Kansas and Her Neighbors: Economic Activity

I don’t know if it counts as a “disaster”, but Kansas continues to lag its neighbors in economic activity, and to under-perform what is to be expected from historical correlations.


Figure 1: Log coincident indices for Colorado (blue), Kansas (bold red), Nebraska (green), Oklahama (purple), Missouri (teal), and United States (bold black), all 2011M01=0. Source: Philadelphia Fed, author’s calculations.

The Philadelphia Fed’s coincident indices are aimed at measuring total economic activity, calibrated to match the growth rate of real state GDP. The correlation of the index with state GDP varies across states, and for Kansas is between 0.55-0.70 (see this report for a discussion).

It would be preferable to use directly the quarterly GDP series to make comparisons. However, reporting of such figures lags the national statistics considerably; we only have the 2015Q3 figures as of early March.

I have used the historical correlation of Kansas GDP with US GDP, and a drought variable, to create a counterfactual by which to quantify the shortfall in Kansas economic performance (see this post for details of the procedure). The key graph is below.


Figure 2: Kansas GDP, in millions Ch.2009$ SAAR (blue), ex post historical simulation (red), 90% band (gray lines). Forecast uses equation (1). NBER defined recession dates shaded gray. Source: BEA, NBER, and author’s calculations.

These results indicate that (1) actual Kansas GDP is far below predicted (5.3 billion Ch.2009$ SAAR, or 3.9%, as of 2015Q3), and (2) the difference is statistically significant. To place this in context, if US GDP were to fall 3.9% below trend, I am sure that plenty of folks would notice.

A digression regarding unemployment rates, and “fixed effects”. The state level unemployment rates are subject to high levels of measurement error given the relatively small sample available for each state (see discussion here). That being said, the average KS-US unemployment rate differential over the 1986-2010 period is -1.17, while the differential for 2016M04 is -1.2. In other words, as measured by unemployment rates, Kansas is doing about average. In contrast, the average MO-US differential is -0.24, with the 2016M04 reading at -0.70. In other words, by this metric, Missouri is doing better than average. (The post-1986 period conforms to the Great Moderation; December 2010 marks the end of the pre-Brownback period.)

10 thoughts on “Kansas and Her Neighbors: Economic Activity

  1. Samuel

    I am interested in what implications the lagging economic activity ultimately has for state budgets. If cutting state taxes fails to encourage economic growth and increase tax revenue, my guess is that you can not adequately fund education and roads in the state. I mention education and roads as two of the major responsibilities voters expect state legislators to address. As well, these two also have major economic implications for a state: an educated workforce and a good transportation network. Will the experiment in Kansas have long-term implications for the people in the state?

    1. James Edwards

      The implication from the lagging economic activity as a result of the tax cut is that it forces the state to increase taxes other ways to cover the shortfall in its budget. At the same time, cutting spending in the education that school districts have to close early in the year because there is not enough to cover its payroll of the teachers. Recently KS had to raise its sales tax rate to 6.75% and move funds from other accounts to cover the shortfall.
      What’s even worse is that one of the Republican legislature who was sold on the idea that KS will grow as a result of the Laffer supported tax policy is now arguing that it is not working and the need to rethink its policy. Indeed, the “great experiment” has failed.

        1. James E

          What Wisconsin is experiencing (where revenue from one source decreases causes an increase of other revenue to cover the short fall) is common for dogma of low taxes mentality in other states. In the article you linked, Walker’s Act 10 in 2011 provided a tool for school districts to cover their reduced revenue by lowering the staffing level instead, voters provided an escape hatch to ameliorate the damage of larger class size. There’s an effect when you have to teach a large class, some students will fall through the crack by falling behind.

          You’re correct in the assessment that the tax referendum puts the burden back to the local level. When you have 81% local referendums passed to cover education, there’s a problem.

          What’s going to happen down the road, the taxes goes higher at the local level is going to get someone fed up to try to lower the rates in some way.
          Let me give an example, when Todd Whitman was Governor of NJ, elected on the platform to lower state taxes. People were all for that until it starts affecting local operations that they had to raise taxes to cover the shortfall. As a result taxes are higher than it was before. You’re seeing the same effect with Christie as Governor.

  2. sherparick

    I have linked to an article indicates, much of Kansas’ population growth has been in the counties near Kansas City, Missouri. Folks live in Kansas and work in Missouri or Oklahoma, so Kansas is benefits from employment growth in the surrounding states, particularly Missouri. Also, as the article indicates, the Brownback/Koch solution of minimalist Government and privatizing public services, in combination with the Kobach policy of driving out and discouraging immigration, is actually accelerating the decline of rural Kansas. http://www2.ljworld.com/news/2016/apr/10/kansas-population-continues-shift-urban-centers-la/

    Dodge City kind of serves as the counter-example of using using public sector, including moderate tax increases, to enhance local infrastructure. However, setting up a casino is not a great way to replace the meat packing industry.

  3. W.C. Varones

    Wow, 4 of the last 10 posts are devoted to bashing 2 Midwestern Republican governors.

    Well done!

    1. Menzie Chinn Post author

      W.C. Varones: Gee. There is no criticism of either governor in either post. They are merely recounting economic developments. I know that you don’t like facts/figures/data, but I think in this case you are projecting.

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