The Corner

Economy & Business

California’s Economic Performance Is Hardly a Vindication of the ‘Blue State’ Model

Over the past several years, many Republican leaders and conservative analysts have written about the diverging economic fortunes of Republican-governed states with relatively smaller governments and Democratic-governed states with relatively larger governments. Unfortunately, all too often the complex economic and public-policy issues involved have gotten oversimplified. Some analysts have compared California and Texas as prototypical Blue and Red states, for example. That has been rhetorically useful for conservatives in the past. But it has proved problematic over the past year as falling oil prices have slowed the growth of the Texas economy while California has continued to benefit from Pacific Rim trade. As a result, Democratic operatives and liberal columnists have been crowing lately about California’s superior performance, as if it disproved the economic virtues of lower taxes, less regulation, and other market-friendly policies.

It does not. Two cases establish precisely nothing, particularly when those two cases happen to be such exceptional ones as California and Texas. Most careful academic studies on the matter conclude that heavy state taxes and regulations tend to hamper state economic growth, all other things being equal. That’s the key phrase, of course. No serious person would suggest that state fiscal and regulatory policies are the most important factors affecting state economies, or even that they are large enough to swamp other factors when seeking to explain state-by-state differences in economic performance. Natural resources, geography, climate, and international trading patterns are clearly important.

At the very least, analysts should look at a range of large states rather than just two. I recently took a look at three measures — employment growth, GDP growth, and per-capita income growth — for the 10 most-populous states. In each case, I began the time series in June 2013 (because I was thinking in terms of state fiscal years). The job count grows through November 2015. The GDP measure goes through 2nd Quarter 2015. The income measure goes through 3rd Quarter 2015. Here are the topline results:

‐In employment growth (from the payroll survey), Florida, California, Georgia, Texas, and North Carolina beat the national average (in that order). Falling below the national average were Michigan, New York, Ohio, Illinois, and Pennsylvania (with PA have the lowest job-growth rate during the period).

‐In GDP growth, here are the same ten states ranked highest to lowest: Texas, Florida, California, North Carolina, Georgia, National Average, New York, Illinois, Michigan, Pennsylvania, Ohio.

‐In per-capita income growth, here are the same ten states ranked highest to lowest: California, North Carolina, Michigan, New York, Georgia, National Average, Florida, Ohio, Pennsylvania, Texas, Illinois.

Placed in the larger context, then, California’s recent economic growth looks less like proof of the superiority of the Blue State model and more like further evidence that, when possible, people still prefer to live and do business in sunny climes, particularly if they are on a coast. Three states — California, North Carolina, and Georgia — have above-average performance in all three categories. Two more, Texas and Florida, do well in two of the three measures. Michigan and New York beat the national average in only one, per-capita income. Ohio, Pennsylvania, and Illinois rank low in all three.

Just as liberals shouldn’t try to use California’s recent performance as a proof for their favored theories about economic growth, conservatives should avoid falling into the trap of holding up just a single state to prove our case. Nor should we oversell the effects of public policy, good or bad. California has such a wealth of natural and human resources that it is not easy to deal its economy a mortal blow — although its liberal politicians seem determined to test that proposition.

John Hood — John Hood is president of the John William Pope Foundation, a Raleigh-based grantmaker that supports public policy organizations, educational institutions, arts and cultural programs, and humanitarian relief in North Carolina ...

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