Economic Reality

Until recent years, the American economy thrived on growing crops and making things. But today most other nations in the world can build and operate farms and factories more cheaply than can be done in the United States—mostly because of their large pools of available inexpensive labor.

For the United States, future growth depends on the creation of new ideas—a new concept, a different business model or a discovery that changes society. Harvard Economist Elhanan Helpman suggests in his recent book, The Mystery of Economic Growth, that accumulating capital (including more capital equipment and higher levels of education) is not as important to economic growth as organizing that equipment and workers in different ways and using technology (for example, the Internet and World Wide Web, fast computer chips, fiber optics and robotics) to achieve higher productivity.

This theory suggests that measures of job growth and population growth—the traditional guideposts of economic development success—are no longer sufficient. In fact, some states experience growth in these traditional measures and still suffer from stagnant per capita income and other measures of economic well-being. For states today, increases in productivity and prosperity are key metrics of success.

Without increases in productivity, which is defined as the average value of goods and services produced by each worker, per capita income will not rise because companies will not be able to justify paying employees higher wages. Furthermore, without continually increasing productivity, states will not be able to retain businesses in a competitive global economy, and more jobs will eventually migrate overseas. High productivity gain will raise states’ standards of living and allow them to remain competitive despite higher labor costs.

Both productivity and prosperity have been increasing in the United States, but the growth rates have varied by state. Not much of a regional pattern has been present in the gains over the last decade, though most of the northeastern states have performed at or above the national average and most of the Great Lakes states have done poorly. In contrast, the level of measures such as per employee earnings and per capita personal income have a strong regional pattern, highest in the Northeast and in some western states, and lowest in the South and Great Plains regions.

How is your state doing economically?