Today is April 18, 2022. (Reminder: today is the tax deadline.) Sunday’s San Jose Mercury-News includes one columnist’s attempt to report on how states are recovering from COVID. Meet Jonathan Lansner, business columnist for the Southern California News Group. His column, titled “California No. 3 state for economic growth, by GDP math,” measures real GDP growth by state between 2020 and 2021. He concludes that Tennessee, with a growth rate of 8.6%, was number one. The Volunteer State was followed by New Hampshire (8.5%) and California (7.8%). So we’re number … three?
A Basic Mistake
Actually, no. Even those with only a passing familiarity with economic statistics will immediately recognize the problem. One of the main drivers of GDP growth is population growth. We almost always look at GDP per capita instead of just GDP. I’ll discuss possible explanations for my findings later. For now, here are the top ten states.
As always, my methods are transparent. Click here to download my Excel workbook (which also includes data sources).
Wait – California moved from third to first? How is that possible?
Real GDP per capita growth is made up of two parts: the growth of real GDP and the growth of population. Between 2020 and 2021 (July of each year), California’s population fell, with a net outmigration of 261,902. That’s a loss of 0.66%. Somewhat ironically, that boosted California into first place in per capital GDP growth. In fact, there’s a common rule of thumb used by economists that works pretty well as long as the changes are small.
Real GDP per capita = Real GDP/Population
%(Real GDP per capita) ≈ %(Real GDP) − %(Population)
In this case,
%(Real GDP per capita) ≈ 7.80% − (−0.66%) = 8.46%.
Explaining These Results
You may remember that 2020 was the year of COVID lockdowns. States that had more restrictive lockdown rules saw larger hits to their state output. In 2021, lockdowns were being relaxed somewhat. It’s not surprising that states with more limiting lockdowns grew faster in 2021. Their GDP fell more in 2020, giving them more room to grow in 2021. That’s a good explanation for California, Massachusetts, Nevada, New York, Indiana, Michigan, and Washington. California, Michigan, and New York also got boosts from negative population growth. New York lost 1.58% of its population from 2020 to 2021. California lost 0.66% and Michigan lost 0.17%.
Regarding Indiana, Indianapolis is headquarters for the Eli Lilly pharmaceutical company. Company revenue grew by 15% in 2021, contributing significantly to Indiana’s rebound from COVID. Indiana also “benefited” from having only a 0.36% growth rate in 2019. That meant the state went deeper into recession than the –2.51% decline in 2020 would seem to indicate. See my previous comment about deep recessions leading to stronger recoveries.
While Nevada GDP grew by 7.09%, that was not enough to make up for their catastrophic 7.40% drop in 2020. It’s easy to grow fast when you’re rebounding from a very deep slump. Relaxing lockdowns was an especially important driver of tourism and other activities in Las Vegas. That also applies to California and New York to some degree.
But Tennessee, Iowa, and New Hampshire? To explain those, let’s look at the last four years of GDP growth in those ten states.
Iowa GDP fell by 2.02% in 2020. But people and animals gotta eat. Iowa is a major farm state, known for their high-quality corn, hogs, and cattle. The state’s bounceback was probably driven by agriculture. And the state’s economy actually shrank slightly in 2019.
New Hampshire and Tennessee both benefited from a moderate decline in GDP per capita. But my guess is that these states benefited from migration. Sadly, the last year Census reported interstate migration is 2019. Luckily, the private sector offers their own estimate. I turned to North American Moving Services where I found this map:
North American Migration Map – An infochart by the team at North American Van Lines
Tennessee’s population increased by 0.80% in one year. Fueled by low tax rates, a great business climate, and ready access to global air transportation (Nashville), the marginal product of the new workers was well above the state average. That led to GDP increasing by 8.57%. The population growth made per capita GDP slightly lower at 7.72%.
My guess was that New Hampshire benefited from migration from Massachusetts. When I lived in Boston, the state was known as Taxachusetts — with good reason. But let’s see what North American has to say. They describe the state as “balanced.” Their numbers say inbound migration was 49% and outbound was 51%. But Census reported that the Granite State’s population increased by 0.81%. I have no explanation beyond low taxes, a good business climate, and limited regulations. It certainly wasn’t the physical climate! (When I lived in Boston I would occasionally ski in New Hampshire. Ice, rocks, and generally bad conditions were the rule. Go to Vermont or Maine instead.)
A state’s output is determined by labor force and productivity. The number of workers generally increases with population. (Florida may be an exception to this with its large population of retirees.) Productivity is influenced by taxes, regulations, business climate, and the age structure of the labor force. If the marginal product of immigrant workers is above the average productivity of the current labor force, productivity will rise. Some combination of these factors can explain most of what happened during the post-COVID recovery.