Nothing hurts a plan more than a lack of vision. The primary aim of the Indiana Economic Development Corp.’s plan-Accelerating Growth, Indiana’s Strategic Economic Development Plan-announced in April, is to boost personal income per capita to the
national average by 2020. An effort to achieve an average standard in 14 years seems to be an unusually low aspiration.
The historical record makes this target appear more challenging. Indiana has ranked 30th to 34th in the nation in percapita personal income since 1981. Such income has generally been about 90 percent of the national average since then, which implies, by the way, that Indiana’s per capita income growth has matched that of the nation for about a quarter of a century.
Is the national average achievable? Over the past 15 years, 11 states had cumulative per-capita personal-income growth that exceeded the national average by enough to close a 10-percent gap. More important, economic growth theory predicts that states’ income per capita tend to converge to the average. There is ample evidence of convergence in the level of per-capita income in the United States and Western Europe.
Convergence is often estimated to be slow, about 2 percent per year in many studies, but one prominent study shows convergence occurs faster, with gaps in income declining about 16 percent per year for U.S. states. Either way, Indiana’s gap of nearly 10 percent in
per-capita income could easily be closed and more quickly.
A more modest form of convergence, called conditional convergence, is based on differences in technology or other factors that cannot be moved across borders in response to competitive pressures. Conditional on those differences, however, growth rates of per-capita income are expected to equalize.
For example, comparisons of income implicitly assume that average prices are the same across states. A $50,000 Indiana income is expected to offer the same standard of living as a $50,000 income elsewhere. But if prices are 10-percent lower in Indiana, a Hoosier earning $45,455 could buy the same items $50,000 buys elsewhere. In this case, the convergence process would lead to wages and other resource payments that are 10-percent lower in Indiana, but achieve the same standard of living as elsewhere.
The national median housing price has
risen about 1.6 times as much as Indiana’s since 1975, according to the Office of Federal Housing Enterprise Oversight. Our lower cost of living could easily account for our 10-percent gap in income. Workers may accept lower wages simply
because of lower housing prices. As long as Indiana has lower housing costs or other advantages that make it more attractive to live here, incomes are not likely to converge, though the growth rate will, to maintain convergence of the standard of living.
Indiana has a solid growth record, matching the relatively rapid growth of per-capita U.S. personal income for the past quarter
century. It could be that we have already achieved convergence. But a competitive state must aim for better. Setting out to achieve the inevitable lacks ambition, and giving ourselves 15 years to do it is even less so.
Why not strive to have the best state performance in the country over the next 15 years? It will be hard to raise the state’s ranking without setting more ambitious goals.
Tatom is director of research at Indiana State University’s Networks Financial Institute in Indianapolis and an associate professor of finance at the university.