The U.S. Department of Commerce put two data sets under my tree the week before Christma. On Wednesday, I got personal-income data, by state, for the third quarter of 2006 from the Bureau of Economic Analysis. On Friday, the Bureau of the Census sent me 2006 population estimates for all the states.
Could I ask for anything better unless it was the “Complete Works of Alvin and the Chipmunks”? However, my joy may not be shared by those who have taken on the welfare of the state.
Remember that the governor and his staff have adopted per-capita personal income (PCPI) as one of their metrics of success. We can offer technical reasons against that measure of economic performance, but that is beside the point here.
What has happened to total personal income divided by total population in the past year? The figures I offer are not final, but they are probably very close to the full-year data.
Let’s start with total personal income. Third-quarter-to-third-quarter, Indiana ranked 41st in the country, with a 5.1-percent growth rate, compared to the nation’s 6.7-percent increase.
Now the population figures. Indiana grew at a 0.8-percent rate (29th) from July 1, 2005 to the same point in 2006. This was behind the nation’s 1 percent. Thus, in both personal income and population, Indiana grew slower than the national average.
What has happened to PCPI? In the Hoosier state PCPI has grown by 4.3 percent, to $32,760. This growth rate ranks 39th in the nation, where the increase was 5.7 percent. We are not catching up with the nation; we are sinking lower. In 2005 we were 9.2-percent below the U.S. average PCPI, now we are 10.3-percent below that average.
None of these figures was adjusted for consumer price increases, which were 4.1 percent. This would mean that, instead of enjoying an increase of $1,360 in PCPI in Indiana, the real increase in buying power was closer to $70 per person. Whoopee.
What is holding back Indiana’s growth in personal income (PI)? “Well, it was a bad year for farmers.” That sure is one of my favorite reasons for everything.
Let’s look at the facts: In the third quarter of 2005, farm earnings were a mere 0.4 percent of Indiana’s PI. Even with a sharp decline of 56 percent in the year, the net effect on PI was a decrease of less than $500 million.
That is not much when we recognize that Indiana’s total PI was $197 billion in 2005 and grew by $10 billion in the past year. No, farming is not as important in Indiana as farmers would have us think.
“It can’t be in real estate and construction, because we didn’t have the big bubble that other states had. We did not have the phenomenal appreciation in values that would lead to a problem when interest rates rise.” I heard that (and believed it) many times in the past year.
Real estate, along with rental and leasing activity, declined in Indiana by 5.4 percent, while increasing nationally by 4.8 percent. Construction increased in the U.S. by 7.7 percent, but only by 1.4 percent in Indiana. This now looks as though we had more problems in these industries than did our friends elsewhere.
Our biggest problem could be that we just are not as capitalistic as other states. Dividends, interest and rents (returns to capital) grew by 9.2 percent in Indiana and accounted for slightly more than a quarter of our PI growth. Contrast that with the nation where those returns on capital (earnings on IRAs and other forms of investments) increased by 15.6% and constituted over one-third of the total increase in PI.
Of course Indiana has done well in keeping down increases in the income derived from state and local government employment. That pot of gold increased by just 1.2 percent, while the spendthrift nation was adding 4.7 percent to its employees’ remuneration. We, with humble candor, justify our record by saying that state and local workers are already paid too much and we might induce their departure if we keep them hungry.
Ultimately if you want higher income in the state, begin by making sure our K-12 teachers are knowledgeable communicators. You may have to pay those teachers more, rather than endow more faculty chairs at our universities, but that’s a different column.
Marcus taught economics more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to email@example.com.