Jump to Section:

  1. Introduction
  2. Demographics
  3. Family Self-Sufficiency
  4. Family Structure
  5. Family Culture
  6. Family Health

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ECONOMICS

While seemingly self-explanatory, the Economics major index involves a complicated calculation of the factors that most directly affect the bottom line of family budgets: income and the means by which it is earned - jobs. These two data points go a long way - but not all the way - toward determining the prosperity of families in a given state. Specifically, how and where income is earned is a key determinant.

Personal income comes from two sources: the private sector and the public sector. The distinction between the two sectors is important because only the private sector creates new income. The public sector, in contrast, can only redistribute income through taxes and spending. More specifically, public sector spending consists of personal current transfer receipts (Medicare, Medicaid, Social Security, etc.) and government employee compensation (federal, state, and local).

This information is important because there is a significant positive correlation between per household personal income and the private sector share of personal income.[1] Put simply, the larger the private sector in a particular city or state, the greater the per household personal income in that community. When examining the lower 48 states, on average, a one-percentage point decrease in the size of the private sector yields a decrease in per household income of approximately $3,300.[2]

Of course, correlation does not equal causation; however, there are two states that allow for a very strong natural comparison to better show causation—New Hampshire and Maine. These two states are similar in many areas—geography, climate, demographics, and culture—but they diverge significantly in their approach to public policy.

As shown in Chart 3, between 1929 and 1950, Maine and New Hampshire had similar per household incomes (adjusted for inflation) and private sectors (as a percent of personal income). In 1951, Maine enacted the sales tax, which led to increased public sector spending and crowded out the private sector. Consequently, New Hampshire’s per household income began to steadily pull away from Maine.

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This trend accelerated in 1969 when Maine enacted its income tax—a few years after the federal government enacted Medicaid. With this new source of revenue, Maine was able to dramatically expand its welfare system, especially Medicaid. In fact, as of FY 2010, Maine had the third highest percentage of population on Medicaid at 31 percent.

In stark contrast, New Hampshire remains the only state in the Union not to have enacted a state or local sales tax or state or local income tax (see Family Self-Sufficiency).

This difference in public policy has resulted in dramatic differences in the size of each state’s private sector. Between 1929 and 2015, Maine’s private sector shrank by 29 percent to 65.4 percent from 92 percent and now has only the 41st largest private sector in the country. By contrast, New Hampshire has seen its private sector shrink by a much smaller 14.9 percent—to 76.9 percent from 90.4 percent —and now has the 2nd largest private sector in the country.

As a result, New Hampshire’s private sector in 2014 is 17.6 percent larger than Maine’s—76.9 percent and 65.4 percent respectively. Consequently, New Hampshire’s per household income in 2015 is 39 percent higher than Maine’s—$137,511 and $98,632, respectively.

This matters because personal income is an important economic measure of a family’s well-being. Higher levels of personal income mean that a family is able to buy more goods and services such as a home, a car, education, and healthcare.

For comparison purposes, three adjustments have to be made to personal income data:

  • First, personal income has to be adjusted for inflation, which erodes purchasing power over time, so the data is shown in constant 2015 dollars.
  • Second, personal income has to be adjusted for differences in demographics, so the data is divided by the number of households. Per capita personal income provides a bonus to older states with fewer children, so for the purposes of the index, the household is an approximation for the family.
  • Third, income must also be adjusted for differences in purchasing power stemming from geography. For example, it is common knowledge that the price of goods and services, especially housing, is generally higher in urban areas than in rural areas. Therefore, states that have high nominal household personal income are also very likely to be high cost of living areas and vice-versa.[3]

Of course, income must be earned and, for the vast majority of people, that comes through having a job. But jobs don’t just appear out of thin air. They are a result of entrepreneurship. Therefore, understanding the strength of entrepreneurship in a state is essential to understanding the growth—or lack thereof—in jobs there. As economist Tim Kane puts it:

“The oft-quoted American sports slogan, ‘Winning isn’t everything. It’s the only thing!’ could well be attributed to the economic importance of firm formation in creating jobs. A relatively new dataset from the U.S. government called Business Dynamics Statistics (BDS) confirms that startups aren’t everything when it comes to job growth. They’re the only thing.”[4]

Finally, we are accustomed to thinking that a person is either employed or unemployed. However, there are many shades of unemployment and in recognition of such, the Bureau of Labor Statistics has developed 6 different measures of unemployment, called “Alternative Measures of Labor Utilization.”

For example, the breadwinner of a family fighting hard to make ends meet might be forced to take a part-time job in lieu of more stable full-time work. Economists refer to this as underemployment and it is captured in the “U6” measure, which is the broadest measure of un/underemployment.

As shown in Chart 4 and Table 2:

Based on the 2017 Family Prosperity Index:

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State Highlight: Rhode Island[5]

Every state strives to identify and implement the best approach to creating a productive public-private environment where individuals and families can thrive, with varying degrees of success. For instance, in recent decades, Rhode Island has taken the path of spending heavily on public assistance programs, which has led to its poor FPI rankings on the Medicaid (47th) and government burden (39th) sub-indexes.

While such programs are well-intentioned, this long-held public policy approach—which mainly seeks to address the material hardships of Rhode Island residents—has actually led to diminished prosperity for families by ignoring their cultural and familial needs; hence, the state’s rank of 46th on the 2017 FPI. Consequently, the lack of opportunity in the Ocean State has forced many Rhode Islanders to migrate to states that offer a greater sense of hope and prosperity.

The government’s attempt to fight poverty, via a massive system of social welfare and social engineering programs, has crowded out the roles that the private sector and civil society have traditionally played in facilitating prosperity and a sense of personal dignity. Instead, the state has created an over-reliance on government assistance, which has reduced the opportunity for family upward mobility,

As Franklin Delano Roosevelt, a creator of the American social safety net state as we know it, said in 1935:

[C]ontinued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.[6]

To illustrate this point, like the Maine example above, Rhode Island can also be directly compared to New Hampshire. As shown in Chart A, prior to WWII, Rhode Island had higher per household incomes (adjusted for inflation) and a larger private-sector share (as a percentage of personal income) than New Hampshire.

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In 1947, Rhode Island enacted the sales tax and corporate income tax, which led to increased public sector spending and essentially started to crowd out the private sector. Consequently, New Hampshire’s per household income began to steadily converge with Rhode Island’s.

This trend accelerated in 1971 when Rhode Island enacted the personal income tax, a few years after the federal government enacted Medicaid. With this new source of revenue, Rhode Island continued to spend, which further expanded its public sector at the expense of the private sector.

Medicaid’s role in this divergence is highlighted in the spending per capita, where Rhode Island spent $2,513 per person in 2015 (4th highest in the nation), while New Hampshire spent $1,291 per person (35th highest in the nation).

This difference in approach to public policy, as illustrated by the variations in Medicaid spending, has resulted in a dramatic difference in the size of each state’s private sector. Between 1929 and 2015, Rhode Island’s private sector shrank by 25.8 percent, to 68.3 percent, from 92.1 percent, and is now only the 34th largest private sector in the country. New Hampshire, on the other hand, has seen its private sector shrink by a much smaller 14.9 percent, to 76.9 percent, from 90.4 percent, and now has the 2nd largest private sector in the country.

As a result, New Hampshire’s private sector, based on 2015 data, is 12.5 percent larger than Rhode Island’s— 76.9 percent and 68.3 percent, respectively. Consequently, New Hampshire’s per household income is now eight percent higher than Rhode Island’s—$137,511 and $126,882, respectively. This is a complete turnaround from the situation prior to WWII, when Rhode Island’s per household income was higher than New Hampshire’s.

If Rhode Island’s private-sector share of personal income had been at the national average, that would have meant an additional $1 billion pumped into Rhode Island’s private sector. This investment in the private sector would, in the long run, result in significantly higher incomes for all Rhode Islanders and, most likely, also a higher ranking on FPI’s social sub-indexes.

Rhode Island can begin to improve its ranking — and the well-being of its residents — by reversing the crowd-out of the private sector and of civil society by an over-intrusive government. The data shows that higher self-sufficiency and productivity and lower reliance on government assistance is the true path to happiness and success.

Ronald Reagan once said about too much government intervention:

[It] robbed us of our tiller and set us adrift. Helping to restore these values (faith, family, neighborhood, work and freedom) will bring new strength, direction and dignity to our lives and to the life of our nation. It’s on these values that we’ll best build our future.[7]

To that end, and throughout history, major Democrat and Republican icons — and people from across the philosophical spectrum — agree on the vital importance of work and strong families. Rhode Island’s politicians would do well to focus on minimizing government encroachment on its citizens by reducing its onerous tax burden, which, in turn, would spark new entrepreneurship and jobs.

In dollar terms, lowering Rhode Island’s state and local tax burden to the national average would require a $359 million tax cut out of the $5.8 billion in taxes raised in FY15. To match Florida, where a plurality of Rhode Island out-migrants choose to settle, would require a tax reduction of $1.7 billion.

Keep in mind, of course, that these are static estimates and that any move to reduce tax burdens at this level would be a strong boost to the private sector — thus significantly reducing the needed size of the tax cut in dollar terms because of naturally increased tax revenue.

Ironically, a debate in Rhode Island years ago about repealing its state sales tax might have been just what the doctor ordered. But political leaders were not ready for such bold action then. A thorough economic modeling of the tax plan by economists at the Beacon Hill Institute found that by eliminating this regressive tax — which disproportionately harms average and low-income families — Rhode Island could create up to 25,000 new jobs.

This kind of reform can improve the quality of life for Rhode Islanders today and snowball to create even more good jobs that will attract Americans — especially young people — from other states to move into the Ocean State in the future.[8]

As the FPI demonstrates, the job security and individual economic opportunity resulting from a reform of the sales tax or similar measures would likely have the added benefit of improved social and cultural circumstances for Rhode Island families. Lowering the state and local tax burden on Rhode Island’s families and businesses should be a major policy priority. This can only happen effectively if overall government spending is reduced.

Rhode Island must set itself on a path to grow its family and business population, thus increasing its productivity and tax base and improving the quality of life for its resident families. The Ocean State can ill afford to continue to lose even more of its workforce or business and community leaders to other states.

Private Sector Share of Personal Income

As shown in Chart 5, the private sector share of personal income (hereafter “private sector”) fell nationally by 6 percent to 70.8 percent in 2015 from 75.4 percent in 2000. Of course, the private sector is still rebounding from the “Great Recession” and is likely to continue its improvement, albeit slowly, in the coming years.[9]

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At the same time, there is a large variance in the size of the private sector among the 50 states. In 2015, Connecticut had the largest private sector at 78.3 percent, while New Mexico had the smallest private sector at 58.1 percent—a difference of 35 percent.

Overall, for the private sector sub-index, Connecticut had the highest score (8.07), followed by North Dakota (7.565), New Hampshire (7.29), New Jersey (7.14), and Massachusetts (7.04). West Virginia had the lowest sub-index score (0.18), followed by New Mexico (0.27), Mississippi (1.26), Kentucky (2.16), and Alabama (2.66).

Real, Per Household Personal Income

As shown in Chart 6, real, per household personal income increased nationally by 17 percent to $126,408 in 2015 from $107,769 in 2000. Not surprisingly, given the correlation found between the private sector and personal income, Connecticut in 2015 had the highest level of personal income at $175,515 while West Virginia had the lowest level of personal income at $87,159—a difference of 101 percent.[10]

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Overall, for the personal income sub-index, four states scored a perfect 10—California, Connecticut, Massachusetts, and New Jersey. West Virginia had the lowest personal income sub-index score (0.15), followed by Mississippi (0.73), New Mexico (0.76), Alabama (1.15), and Arkansas (1.80).

Cost of Living

As shown in Chart 7, there is a large variance in cost of living among the 50 states. In 2015, Hawaii had the highest cost of living with an index value of 116.8, while Mississippi had the lowest level of cost of living with an index value of 86.7—a difference of 35 percent.[11]

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Overall, for the cost of living sub-index, Mississippi had the top score (7.61), followed by Arkansas (7.37), Kentucky (7.23), Alabama (7.21), and South Dakota (7.07). New York had the lowest score (0.52), followed by Hawaii (0.65), New Jersey (0.80), California (1.52), and Maryland (1.90).

Note: Due to data limitations, the measure for the year-to-year change could only be measured in one-year increments.

Entrepreneurship

Charts 8 and 9 show the variance in the various measures of entrepreneurship (establishment and job births) nationally and in the 50 states from 2000 to 2014.[12]

As shown in Chart 8, establishment births (as a percent of total establishments) decreased nationally by 12 percent to 10 percent in 2014 from 11.4 percent in 2000. In 2014, Nevada had the greatest level of establishment births at 13.1 percent, while West Virginia had the lowest level of establishment births at 7 percent—a difference of 85 percent.

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As shown in Chart 9, job births (as a percent of total jobs) decreased nationally by 30 percent to 4.4 percent in 2014 from 6.3 percent in 2000. In 2014, Nevada had the greatest levels of job births at 5.7 percent, while Nebraska had the lowest levels of job births at 3.1 percent—a difference of 83 percent.

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Overall, for the entrepreneurship sub-index, Nevada had the top score (10.00), followed by Colorado (9.60), North Dakota (9.41), Florida (9.32), and California (8.84). Iowa had the lowest score (0.74), followed by West Virginia (1.24), Nebraska (1.48), Wisconsin (1.59), and Indiana (1.92).

Note: The establishment births and job births were weighted equally in the entrepreneurship sub-index.

Unemployment

Charts 10, 11, 12, 13, 14 and 15 show the variance in the various unemployment rates nationally and in the 50 states from 2003 (the first year of available data) to 2015.[13]

As shown in Chart 10, the U1 unemployment rate measures the number of people unemployed for 15 weeks or longer as a percent of the civilian labor force. U1 declined nationally by 1 percent to 2.3 percent in 2015 from 2.3 percent in 2003. In 2015, Rhode Island had the highest U1 unemployment rate at 3.3 percent, while North Dakota had the lowest rate at 0.7 percent—a difference of 387 percent.

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As shown in Chart 11, the U2 unemployment rate measures the number of people who lost their job or completed a temporary job as a percent of the civilian labor force. U2 decreased nationally by 22 percent to 2.6 percent in 2015 from 3.3 percent in 2003. In 2015, Alaska had the highest U2 unemployment rate at 3.8 percent, while South Dakota had the lowest rate at 1.2 percent—a difference of 210 percent.

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As shown in Chart 12, the U3 unemployment rate measures the number of unemployed people as a percent of the civilian labor force (and is the official unemployment rate). U3 decreased nationally by 12 percent to 5.3 percent in 2015 from 6 percent in 2003. In 2015, West Virginia had the highest U3 unemployment rate at 6.9 percent, while North Dakota had the lowest rate at 2.7 percent—a difference of 155 percent.

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As shown in Chart 13, the U4 unemployment rate measures the number of unemployed people plus discouraged workers as a percent of the civilian labor force plus discouraged workers. U4 decreased nationally by 10 percent to 5.7 percent in 2015 from 6.3 percent in 2003. In 2015, West Virginia had the highest U4 unemployment rate at 7.4 percent, while North Dakota had the lowest rate at 2.9 percent—a difference of 155 percent.

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As shown in Chart 14, the U5 unemployment rate measures the number of unemployed people plus discouraged workers plus all other marginally attached workers as a percent of the civilian labor force plus all other marginally attached workers. U5 declined nationally by 8 percent to 6.4 percent in 2015 from 7 percent in 2003. In 2015, Alaska had the highest U5 unemployment rate at 8.6 percent, while North Dakota had the lowest rate at 3.4 percent—a difference of 153 percent.

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As shown in Chart 15, the U6 unemployment rate measures the number of unemployed people plus all marginally attached workers plus workers employed on a part-time basis for economic reasons as a percent of the civilian labor force. U6 increased nationally by 3 percent to 10.4 percent in 2015 from 10.1 percent in 2003. In 2015, Nevada had the highest U6 unemployment rate at 13.9 percent, while North Dakota had the lowest rate at 5.3 percent—a difference of 161 percent.

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Overall, for the unemployment sub-index, North Dakota had the top score (8.72), followed by Nebraska (8.50), Utah (8.46), Colorado (8.15), and Iowa (8.00). West Virginia had the lowest score (0.57), followed by Alaska (0.76), New Mexico (0.82), Nevada (1.99), and Louisiana (2.30).

Note: U3 was weighted 50% of sub-index while U1, U2, U4, U5, and U6 were weighted equally (10%) for the remainder of the unemployment sub-index.

Jump to Section:

  1. Introduction
  2. Demographics
  3. Family Self-Sufficiency
  4. Family Structure
  5. Family Culture
  6. Family Health

[1] As such, the public sector crowds out the private sector. For example, see: Moody, J. Scott, “Expanding Medicaid Will Hurt North Carolina’s Families, Lower Income, and Reduce Jobs,” Federalism In Action, No. 5, March 23, 2015. http://www.federalisminaction.com/study-no-5

[2] Alaska and Hawaii are excluded, as is common practice in state analysis, due to their unique economic characteristics.

[3] Cost of Living is significantly overlooked in policy discussions. For instance, the federal tax code adjusts for inflation, but does not do the same for cost of living. As a result, federal tax payments can vary dramatically even if the real purchasing power of one’s income is the same. For more information, see http://keypolicydata.com/cost-living/federal-taxes-and-cost-living/

[4] Kane, Tim, “The Importance of Startups in Job Creation and Job Destruction,” Ewing Marion Kauffman Foundation, July 2010. http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2010/07/firm_formation_importance_of_startups.pdf

[5] The full Rhode Island study can be found here: http://familyprosperity.org/application/files/6814/8233/0327/RhodeIsland-FPI-Study-122116.pdf

[6] Roosevelt, Franklin D., “Annual Message to Congress,” January 4, 1935. http://www.presidency.ucsb.edu/ws/?pid=14890

[7] Reagan, Ronald, “Radio Address to the Nation on Administration Policies,” August 25, 1984.

[8] The Rhode Island Center for Freedom and Prosperity’s “Zero.Zero” plan, based on the elimination of the state sales tax, can be found at http://rifreedom.org/0-0-sales-tax/

[9] Regional Data, U.S. Department of Commerce: Bureau of Economic Analysis http://www.bea.gov/itable/iTable.cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1

[10] Regional Data, U.S. Department of Commerce: Bureau of Economic Analysis http://www.bea.gov/itable/iTable.cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1

[11] Regional Data, U.S. Department of Commerce: Bureau of Economic Analysis http://www.bea.gov/itable/iTable.cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1

[12] Business Dynamics Statistics, U.S. Department of Commerce: Census Bureau http://www.census.gov/ces/dataproducts/bds/data_estab.html

[13] “Alternative Measures of Labor Underutilization for States,” U.S. Department of Labor: Bureau of Labor Statistics http://www.bls.gov/lau/stalt_archived.htm