Why Are Some States Growing Faster Than Others? Dumb Luck

The states with the biggest spending cuts are suffering from the steepest employment losses, according to this chart, which is getting a lot of play around the Web:

Adam Hersh, the author and chart-maker, is correct that state cuts hurt employment. But the correlation could go the opposite way, too. States that lose jobs also lose tax revenue. More lost revenue requires more spending cuts. State and local layoffs have slashed 326,000 jobs in the twelve months before May 2011, Dan Indiviglio found. That's steep, but it barely represents 0.2% of our labor force.

So what else is behind the graph's winners and losers? Take a closer look at what separates these state economies.

The states with the steepest employment losses on this chart are Nevada, Arizona, and Florida -- epicenters (a), (b), and (c) of the housing bust. That's not a coincidence. The housing market continues to be the most poisoned sector in the country. The states with the brightest employment pictures are North Dakota, South Dakota, and Texas.* Each has strong petroleum and agrobusiness sectors, which fared extremely well before and immediately after the recession. That's not a coincidence, either. Nor is the fact that of the ten fastest growing states today, eight are concentrated in the energy, agriculture, food processing, and manufacturing industries.

One shouldn't discount spending cuts, which are clearly bad for short-term growth. But state spending cuts are a brush stroke in a bigger picture. Nevada and Arizona have attractive dry climates with lots of open space. They had a development boom in the 2000s whose devastation will take another decade to clean up. Texas and the Dakotas, on the other hand, didn't. Today, they happen to sit on lots of scarce and valuable energy and agricultural resources, which are in high global demand now that China, India and Brazil are joining the middle class. Policies matter. Place isn't destiny. But don't underestimate the importance of pure geographical luck.

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*Texas also has one of the largest projected deficits for next year, so maybe we should hold some of our enthusiastic applause.