without any cost-of-living “booms” which price younger workers out of metro areas and markets.

FINANCIAL GOVERNANCE

The final factor I’ll touch on here is financial governance; we’ll look at that using the credit rating of the state. Financial governance in red states exceeds that of blue states rather markedly; if a state doesn’t have an AAA rating, it simply means that when the state goes to borrow money, they have to pay a higher interest rate to the bondholders, which is of course a waste of taxpayer money.

AAA ratings: Delaware, Florida, Georgia, Indiana, Iowa, Maryland, Missouri, Nebraska, North Carolina, South Dakota, Tennessee, Texas, Utah, Virginia.

Sub-AA ratings: Kentucky (A+), New Jersey (A-), and Illinois (BBB-)

So, in conclusion, I see no reason why blue state economic governance should lead to high growth rates than it has in the past. The laws of economics are not partisan, and they will always favor locations where more of the business’ capital is under the control of the business, rather than under control of a government, either by taxes or regulation,

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