It is election year, so political partisans will make claims about their candidate’s prowess in managing the economy, while claiming their opponent is a destructive force. But, at the national level, there’s no real difference between Republican or Democratic economies. However, at the state level, there are stark and growing differences.
One way to judge if a party was a better steward of the economy would be to select a half dozen common economic indicators, such as inflation, unemployment rate, GDP growth or per capita incomes. You could then compare the performance under Democrats and Republicans. One thing you’d quickly discover is that there is no reliable pattern to these data.
If you did the same thing among states, you’d find exactly the same result from the end of World War II up until about 1980. Party affiliation played very little role in economic differences. In fact, if you picked just one variable that best measured prosperity — per capita income — the was no correlation with political party. There were rich states led by Republican and Democratic governors and poor states led by both as well.
Over the past 40 years, that changed. Today, 19 of the 20 richest states are solidly Democratic, while 19 of the 20 poorest states are solidly Republican. It is clear that the GOP has become the party of poor states, while the Democrats have become the party of prosperous states. But, exactly why this is the case isn’t clear, and it certainly isn’t solely due to policy differences.
Shifting parties
One big culprit is that political parties changed, erasing regional differences. Up until the late 90’s, there were conservative Democrats and liberal Republicans. That is no longer the case, so as states began to align with national politics platforms.
This trend more extreme today. Even races for local government tends to be highly nationalized. State and local issues are often ignored in primary or general elections. This homogeneity of national politics naturally tends to cause parties to have success in places that are more similar – polarizing states between parties.
A second trend is the sorting by politics increasingly effects household location choice. Though much sorting happens at the local level, the nationalization of politics means that state borders now effect household location choice.
The nationalization of politics means that each party has been staking out positions that appeal to majorities in key states. In this way, politicians are choosing their voters. The sorting of households reflects voters choosing political landscapes they prefer, on economic, fiscal and cultural issues. This trend appears to be accelerating.
All of this sorting and changes to political parties accompanied an economic divergence between states. From the Civil War until about 1980, poor states tended to grow faster than rich states. This meant that American states were undergoing a process of economic convergence — they were becoming more alike in prosperity. Since 1980, poor states have been growing more slowly, and rich states more quickly. So poorer get relatively poorer, and rich places get relatively richer. This is economic divergence.
This explains some of how we got to where we are in terms of the extreme political sorting. But it doesn’t speak much to the future. I’m afraid that the policy positions chosen by both parties will amplify this divergence.
Human capital
The cause of the economic divergence is because human capital — education, innovation and invention — replaced manufacturing and movement of goods as the primary source of prosperity. This means that places that grow will necessarily need to develop and attract more human capital. But the educational policies pursued by both parties are vastly different, with very different outcomes.
The GOP has largely tried to adopt broad school choice, and cut funding to both K-12 and higher education. The Democrats have largely eschewed school choice, but amply funded both K-12 and higher education. Seventeen of the 20 best funded states are Democratically controlled and 17 out of the 20 lowest funded states are GOP strongholds. Educational outcomes between these states are stark.
Educational attainment differences alone explain about three quarters of the difference in per capita income between states. So, if poor states spend less on education, even if they have robust school choice, they will become poorer than rich states who spending more on education.
Economists have been saying this for three decades, without any effect in poor states. The prognosis is simply that poor states — like Indiana — are going to get poorer for decades to come. While rich states will grow richer.
Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].
