Divergent States

The different rates of economic growth is a rather common topic when comparing countries. There is always a question of whether growth leads to convergence, assuming growth has decreasing marginal returns, or to divergence, assuming growth acts as a feedback loop. Of course, given the number of variables involved, there are plenty of examples to support either claim. While many Asian countries are approaching the levels of wealth seen in Western countries, there are many African countries that have been left behind.

Focusing on just divergence, one reason it occurs is because countries are sovereign. Just because one country has a growing economy, doesn't mean that another randomly selected country will have one. It takes a certain level of exchange between the two countries to forestall divergence. For example, since the introduction of NAFTA, economic growth in the US and Mexico has been almost the same every year. This is of course a situation where there is neither divergence nor convergence. Arguably though, there is a positive relationship between integration and economic convergence.

One reason to believe this is true is to look at regions within a country. It appears to be very rare that two regions within a country have divergent growth rates, at least not in the long-run. China is currently experiencing divergent internal growth rates between the coastal regions and the interior (per capita GDP in the wealthiest province is 5 times greater than in the poorest). China is actively trying to fix this problem, but other countries have mechanisms in place that also address this problem, although more passively, such as the free movement of capital and labor. For example, when a region becomes poorer than its neighbors, property and labor will be cheaper which entices businesses to move there.

What I am curious about though is how effective these mechanisms are. It's actually kind of a marvel that given how big the US is, that most people can expect the same standard of living in every state. There are pockets of wealth and poverty, but those are scattered throughout the US, not concentrated in certain areas.

I wanted a long term look at how GSP per capita in each state grew relative to the US GDP per capita. Unfortunately, there was a change how GSP is measured in 1997, so older data will not much up. Regardless, there have been some interesting movement since 1997.

The most basic way to look at divergence is to find the standard deviation of GSP per capita between states. In 1997, the average state had a GSP per capita of $35350 with an standard deviation of $6943. In 2011, the average state had a GSP per capita of $41446 with an standard deviation of $8109. While the standard deviation increased, so did the average, and relative to the average, nothing has changed as in both 1997 and 2011, one standard deviation was 20% of the average. However, in the years available, 1997 and 2011 are both high points. In 2003, one standard deviation was 17.5% of the average. So since 2003 there seems to have been a divergence, but a glacial one.

Looking at a more individual level, in 1997 the wealthiest state, Alaska, had a GSP 2.4 times greater than the poorest state, Idaho. In 2011 the wealthiest state, Delaware, had a GSP 2.2 times greater than the poorest state, Mississippi. So not only has the gap between the wealthiest and the poorest decreased, but the states holding the top and bottom positions has changed. This indicates that no state is soaring ahead or falling behind.

That said, there is a huge difference in growth rates from 1997 to 2011. During that time period, GDP per capita in the US increased by 14%. At the low end, Michigan's GSP per capita declined by -2%. At the high end, North Dakota's GSP per capita increased by 41%. However, despite such different growth rates, neither state have a GSP per capita much different from the rest of the country. All it really changed was their relative position. North Dakota has intriguing gone from being nearly one standard deviation below the average to nearly one standard deviation above the average.

Another interesting finding is that the current 3 wealthiest states all had below average growth. Which indicates there is some convergence happening at the top. However, there is some indication the poorest states are not converging with the average. Mississippi, the current poorest state, had only 9% growth, while South Carolina, the 3rd poorest state, had only 1% growth. While there's no indication that this trend will continue, it is still a worrying position to be in. It will be interesting to see when this divergence reverses itself.