State’s Per Capita Income Improves (Greg Kaza Commentary)

An overlooked economic story is Arkansas’ increase in per capita personal income to 82 percent of the U.S. PCPI, a record. Arkansas’ decline in rank last year, from 44th (another record) to 46th in the U.S. was duly noted, but its improvement to 82 percent from a multi-decade range of 75 to 78 percent (1973-2006) has generated little attention.

The economic factors contributing to the improvement are debated and could include commodity prices, transfer payments, new entrepreneurs and the multiyear phase-out of the grocery tax. The issue is relevant because a group of Arkansas business and community leaders has worked for five years toward the ambitious goal of achieving 100 percent income parity with the U.S.

The Accelerate Arkansas group encourages entrepreneurship and stated in a 2008 report that its “overarching goal” is to “position Arkansas where it can increase its per capita income to the U.S. average by 2020 and thereby increase state tax revenues by over $2 billion on an annual basis.” The group emphasizes the importance of a knowledge-based economy, i.e., “one that is driven by a high proportion of knowledge-based and high technology industries.”

A long-term trend suggests Arkansas will get closer to 100 percent by 2020. The trend is the convergence between the richest and poorest states (excluding Washington, D.C.) in the U.S. Bureau of Economic Analysis’ PCPI time series, which dates to 1929.  New York, the richest state, had a PCPI of 165 percent of the U.S. that year, while Mississippi, the poorest, was at 40 percent. The gap had narrowed considerably by 2010. Connecticut had a PCPI of 138 percent of the U.S., while Mississippi was at 77 percent.

Another positive trend is the improvement among Southeast states since the 1930s.  Despite these trends, only one Southeast state, Virginia (110 percent), whose northern suburbs are adjacent to the District of Columbia (175 percent), exceeded U.S. PCPI in 2010.

Arkansas leaders are focused on creating a knowledge-based economy. Other states have improved in PCPI due to various factors, including national defense, manufacturing, commodity booms and economic diversification. One or more of these could also play a supporting role in Arkansas.

National defense: Eleven of 12 Southeast states, including Arkansas, recorded PCPI improvement during World War II (1941-45). The following five states made significant gains: Arkansas (47 percent to 60 percent of the U.S.), Tennessee (60 percent to 74 percent), Georgia (58 percent to 71 percent), Alabama (52 percent to 63 percent) and Kentucky (55 percent to 65 percent).

Manufacturing booms: Arkansas’ PCPI improved from 59 to 71 percent of the U.S. between 1954 and 1971, a period characterized by growth in the manufacturing private industry sector. Michigan experienced a great manufacturing boom in the mid-20th century and increased its PCPI from 93 to 119 percent between 1933 and 1937 and to 123 percent by 1943. Michigan has since declined to 88 percent.

Commodity booms in states without an income tax: Commodity booms in the 1970s and the last decade were an important factor in PCPI growth in two Western states without an income tax. Alaska PCPI expanded from 129 to 179 percent (1971-76).  Wyoming’s PCPI increased from 94 to 112 percent (1998-2006). Alaska (109 percent) and Wyoming (118 percent) remained above the U.S. average in 2010.

Economic diversification: Two Southeast states recorded solid PCPI income growth between the late 1950s and early 1970s. North Carolina, the home of Research Triangle Park, launched in 1959, expanded from 71 to 83 percent (1959-73). Georgia also diversified its economy, and its PCPI grew from 74 to 86 percent (1960-73). But PCPI in Georgia (87 percent) and North Carolina (88 percent) remained short of 100 percent in 2010.

At 82 percent, Arkansas’ per capital personal income is short of the ultimate goal. But it represents vast improvement from its position (43 percent) when the federal government started monitoring income.

(Greg Kaza is executive director of the Arkansas Policy Foundation, a Little Rock think tank founded in 1995.)