The New Calculus of Prosperity

In the course of U.S. economic cycles, geography played a key role in the rise and fall of regional economies. This is no longer true.

May 19 2013 by JP Donlon


In the course of U.S. economic cycles, geography played a key role in the rise and fall of regional economies. This is no longer true. In today’s economy where all most businesses need is access to high-speed data networks, proximity to airports, an interstate and a college-educated labor pool, there’s no physical reason why Boeing cannot build airplanes in South Carolina instead of Washington State. Financial analyst Meredith Whitney, who made a name for herself for spotting the subprime mortgage crisis a year before it happened, forecasts a major economic shift in her recent book, Fate of the States: The New Geography of American Prosperity. “Voters and communities are starting to realize just how closely tied their personal economic well-being is to their communities’ fiscal well-being,” she writes. “Voters in mismanaged states, the ones now flushing away jobs, are rising up and putting their feet down. Unemployed workers are packing up their families and relocating to low-tax, non-budget-crunched states like Texas and North Dakota in order to find work.”

Moving has become an easier decision for businesses too. And it’s not just about high taxes. Companies want flexibility to manage their head count and stay competitive. This is why 24 states are “right-to-work” (RTW) states, which means that workers in those states cannot be compelled as a condition of employment to join a union or pay union dues. This is not about being pro- or anti-union. It is about being pro-reality in a globalized world where job creators need maximum agility to adapt to changing needs. As Whitney points out, right-to-work states have grown their economies over three times as fast as non-right-to-work states since 2008. Average unemployment in July 2012 in RTW states was 7.2 percent, versus 8.3 percent in the U.S. overall. Personal income in RTW states grew by 54 percent from 2001 to 2011, 17 percent faster than the U.S. average and 30 percent faster in non-RTW states. But it doesn’t stop there. When one factors in the burden of bonded debt, as well as unfunded pension and health care liabilities the difference between the two groups of states becomes a chasm.

Businesses are realizing that it isn’t just about escaping taxes; it’s about escaping future tax hikes, continued fiscal mismanagement and decline of services as the big-government states struggle to maintain resources to invest in roads, education, airports and public safety. The fact is that California’s total obligations—obligations that can be escaped by the simple expedient of moving—increased by 50 percent in one year alone. In New Jersey, the total tax-supported debt per capita is a whopping $15,000 compared to just $7,000 in nearby Pennsylvania. Or take the comparable figure for Illinois: $16,000, compared to Indiana’s $2,500. No wonder Indiana has been running print ads in California that show a coffee-shop napkin with the handwritten message from Indiana: “Admit it, you find me fiscally attractive.”

Incredibly, some states don’t get it. Prior to 1992 Connecticut had no income tax; and in 2012, it was the only state to raise income taxes. At $18,981, the state’s per capita tax burden is now the third-highest in the U.S. and seven times higher than Florida’s. “The exodus from Connecticut is likely to continue because the state simply cannot afford to cut taxes,” observes Whitney. If there is a lesson in Chief Executive’s annual survey of how CEOs size-up the Best and Worst, it’s “Don’t be like Connecticut or California.”