Methods of Measuring State Economies

State government economies vary tremendously in size in the US, with California’s GDP being so large that if it were its own country it would be the 5th largest in the world (Egel, May 4 2018)

Inc Magazine Method

Inc is a business magazine founded in 1979 and known for the “Inc 5000”, a list of the fastest growing privately held companies in the United States. (Inc Magazine, 2019)

In 1989 they produced a comprehensive ranking of the 50 US states, based on the following factors (Raimondo, 1992, p.21), over a 4 year period. The equivalent collected today would look like this data from 2014-2018:

  • Absolute change in total employment from 2014 to 2018
  • New companies founded 2014 or later, with 10+ employees at the end of 2018
  • Young company growth (founded in 2010 or later) with a growth index of 20 or higher from 2014 to 2018. Growth index is defined as absolute growth multiplied by the percentage of growth in employment.

They go on to note (Inc Magazine, Oct 1 1984):

As in previous years, our scoring system is based on 100 possible points, weighted to reflect their relative importance to most small, growing companies. Capital and state-sponsored small business support each receive 25 points, reflecting the belief that they are the most significant factors; taxation, although not an insignificant concern, was given 10 points, the lowest weighting; and labor and business activity were each allocated 20 points in recognition of their greater significance to the majority of smaller businesses. Based on this scoring system, the 1984 state totals ranged from Connecticut’s 80.3 to West Virginia’s 35.6.

I’ve been unable to identify if this analysis has been conducted in more recent years. Other sources for state rankings mentioned by Raimondo (1992) include the next two entries:

Grant Thornton Annual Study

The Grant Thornton Annual Study of General Manufacturing Climates of the Forty-Eight Contiguous States of America has been produced at least 8 times. These annual studies of the manufacturing climates in America, with the final one that I could identify being published in 1987, have been referenced in a variety of publications on state economics in the late 80s and early 90s.

Unfortunately I haven’t been able to locate a more copy yet, in order to delve into the methodology, although one Mackinac publication includes this brief footnote:

The Grant Thornton study includes changes in taxes as well as tax level in the list of items which affect manufacturing location

Advisory Commission on Intergovernmental Relations (ACIR) Method

The ACIR (1986) produced this book-length report titled Measuring State Fiscal Capacity: Alternate Methods and Their Use. This report came out of a recognition that the existing measure at the time, state per capita income, was not a good measure of the actual fiscal health of its residents because it doesn’t capture all the sources of revenue raised by a state (such as consumption tax, luxury tax, sales tax, and so on.)

They also explained:

The Commission recommends that the federal government utilize a fiscal capacity index, such as the Representative Tax System measure, which more fully reflects the wide diversity of revenue sources which states currently use.

Instead, the measures they suggest are:

  • Representative Tax System (RTS)
  • Representative Revenue System (RRS)
  • Per Capita Personal Income (PCI)
  • Gross State Product (GSP)
  • Total Taxable Resources (TTR)

These measures are indexed so that the US average is 100 and then states may be compared. For example, in 1984 in Iowa the following were calculated:

  • Representative Tax System (RTS) of 87
  • Representative Revenue System (RRS) of 87
  • Per Capita Personal Income (PCI) 95
  • Gross State Product (GSP) of 94
  • Total Taxable Resources (TTR) of 99

In most measures Iowa is performing average or slightly under-performing when compared to other states, but again this analysis is quite outdated. It appears that the HowMuch method below is a more modern version of the same analysis.

HowMuch Method

One method used by the website HowMuch (2019) captures several important economic indicators in order to determine the economic health of each state.

The indicators used include:

  • Average Weekly Wages
  • Percentage Wage Growth
  • Unemployment Rate
  • GDP Per Capita
  • GDP Growth
  • Percentage Job Growth

They then adjust these indicators by the Purchasing Power Parity (PPP), which is essentially the cost of a common “basket of goods” in different parts of the country.

In this analysis, Iowa ranks 14th in the nation.

References

Advisory Commission on Intergovernmental Relations (ACIR) Measuring State Fiscal Capacity: Alternate Methods and Their Use. Washington, DC: Government Printing Office. Retrieved on September 15, 2019 from https://library.unt.edu/gpo/acir/Reports/information/M-150.pdf

Egel, B. (2018, May 4) California now world’s fifth-largest economy, bigger than Britain. Sacramento Bee. Retrieved on September 15, 2019 from https://www.sacbee.com/news/business/article210466514.html

Grant Thornton Accountants. (1987) Eighth Annual Study of General Manufacturing Climates of the Forty-Eight Contiguous States of America, Grant Thornton: Chicago, Illinois.

HowMuch.net. (2019) “Ranking the Economic Health of Every U.S. State in 2019” Retrieved on February 27, 2020 from https://howmuch.net/articles/americas-economic-performance-2019

Inc Magazine. (2019) “Introducing the 2019 Inc. 5000: The Most Successful Companies in America” Retrieved on September 15, 2019 from https://www.inc.com/inc5000/2019/top-private-companies-2019-inc5000.html

Inc Magazine. (Oct 1, 1984) “Inc’s Fourth Annual Report on the States” Retrieved on September 15, 2019 from https://www.inc.com/magazine/19841001/8986.html

Raimondo, H.J. (1992) Economics of state and local government. Praeger: New York, NY. ISBN: 0-275-93937-5

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