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Why Some State Economies Are Healthier Than Others

Almost all states were hit hard by the recession and are recovering very slowly, but a few — most notably Alaska, North Dakota, and Texas – experienced only a mild recession and/or are recovering more rapidly.  Do these states’ tax and spending policies explain why they avoided the same economic fate of other states, as some have suggested?  Actually no, according to a new analysis by Goldman Sachs.*

What really mattered, the analysis found, were three things:

  • Energy. States that are sitting atop active reserves or otherwise linked to the oil or natural gas industries, as Alaska, Texas, Wyoming, and North Dakota are, have done better.  The oil industry declined somewhat when prices fell during the recession, but it has recovered much faster than most other industries.
  • Exposure to the housing bubble. States that entered the recession with a larger share of residents holding subprime, adjustable-rate mortgages have done worse.  This helps explain why Texas, for example, has performed relatively well.  Its long history of strong regulatory control over mortgage lending — with roots dating back to the 1800s — helped limit its exposure to the housing bubble.
  • High-end services or technology. States with stronger professional business services or technology industries got a boost. Virginia, Maryland, and Colorado, for example, have more jobs for lawyers, accountants, architects, computer systems designers, and other high-end business service or technology experts.  These people tend to be in demand in good economic times and bad, and they’ve continued to do relatively well despite the recession.

These factors alone, Goldman Sachs found, account for as much as three-quarters of a state’s relative job performance since December 2007.

In contrast, the study found no relationship between a state’s job performance and its income tax rates, property tax rates, or state spending as a share of the economy.

* “US Daily:  State of the States,” August 16, 2011 (available to subscribers only).