Growing List of Winners, Losers Among the States

When the jobs economy was still humming along back in February of 2007, the performance of individual states seemed relatively uniform. That month, the highest state unemployment rate, Mississippi's 6.7 percent, was just 2.2 percentage points above the national average, while the three states with the lowest jobless levels clocked in at just 2.2 percentage points below the nation's.

Today, by contrast, the gap between the winners and losers among the states seems massive. Several years into a sluggish recovery, unemployment ranges from the dizzying 12.6 percent in Nevada and 11.1 percent in California to a low of 3.3 percent in North Dakota.

It's easy to dismiss states' widely varying employment situations today as a result of a few economic peculiarities, like an energy boom that's nourishing North Dakota, or the housing bust that is a big part of the unemployment woes of Nevada and California. But to do so ignores differences among states in everything from how they regulate business and new investment to how they have managed (or mismanaged) their own long-term fiscal situations. In an era in which businesses are being extra careful about where they place their next bets, the gap between the winners and losers among the states might be dramatic for some time to come.

It's true, for instance, that North Dakota has gotten an enormous boost from the nation's energy boom, but the state's leaders have aimed to cash in on that boom in ways that other states have not. They've encouraged energy firms using new technologies to exploit the Bakken and Three Forks shale formations and to increase productivity at existing wells, resulting in an increase in average daily oil production from 100,000 barrels a day back in 2000 to above 500,000 barrels a day today. Thanks to the boom, employment in the state is one-quarter higher today than it was a decade ago, personal income of residents jumped nearly 7 percent last year alone, and the unemployed are flocking to the state for jobs.

New technologies have similarly helped Texas, which saw oil production slide in the 1990s and early 2000s, to stabilize its business and increase production by nearly 60,000 barrels a day in the last five years. Perhaps more important, natural gas production in Texas has nearly doubled since 2007. A study by the Perryman Group, an economic consulting firm, estimated that rising gas extraction in Texas' Barnett shale alone has produced some 137,000 jobs.

But California is rich in energy resources too. It's actually the third-largest oil producing state in the country, though it's about to be surpassed by North Dakota. Whereas North Dakota has encouraged energy companies to ramp up production using new techniques, oil production in California has been a downward decline amidst environmental restrictions and new energy mandates. In 2001 the state produced 689,000 barrels a day, but today that's down to 534,000 a day and continuing to shrink even though there are untapped sources in the state ripe for extraction with new technologies, including a whole swath of reserves in the Monterey shale that reaches from the Central Coast down to Los Angeles.

Of course, in California, public policy is often about regulations and taxes. And so even as production declines in the Golden State, tax activists are pushing a ballot initiative to raise taxes on oil producers in California. The new severance tax, if passed, would raise the total effective tax rate on oil produced in the state about 40 percent higher than oil taxes in any other producing state, according to Wayne Lusvardi at CalWatchdog.

Some states haven't even gotten started on the energy boom despite the potential. New York has a moratorium on natural gas fracking, which has stalled any significant drilling in the giant Marcellus shale. Two other states, Pennsylvania and West Virginia, by contrast, have already added some 57,000 jobs thanks to new exploration of Marcellus in their territory. A Manhattan Institute study estimated New York could add 15,000 to 18,000 jobs in Western New York alone from expanded natural gas exploration, and another 75,000 jobs if drilling were expanded to the Utica shale and southeastern New York.

Energy isn't the only sector where businesses are pursuing new investment. Despite the widespread notion we don't ‘make anything' in the United States anymore, a California group last year studied industrial investment in the nation over a three year period. It found more than 10,000 investments in new or expanded industrial plants, but with widely diverging results among the states. When the group, the California Manufacturers and Technology Association, parsed the investments on a per capita basis, it found that its own home state as well as places like New Jersey and Connecticut gained barely more than $200 per resident in industrial investment, compared to a national average of $1,335 per resident.

There are many reasons businesses make those kinds of investment decisions, but the fiscal condition of some states is increasingly an issue. It may not be a coincidence, for instance, that three of the states garnering the least investment in the CMTA study all face huge long-term liabilities. Connecticut bears the highest per-capita debt burden of any state, while New Jersey has among the worst funded pension plans and California owes the most, an estimated $500 billion in unfunded pension liabilities, of any state. Businesses question how states will pay off these huge debts, or rather, how the states will tap taxpayers to pay them off.

Last year, for instance, finance professors Robert Novy-Marx and Joshua Rauh estimated that every household in California would have to contribute the equivalent of nearly $2,000 per year for the next 30 years to achieve full funding of the state's pension system if policymakers in Sacramento do nothing to reform the system. If you are a business executive contemplating expanding into California, that's not the kind of problem you necessarily want to buy into with a new plant in the Golden State.

The economic meltdown that began in late 2007 was so steep that today neither tax revenues nor jobs have recovered to pre-recession levels in many states. Some states are enduring a giant reset in which the old fiscal and economic parameters don't hold anymore. One result may be that the differences among states remain significant for some years to come, with clear winners and losers.