Michael Hicks: Some good reasons for partisan perceptions about the economy

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Several readers objected to my recent column about economic illiteracy colliding with feelings about today’s booming economy. I was tempted to quote a pithy bumper sticker about the relevance of feelings, but this is a family publication.

Instead, I’ll simply say, your emotions offer a poor epistemological approach to understanding macroeconomic fluctuations.

Nationwide, it is unambiguously clear that the U.S. economy is performing historically well. On every important measure — employment, wages, GDP, or wealth — the overall economy is not just performing at record levels, but also outperforming the rest of the world.

Robust national economic performance has benefits for every county and small town, but that does not mean every place shares equally in economic growth. There are plenty of places that continue to do poorly.

Many places are doing very, very poorly.

There are two phenomena around differences in economic performance of states and counties. The first is that the gap is growing. Rich places are, for the most part, getting richer and poor places poorer. This is in stark contrast to most of the nation’s history, in which state and local economies became more alike rather than diverging in wealth and opportunity.

The second phenomenon is a growing political divide between rich and poor places. This will shock many folks, but poor places are increasingly governed by Republicans and rich places by Democrats. The gap between rich and poor places might help explain the partisan differences in perceptions of the economy.

The regional differences are compelling across dimensions of rural and urban places, as well as between cities and rural areas.

The rural-urban income gap is more than 2% larger than it was a decade ago, with rural workers earning only 75 cents for every dollar earned by urban workers. Poor economic conditions in rural America are nothing new, but they aren’t fueled by national economic conditions. Many of the problems of rural America are related to state, rather than national, conditions.

The 10 poorest rural areas are all in solidly Republican states. Only half of the 10 richest rural places are in Republican states.

There is a rural-urban divide in politics, with GOP-leaning rural places doing worse than Democratic-leaning urban places. There is also a gap between the political leanings of the poorest and richest rural parts of each state that distinctly disfavors GOP states.

The GOP has a firm electoral lock on poor, rural places. There is considerable evidence that decades of ineffective state policies have helped immiserate rural places in many states. But, again, the political divides are newer than the policy failings. So, which party is responsible for those poor policies will vary state by state. Indiana is the median state in terms of rural affluence.

We are a nation of city dwellers, with eight out of 10 Americans living in metropolitan counties. The six most affluent metro areas have per capita incomes more than double the rural county average. As with rural places, there are big regional divides in urban affluence.

Rich cities are mostly a blue-state characteristic. Of the top 25 richest metro areas in the country, as measured by per capita income, only five are in solidly GOP states. Three are in Texas and two in Florida.

Only three of the 25 poorest metro areas are in Democratic-controlled states. California has two of them and Michigan one. The Chicago area, which includes parts of Indiana, ranks 32nd and Indianapolis is the 49th-richest metropolitan area in the nation.

Indiana’s worst-performing city, I am sad to report, is Muncie. It ranks 353rd out of 385 in per capita income. Poor cities are mostly a red-state characteristic.

It is difficult to lay the blame for worsening economic conditions at the feet of one party or the other. For the past 50 years, there was considerable overlap in state policies, so conservative Democratic states behaved a lot like more progressive Republican states in tax, education and economic development policy.

However, today there is a growing understanding that differences in economic outcomes are mostly connected to differences in educational attainment between places. Other factors, such as tax rates, tax structure, regulatory environment or economic development policy, are of declining importance.

I would go even further in concluding that differences in tax policies explain almost none of the differences in affluence or growth. That is a major departure from the start of my career a quarter-century ago, when tax differences were important. Today, differences in economic conditions are almost exclusively caused by the level of education of residents.

This means that the observed differences in economic conditions across states seems likely to worsen. We are in the first extended period of diverging educational attainment in U.S. history. And there is a very deep political divide around education policy that seems certain to exacerbate the economic and political divide.

The 15 states that have seen the biggest relative drop in educational attainment are all solidly Republican states—and poor. Indiana ranks 10th on this list. The top 15 states are all solidly Democratic — and affluent. This gap will worsen as states with a large share of well-educated adults are attracting more, while states with a shortage are losing them.

The United States remains firmly in a long patch of strong economic performance, easily the best in a half-century. But there are growing differences between states and within urban and rural places. These differences are increasingly connected to political affiliation, which naturally fuels different perceptions of the economy. It is not an excuse for getting economic facts wrong.

The political realignment means that we cannot give credit to Democrats for creating wealth, or the GOP for being more popular in poor places. However, if we stumble through another generation of diverging educational attainment, placing blame for diverging economic performance will be easy.

Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].