With the U.S. economic recovery apparently stalling and perhaps headed for a double dip, the debate among economic policy makers about what to do is heating up.  The right says it’s time to embrace fiscal prudence, to cut spending and pay off debt.  On the left, there are calls for continued spending to offset reduced private investment.

A new study by Tulane’s James Alm and Janet Rogers of Nevada’s Department of Budget and Planning (h/t Ryan Avent, whose deadpan tweet noted that it was likely to spark a “lively discussion”) takes a close look at the effects of tax and spending policies at the state level.  Entitled  “Do State Fiscal Policies Affect State Economic Growth?”, it examines  fifty years of data  (from 1947 to 1997),  tracking  the effects of state tax policies, spending policies, and political orientation on economic growth. Looking at the different policy approaches and strategies that have been pursued at the level of states and cities and comparing their results provides a useful lens through which to examine pressing national issues. Alm’s and Rogers’ main findings are certainly interesting; “lively” is quite likely an understatement for the sort of debate their findings should inspire.

There are two major take-aways. First, a “state’s fiscal policies have a measurable relationship with per capita income growth, although not always in the expected direction.” Tax impacts, they report, are “quite variable”; “expenditure impacts are more consistent.”

Second, they find “moderately strong evidence” that a “state’s political orientation, as indicated by whether the governor is Republican or Democrat, whether the state has enacted tax and expenditure limitation legislation, and whether the state frequently elects a governor of the same party as the incumbent, have consistent, measurable, and significant effects on economic growth.”  And then they drop their bombshell: “Having a Republican governor,” they conclude, “Is associated with lower rates of growth.” They qualify their conclusions slightly—but only slightly—noting that past measurement errors may have introduced some distortions into the record.

Taken together, these findings seem to support the spending orientation favored by liberals and pose a rather stark challenge to Republican governors who are embracing austerity.

The conventional wisdom presumes that growing populations bring economic growth. But what drives wealth isn’t how many people a place is adding, but how much more productive its workers are becoming.  Yesterday, I showed that population growth and productivity growth are unrelated on the level of states. Today, drawing on my ongoing research with Kevin Stolarick of the Martin Prosperity Institute and Jose Lobo of Arizona State University, I’ll take a look at the pattern for 350 plus U.S. metro areas. The disconnect is even more pronounced.

The map above charts population growth across metros. Sunbelt metros (from dark to lighter blue on the map) grew at the fastest clip. East and West Coast metros (shaded green) grew at a considerably slower pace. The slowest-growing metros (beige) are concentrated in the Midwest.

The second map charts the change in productivity – measured as gross metropolitan product per capita. This map looks completely different than the first one.  The top productivity gainers (highlighted in blue) are spread throughout the country. They include metros like Pascagoula, Mississippi; Corvallis, Oregon; Casper and Cheyenne, Wyoming, and Vallejo, California.  College towns like Manhattan, Kansas; Durham-Chapel Hill, North Carolina and Binghamton, New York also register impressive gains. Among large metros (those with over one million people), San Jose, California, Portland, Oregon and Oklahoma City, Oklahoma saw the largest productivity increases.  But the productivity laggards are concentrated in two areas: the Sunbelt and the Midwest.

The third map also charts the change in productivity, this time measured as gross metropolitan product per worker. This map is even more telling.

The same large metros and the same college towns as on the last map are well-represented, as are heartland metros like Casper, Wyoming; Sioux Falls, South Dakota, and De Moines, Iowa, which saw impressive gains of 15 percent better. Even Frostbelt metros like Buffalo, Baltimore, Philadelphia and Pittsburgh, whose very names have become bywords for decline, registered productivity gains of between 7 and 10 percent. But the five metros with the fastest population growth all saw their productivity decline. Palm Coast, Florida’s dropped a whopping 18 percent, the fourth worst figure in the nation. Cape Coral, Florida’s fell by 13 plus percent, Raleigh, North Carolina’s by 9 percent (more than Frostbelt metros like Dayton or Toledo, Ohio), St. George, Utah’s by more than 5 percent, and Las Vegas, Nevada by 1 percent. Atlanta’s productivity fell by more than 12 percent, which puts it in the same league with Detroit.

A decade ago, urban economist Paul Gottlieb coined a term for this disconnect between population and economic growth. He called it “growth without growth,” a construct former Ventura Mayor Bill Fulton has picked up on in recent writings.  When Gottlieb compared population growth to growth in real per-capita income in the 100 largest U.S. metropolitan areas, he found a pattern similar to what we discovered for states. Like states, U.S. metros divided into four categories.  Some – like Atlanta, Austin, and Dallas — were above the national average in both categories. Others, including many older Rustbelt metros, were below average in both. But it’s the last two categories that were more interesting.  Much as we found with states, half of the 100 largest metros divided into “population magnets” — places where population grew but not income, and “wealth builders,” where incomes rose much faster than population.

When Stolarick, Lobo and I looked at the connection between population growth and productivity across America’s 350 metro regions over the past decade, we found that, if anything, the disconnect has become even more pronounced. Just one in three metro areas experienced gains in both productivity and population that exceeded the national average—and we found no statistical association whatsoever between population growth and productivity growth, either for metros or states. This not only challenges the notion that population growth is a proxy for economic growth, it puts the lie to economic development strategies that encourage population growth as an end in itself. A rising population can create a false illusion of prosperity, as it did in so many Sunbelt metros, which built their house-of-cards economies around housing construction and real estate development, leaving ghost towns, mass unemployment, and empty public coffers in their wake when the bubble inevitably burst.

The south and the west may be winning the demographic race, but America’s economic winners are the places that have improved their productivity—something which doesn’t turn on the sheer numbers of workers they have on tap, but rather on how skilled and innovative they are.

This past weekend, I had an oped in the New York Daily News about the widespread fallacy that population growth and prosperity go hand in hand.

Yes, the Sunbelt is growing and the Frostbelt declining.  That decades old meme was confirmed by the earliest releases of the new 2010 Census. “The quest for mild winters remains the great constant of American demographics,” wrote Walter Shapiro in a piece headlined “The Census Ratifies the Sunbelt’s Supremacy and Buoys the GOP.  “For the first time in history, more than half of the nation’s population (308,745,538) resides either in the South or in the warm-weather states of California, Arizona and New Mexico.”

But are those states that are adding people also growing economically?   Not so much, actually.

State population growth does not necessarily translate into higher incomes, notes Harvard economist Edward Glaeser, who points out that median family incomes were $56,200, $60,800 and $56,600 in fast growing Georgia, Nevada and Texas, significantly lower than the $83,000, $81,000 and $66,900 found in slow-growing Connecticut, Massachusetts and New York.

If there is one thing that economists of all persuasions agree on is that it is productivity growth – fuelled by invention and innovation, increased skills and human capital – that is the main driver of economic growth and greater prosperity.  Higher productivity translates into higher wages and income and improved living standards.

So with the help of my colleagues Kevin Stolarick of the Martin Prosperity Institute and Jose Lobo of Arizona State University,  I decided to take a more systematic look at the connection between population growth and productivity growth  across the 50 states.  We found little connection between the two.

The map above shows state population growth based on the new 2010 U.S. Census. The Sunbelt states (darker orange and red) – Nevada, Texas, Arizona,  Florida, Georgia, North and South Carolina, as well as Colorado, Idaho and Utah in the Rocky Mountain West – grew their populations at the fastest clip over the past decade.

The second map charts the change in productivity – measured as gross state product per capita. Now heartland states like North and South Dakota, Wyoming, Nebraska, Iowa, Montana and Oklahoma as well as Oregon in the northwest and Maryland and DC in the east are the top performers, with Sunbelt states lagging.  Once-booming Florida is seeing more people move out than move in for the first time.

The scatter-graph below puts the picture in sharp relief. Some states that have attracted lots of people have registered meager productivity growth. This is especially true of the booming Sunbelt states that show up in the lower right-hand quadrant of the graph. Nevada, which posted the fastest rate of population growth, posted negative productivity figures. Productivity growth was also negative in the fast-expanding Sunbelt states of Georgia and North and South Carolina. And economic conditions in many of these states have likely worsened as the housing crisis has deepened.

Conversely, other states where population growth has been slow have seen much higher productivity growth. This group, clustered in the upper left-hand quadrant, includes Rhode Island, New York, Oklahoma, Iowa, North Dakota, South Dakota, Nebraska, and Kansas, all of which posted above-average productivity growth alongside below-average population growth.

Sadly, there are quite a few states (lower left-hand quadrant) that posted both below average population growth and below average productivity growth.  Many of these – Michigan, West Virginia, Ohio, Illinois, Indiana, Wisconsin and Minnesota – are in the Rustbelt. But this group also includes several states in New England and the Northeast – Massachusetts, Maine, New Hampshire and Connecticut and New Jersey, as well as Missouri and Kentucky in the south.  These states have been locked in a downward economic cycle.

There are just a handful of states (upper right-hand quadrant) – among them California, New Mexico, Oregon, Washington, and Virginia – that posted rates of productivity growth and population growth that were both above the national average.

A booming population might be a sign that people want to live in a place—because of a pleasant climate, a lower cost of living, or the illusion of prosperity caused by a housing boom. But population growth alone does not suffice to make a state an economic “winner.”

Later this week,  I’ll take a close look at population growth and productivity growth in America’s metropolitan areas, to see if the pattern holds.

We know a great deal about the clustering of human capital and of creative class jobs and how they drive regional economic growth. But only recently have economists and economic geographers begun to explore the skills that underpin the clustering of talent and creative-knowledge jobs.

A brand new paper with my MPI colleagues Charlotta Mellander, Kevin Stolarick, and Adrienne Ross examines the distribution of three key skills across U.S. metropolitan areas: physical skills, cognitive skills, and social skills.

Here’s the abstract:

This research examines the effect of skill in cities on regional wages. In place of the extant literature’s focus on human capital or knowledge-based or creative occupations, we focus our analysis on actual skills. We use cluster analysis to identify three broad skill types – analytical, social intelligence and physical skills from 87 occupational skills. We then conduct regression analysis to quantify how each skill contributes to regional prosperity and how they are related to regional size, using data from 1999 and 2008. We find that analytical and social intelligence skills have a significant positive effect on regional wages, while physical skills have a negative effect. We also find that analytical skills are somewhat more closely associated with regional wages than social intelligence skills, after controlling for education and regional size. Furthermore, we find that the wage return to analytical and social intelligence skills has increased over time, and the return to physical skills has declined significantly. We also show that larger cities reward analytical and social intelligence skills to a higher degree, whereas smaller cities tend to rely more on physical skills.

The full paper is here.

Jane Jacobs and Robert Lucas long ago argued that the clustering and density of talented people is a key driver of innovation and economic growth. A new study, “Productivity and the Density of Human Capital,” by Jaison Abel of the NY Fed, Ishita Dey of the University at Buffalo, and Todd M. Gabe of the University of Maine, provides clear evidence of density’s effects on regional economic output (pointer from Kevin Stolarick).

We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. Using new measures of output per worker for U.S. metropolitan areas along with two measures of density that account for different aspects of the spatial distribution of population, we find that a doubling of density increases productivity by 10 to 20 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock that is one standard deviation below the mean level realize around half of the average productivity gain, while doubling density in metropolitan areas with a human capital stock that is one standard deviation above the mean level yields productivity benefits that are about 1.5 times larger than average.

To download the study click here.

Wendell Cox writes (pointer via Planetizen):

Most suburban growth is not the result of declining core city populations, but is rather a consequence of people moving from rural areas and small towns to the major metropolitan areas. It is the appeal of large metropolitan places that drives suburban growth.

Larger metropolitan areas have more lucrative employment opportunities and generally have higher incomes than smaller metropolitan areas. This is particularly the case in developing countries. As a result, the big urban areas attract people seeking to escape what are often the stagnant or even declining economies in smaller areas.

A very Jane Jacobs insight, and one I find compelling.

In The Economy of Cities, Jacobs controversially argued that virtually all of economic growth traces back to cities: In her view, cities actually precede agriculture. Early cities, according to Jacobs, spurred agricultural development by providing trading centers for agricultural products.

While it’s common to think of suburbs as draining off city assets, today’s metropolitan areas with their urban cores and suburban and ex-urban rings, are really expanded cities. Up until the early-to-mid 20th century, cities were able to capture peripheral growth by annexing new development, until suburbs figured out they could prosper by becoming independent municipal entities – thus the now famous concentric-ring, or, in some cases, the hole-in-the-donut pattern of our metro regions. The growth of gargantuan mega-regions like the Boston-New York-Washington corridor is essentially the next phase of this process of geographic development.

It’s important to understand how these two interrelated geographic processes – outward geographic expansion and the more intensive use of existing urban space – combine to shape economic progress.

Measurement abounds! Stocks are down around the world over 50 percent from a year ago, GNP growth is down a little, unemployment has doubled but from a very low base, bank stocks are in the toilet. But how can we get a handle on what is actually happening around the world that represents a real number and not just financial.?

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. The index provides “an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time charter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron, ore, and grain.”

The index is a good measure of future manufacturing output since many of the inputs that go into manufacturing are dry goods. Over the past year the index has fallen from 10,000 to just over 1,500! This sudden collapse in shipping prices and increase in capacity is one indicator of the depth of this crisis. It more than other indicators suggests that the economic recession is far from over and will most likely deepen.

What to do about this is clearly expressed in the major concerns today about trade protraction and bigger than thy neighbour policies that bought on the Great Depression of the 1930s.  We world needs to keep trade routes open and avoid protectionism as much as possible. For if we are not able to keep trade going the world will no longer be flat, or spiky. It will be chopped up.

Many economic development experts continue to insist that jobs are the key to economic growth. Attract the companies and the jobs and the people will follow? Consider this from a recent study by Harvard economist Edward Glaeser and collaborators.

[W]hich way does the causality run? Are skilled industries moving into an area because there are an abundance of skilled workers, or are skilled workers moving to areas because of skill-oriented industries?

While surely both phenomena occur, we think that the evidence supports the view that industries are responding to the area’s skill distribution more than the view that the skill distribution is responding to the area’s industries mix. For example, the share of the population with college degrees in 1940 can explain 35 percent of the variation in the skill mix of industries today. By contrast, the skill composition of the industries in the metropolitan area in 1980 can only explain seven percent of the variation in growth of the population with college degrees since that date. The complex two-sided nature of this relationship makes it difficult to accurately assess the direction of causality, but there are reasons to think that much of the industrial mix in the area is actually responding to the skill distribution.