GDP overachievers

Yesterday Karl Fisch and I were e-mailed a link to a video from Shocking Economics. Although I’m neither a demographer nor an economist, the video got me thinking… (bear with me here; there’s a point at the end of all of this!)

As you can see in the spreadheet I made [.xls or .pdf], there is an extremely strong positive correlation (cell E2) between a state’s overall population rank (column D) and its overall GDP rank (column F). In other words, the more people in the state, the bigger GDP it has. California has the most people and it has the biggest GDP. This makes sense.

However, some states seem to be more GDP-efficient than others. For example, Connecticut is ranked 29th in overall population and 23rd in overall GDP, but is the 4th-ranked state when it comes to GDP per capita (column G). In contrast, Alabama is ranked 23rd in overall population and 25th in overall GDP, but is the 45th-ranked state in terms of GDP per capita. Connecticut’s GDP over/under (column H) is +19 (23 minus 4). Alabama’s is -20 (25 minus 45). Connecticut appears to be a GDP overachiever, while Alabama seems to be an underachiever. Dollar for dollar, person for person, Connecticuters are contributing more to the overall national economy than Alabamans.

As the spreadsheet shows (cells K26:K29), states in the Northeast and Pacific regions (as defined by the U.S. Census) are, on average, more GDP-efficient than states in the Midwest or South. There are moderately strong correlations between states’ over/under ratio and their overall population rank (cell E4), overall GDP rank (cell H5), and GDP per capita rank (cell H6). States with smaller populations are moderately more likely to have a higher GDP per capita rank and a better GDP over/under ratio.

So here are 10 select states [click on image for larger version or download the PDF]:

While some of the states (Montana, Maine, New Jersey, and Maryland) have overall GDP ranks and GDP per capita ranks that are congruent, you can see that there are large discrepancies in GDP over/under between the lowest states (Florida, Michigan, Ohio, and Arizona) and the highest states (Wyoming, Alaska, Delaware, and Rhode Island). Florida is #4 in overall GDP but #34 in GDP per capita. Wyoming is #48 in overall GDP but #5 in GDP per capita. The lower states seem to be under-contributing to the national economy.

So how does a state like Michigan or Arizona increase its GDP per capita? Well, in today’s day and age, I think these states need to follow the lead of West Virginia (over/under of -9). West Virginia is making strategic, long-term investments in 21st century skills initiatives for its schools. To its credit, it sees that a focus on digital technologies and preparation of a globally-competitive workforce is the best solution for an anemic state economy. It’s probably no coincidence that five of the first six states to join up with the Partnership for 21st Century Skills (in red on the spreadsheet) have neutral or negative GDP over/under ratios.

I don’t know if all of this would make sense to an economist, much less a ‘shocking’ one, but it sits well intuitively with me. Although the video points out that our system has worked well for us to date, it also is true that our world is transforming itself in revolutionary ways. Don’t we want our state educational systems to be proactive rather than resting on their laurels and one day waking up to find that their economic models no longer work?

Comments

[Ewan McIntosh]

1.

What an excellent first-stop analysis of this data. It's no coincidence that economy is related to education standards in other parts of the world. However, if you read the McKinsey report on what makes great ed systems great, then money, actually, doesn't come into it ALL of the time (although it does make a difference).

Perhaps all that this reveals is that parents who are more well-off (middleclass and up) are more likely to be adding more value after hours i.e. the education systems themselves may or may not be doing particularly well themselves, but parents may be pushing children to do more constructive work in the evenings and weekends.

What do you think?

[Rob]

2.

As the cost of technology continues to decrease, the barrier to entry weakens for developing countries entering into a globally competitive arena. I think a cycle exists that wealthy countries can afford to invest in technology and thus increase their wealth even more. As it becomes cheaper and easier to invest in technology, the less wealthy countries have an opportunity to catch up.

[John Kain]

3.

This is a fascinating piece of research and I agree with the conclusion about focusing on digital technology skills. However, I think there are a lot of other factors that explain why some states are GDP overachievers or underachievers. I suspect Connecticut is an overachiever because it is home to large number of rich people who work in lucrative fields in New York such as Wall Street or show business. And I would guess that oil revenue makes Alaska and Wyoming overachievers. Arizona (my home state) is probably an underachiever because of low wages and a high concentration of illegal immigrants. But developing a tech-literate workforce would certainly help us.

[Scott McLeod]

4.

John, I think you're right. There are a number of contributing factors to this. However, while states can't do much about geographic issues like natural resources or proximity to major metro areas, they can do other things to make themselves globally competitive. From my viewpoint, investing in their future workforce and technology infrastructure are some of the smartest bets states can make. Countries like Ireland, Singapore, and South Korea are excellent examples of how to do this well.

[Doug Johnson]

5.

Hi Scott,

You should send this to Steven Levitt of Freakonomics fame. Interesting stuff.

http://en.wikipedia.org/wiki/Freakonomics

You don't mention how Iowa and Minnesota do which both tend to rank high in educational measures.

All the best,

Doug

[A. Mercer]

6.

Saw the video...the delivery makes Thomas Friedman looked staid. Can I say I was really underwhelmed by the revelations it purported to make. You've taken this lemon of a video and made not just lemonade, but something to chew over. Nice job.

Doug, thanks for the Freakanomics link, it prompted me to check out the blog on NY Times: http://freakonomics.blogs.nytimes.com/ good read.

[Chris Goldschmidt]

7.

I think there's a flaw in your analysis, chiefly because you look at a snapshot rather than long term trends. Southern states have very steadily narrowed the gap over the past three decades, to the point that the next decade will see a change in the overall ranking of states. Need an example? If trends continue, Alabama will surpass Michigan in per capita income by 2011, a scant four years from now.