Beacon Hill Institute. Metro Area and State Competitiveness Report 2003

Transcription

1 Beacon Hill Institute Metro Area and State Competitiveness Report 2003

2 State Competitiveness Report 2003 BHI State Competitivness Indicators Index And Subindexes Overall index and rank in 2003 Subindexes, Rank in 2003 Gov.and Security Infrastruct Human Technology Finance Openness Domestic Environmental Overall Overall fiscal ure resources competition policy Index Rank policy Delaware Massachusetts Wyoming Utah Washington Vermont Minnesota New Hampshire Connecticut South Dakota Colorado Virginia Oregon Idaho Nebraska Iowa Kansas Maryland California Wisconsin Montana Rhode Island Michigan Missouri Alaska New Jersey Maine North Dakota Pennsylvania Indiana New York Texas North Carolina Georgia Kentucky Florida New Mexico Ohio Tennessee Illinois South Carolina Oklahoma Alabama Arizona Louisiana Nevada Arkansas Hawaii West Virginia Mississippi The Beacon Hill Institute at Suffolk University in Boston focuses on federal, state and local economic policies as they affect citizens and businesses. The institute conducts research and educational programs to provide timely, concise and readable analyses that help voters, policymakers and opinion leaders understand today s leading public policy issues by the Beacon Hill Institute at Suffolk University ISBN Beacon Hill Institute at Suffolk University 8 Ashburton Place Boston, MA Phone ; Fax ; bhi@beaconhill.org; Web Metro Area and State Competitiveness Report / Page 2

3 Metro Area Competitiveness Report 2003 BHI Metro Competitivness Indicators Index And Subindexes Overall index and rank in 2003 Subindexes, Rank in 2003 Gov.and Security Infrastructure Human Technology Finance Overall Index Overall Rank fiscal policy resources and cost Openness Domestic competition Environmental policy Seattle San Francisco Minneapolis Boston Denver Raleigh Austin Salt Lake City Portland Atlanta Kansas City Charlotte Washington Grand Rapids Indianapolis Richmond Cincinnati St. Louis Pittsburgh West Palm Beach Providence Chicago Orlando Greensboro Norfolk Milwaukee Houston Las Vegas Louisville Detroit Hartford Phoenix Columbus San Diego Oklahoma City Tampa Nashville San Antonio Jacksonville Cleveland Sacramento New York Miami Philadelphia Dallas Rochester Los Angeles Buffalo Memphis New Orleans The Beacon Hill Institute at Suffolk University in Boston focuses on federal, state and local economic policies as they affect citizens and businesses. The institute conducts research and educational programs to provide timely, concise and readable analyses that help voters, policymakers and opinion leaders understand today s leading public policy issues by the Beacon Hill Institute at Suffolk University ISBN Beacon Hill Institute at Suffolk University 8 Ashburton Place Boston, MA Phone ; Fax ; bhi@beaconhill.org; Web Metro Area and State Competitiveness Report / Page 3

4 From the Executive Director This is the third annual Competitiveness Report of the Beacon Hill Institute at Suffolk University. The report, first limited to the states and then broadened in 2002 to include the fifty largest U.S. metropolitan areas, has become a nationally recognized barometer of economic success and failure. Thus, we expect that policy makers in Delaware will celebrate the fact that their state remains solidly in first place for the third year in a row. Perhaps the state of Utah can be even more encouraged, having moved as it has, from 13 th place last year to 4 th place this year. South Dakota rose from 23 rd to 10 th. Other states can start worrying (if they weren t already). California dropped for the third year in a row, from 10 th in 2001, to 16 th in 2002, to 19 th in Maine and Hawaii have experienced parallel three-year declines. Although we ve been ranking metropolitan areas for only the last two years, there are also some shifts there to report. Over the period 2002 to 2003, Minneapolis moved into 3 rd place, pushing Boston down to 4 th. West Palm Beach went from 30 th to 20th and Chicago from 29 th to 22 nd. Hartford, Connecticut fell from 15 th to 31 st. Some of the cities trended in the same direction as the states in which they are located. Colorado slipped from 4 th to 11 th and, with it, Denver from 4 th to 5 th. Salt Lake City moved up, along with the state of Utah. In other states, some cities rose while others fell in rank. The institute would like to thank authors Jonathan Haughton and Cagdas Sirin for their work on this year s edition. We hope that the Report will continue to be of value to cities and states seeking ways to improve their competitiveness and, with it, the well-being of their residents. Metro Area and State Competitiveness Report / Page 4

5 The State and Metropolitan Competitiveness Index 2003 Introducing the indexes This is the third annual report that is designed to address a very simple question: how competitive is Massachusetts, or Boston, or indeed any other state or major metropolitan area of the United States? This question quickly leads on to others: What is meant by competitiveness? How can it be measured? What standard should be used to determine whether a state is competitive or not? Indeed, why is it even interesting to measure competitiveness? To answer these questions, we have developed indexes of competitiveness for a. the states, and b. the metropolitan areas of the country. The indexes are designed to measure the long-term competitiveness of an area, and use a similar approach to the one taken in our earlier studies of state competitiveness (State Competitiveness Report 2001) and metropolitan competitiveness (Metro Area and State Competitiveness Report 2002). For the third year in a row, Delaware emerges as the most competitive state, followed by Massachusetts (Table 1). They are followed by a group of four highly competitive states: Wyoming, Utah, Washington and Vermont. With the exception of newcomer Utah, all of these states have been among the ten most competitive states since Table 1 State Competitiveness Index Index Rank in Delaware Massachusetts Wyoming Utah Washington Vermont Minnesota New Hampshire Connecticut South Dakota Colorado Virginia Oregon Idaho Nebraska Iowa Kansas Maryland California Wisconsin Montana Rhode Island Michigan Missouri Alaska New Jersey Maine North Dakota Pennsylvania Indiana New York Texas North Carolina Georgia Kentucky Florida New Mexico Ohio Tennessee Illinois South Carolina Oklahoma Alabama Arizona Louisiana Nevada Arkansas Hawaii West Virginia Mississippi Metro Area and State Competitiveness Report / Page 5

6 Seattle and San Francisco remain the two most competitive metropolitan areas, followed by Minneapolis, Boston, Denver and Austin. Table 2 Metropolitan Competitiveness Index Index Rank in Seattle WA San Francisco CA Minneapolis MN Boston MA Denver CO Raleigh NC Austin TX Salt Lake City UT Portland OR Atlanta GA Kansas City KS-MO Charlotte NC Washington DC-MD Grand Rapids MI Indianapolis IN Richmond VA Cincinnati OH St. Louis MO Pittsburgh PA West Palm Beach FL Providence RI Chicago IL Orlando FL Greensboro NC Norfolk VA Milwaukee WI Houston TX Las Vegas NV Louisville KY Detroit MI Hartford CT Phoenix AZ Columbus OH San Diego CA Oklahoma City OK Tampa FL Nashville TN San Antonio TX Jacksonville FL Cleveland OH Sacramento CA New York NY Miami FL Philadelphia PA Dallas TX Rochester NY Los Angeles CA Buffalo NY Memphis TN New Orleans LA What is Competitiveness? We consider a state or a metropolitan area to be competitive if it has in place the policies and conditions that ensure and sustain a high level of per capita income and its continued growth. To achieve this, a state or metropolitan area needs to be able both to attract and incubate new businesses, and to provide an environment that is conducive to the growth of existing firms. Competitiveness may be thought of as a catchall term that covers what Michael Porter calls the microeconomic foundations of prosperity. 1 The states and metropolitan areas of the United States all face the same macroeconomic conditions; where they differ is in their microeconomic policies. These policies matter. As Porter puts it, wealth is actually created at the microeconomic level - in the ability of firms to create valuable goods and services using productive methods (p.40). It follows that the outcome of competitiveness is greater affluence, measured by higher levels of real Gross State (or Metropolitan) Product or personal income per capita. Quantifying Competitiveness To be useful as a concept, it is essential to have an operational measure of competitiveness, a measure that aggregates the key microeconomic variables into a single index. The World Economic Forum does this for the countries of the world in its influential annual Global Competitiveness Reports, but there is no equivalent at the level of the metropolitan areas of the U.S. Metro Area and State Competitiveness Report / Page 6

7 (although some more specialized rankings of the states and metropolitan areas have been developed; we discuss these in more detail below). In thinking about how to create an index of competitiveness, we begin with the simple economic relation: Y = f(k,l,technology). This says that output (Y) depends on the amount of capital (K), labor (L) and technology that is harnessed by the economy. 2 Not surprisingly, more inputs lead to more output. But what raises input levels? And why do some urban areas mix the ingredients more successfully than others? with moderate tax rates and clear evidence of financial discipline (as evidenced, for instance, by high state and municipal bond ratings). This sub index is designed to pick up these effects. Security A state or metropolitan area will be more attractive to business if the legal system is sympathetic to business concerns, if public officials are trusted, if the regulatory burden is light, and if crime is low. The security sub index addresses these dimensions of competitiveness, with particular emphasis on the importance of public safety. To answer these questions we need to focus on the quality of the business environment. Using his celebrated diamond, Porter finds it helpful to group the influences into four components: the quality of available inputs, the sophistication of local demand, the nature of local suppliers and the extent to which they form clusters, and the rules and institutions that govern the market. 3 These are still very broad categories and so, following the Porter-inspired Global Competitiveness Report, we actually classify our indicators into nine groups. The first two groups refer to institutions, the next four to the quality of inputs, and the last three to the nature of local demand. The breakdown is as follows: Infrastructure. How easy is commuting? Do most households use the Internet? Is housing affordable? These are the elements of competitiveness that are included in the infrastructure sub index for each state or metropolitan area. Human resources. A high level of labor force participation, and skilled labor that is readily available and not too expensive, combined with a widespread commitment to education, training and health care, make a state or metropolitan area attractive for business. These factors are captured in the human resources sub index, which in turn is based on ten primary data series. Government and fiscal policies. Businesses are more likely to be attracted to areas Technology. The development and application of technology is central to Metro Area and State Competitiveness Report / Page 7

8 economic development, and has been ever since the industrial revolution. The technology sub index measures this by taking into account research funding, patents issued, the proportion of scientists and engineers in the labor force, and the importance of high tech companies. Finance and Prices. A good idea is not enough; businesses also need to be able to mobilize financing for investment, both internally and from the financial system. The finance and prices index measures these factors. However, competitiveness is impaired if prices are high, which is why the cost of living is also included in this sub index. Openness. Open economies tend to be more competitive and hence more productive. The openness sub index measures how connected the firms and people in a state or metropolitan area are with the rest of the world. It is based on the level of exports, as well as the number of air passengers, per capita. Domestic Competition. In a vibrant economy firms are both born and die. A higher rate of business births is a particularly clear sign of a competitive environment, and is an important component of the domestic competition sub index. This index also incorporates the Cognetics entrepreneurial hot spots index. Environmental Policy. States or metropolitan areas that are faced with environmental problems, or that have a heavy-handed policy of environmental regulation, are likely to be less attractive to businesses as well as to their workers and managers; we measure this effect with the environmental policy sub index, which among other things reflects the levels of air pollution and of toxic releases. A complete list of the components the competitiveness indexes are given in Table A1 (for states) and Table A2 (for metropolitan areas) at the end of this section of the report. The data used to compute the indexes are shown in an appendix to the report. We have used the most recent data available; due to time lags, most of the series refer to 2001 or The nine categories are coherent, but there is inevitably some degree of arbitrariness in the way in which individual data series are assigned to the sub indexes. For instance, the amount of air travel could be included in the infrastructure sub index or the measure of openness; and electricity prices could be included in the infrastructure sub index or the environmental sub index. In practice the assignment of the data series is much less important than the fact that they are included at all. Metro Area and State Competitiveness Report / Page 8

9 Technical note 1: Creating the Indexes Given the raw data series for each metropolitan area, several steps were needed in order to construct the competitiveness index. 1. First, each variable was normalized to give it a mean of 5, a standard deviation of 1, and a range from 0 (worst) to 10 (best). 2. Then the nine sub-indexes were formed as the simple averages of the normalized component variables. 3. Next, the sub-indexes themselves were normalized, again giving a mean of 5 and standard deviation of 1 to each. These are presented in Table A, inside the front cover. 4. Finally, the overall index of state competitiveness as the simple average of the nine sub-indexes, again normalizing it so it has a mean of 5 and standard deviation of 1. In practice the competitiveness indicator index ranged from a low of 2.70 to a high of A competitiveness index is simply a summary measure based on a large number of variables. The difficult, and controversial, part is choosing a weighting scheme. Our approach is the simplest and most transparent: within each sub-index, each variable carries equal weight. Then each sub-index is given the same weight when constructing the overall index. This has been referred to as a democratic weighting structure, but it is of course arbitrary (although reasonable). Is the competitiveness index useful? Does the index of state competitiveness explain affluence and growth? If the index is properly constructed, then it alone should go a long way towards explaining why some areas are affluent and others are not. A simple way to show the relationship is with the scatter plot in Figure 1: the vertical axis shows real personal income per capita while the competitiveness index is on the horizontal axis. 4 Also shown in Figure 1 is the best-fit regression line, which is given by Real personal income/capita = Index. t=10.3 t=3.9 This equation has an R 2 of 0.24, which means that almost a quarter of the variation in real personal income per capita from area to area is attributable to variations in the metropolitan area competitiveness indicator index alone. Competitiveness really does matter. Metro Area and State Competitiveness Report / Page 9

10 Figure 1. Real Personal Income per capita, ,000 40,000 35,000 y = 1626x R 2 = 0.24 Real PI per capita, $ 30,000 25,000 20,000 15,000 10,000 5, Competitiveness Index The competitiveness index has a fairly strong correlation with the growth rate of personal income per capita between 1992 and 2002 (R 2 =0.17), with a higher index associated with a significantly faster increase in per capita income. This result is important, because growth rates are notoriously difficult to explain, particularly with single variables such as the competitiveness index. In the short-run the growth of a given state is likely to be strongly influenced by local factors a boom in the auto industry, or a drop in research spending, for instance which obscure the more fundamental issue of competitiveness. 5 Putting the competitiveness index to work What do we learn from this exercise? Naturally it is interesting to look at the raw rankings (Tables 1 and 2), but this may not be the most important use of the information. The detailed data, both in individual variables and the sub-indexes, allow one to identify the determinants of competitiveness. This is of value to policy makers, who are then in a better position to identify what needs to be done in order to improve the position of their states or metropolitan areas. The logic behind this is that a higher competitiveness indicator index is associated with greater affluence. A reasonable inference is that if one were to improve competitiveness, then residents of the state would be better off. And the greatest upside potential is for the indicators whose performance is currently weak. For instance, a low-crime state may have trouble reducing the crime rate further, while for a high-crime state, efforts to reduce crime are Metro Area and State Competitiveness Report / Page 10

11 likely to be an efficient way to boost competitiveness. To illustrate, consider the case of Dallas- Arlington-Fort Worth, Texas, which ranks 45 th with a competitiveness indicator index of A major strength is the low fiscal burden in Texas, and fiscal discipline, as evidenced by above-average bond ratings for the state and city. At the other extreme, the city scores low on the environmental sub index, mainly because of the serious air pollution. The city scores somewhat above average on competition, but does poorly on security and infrastructure. wealth and job creation are the extent to which ideas, innovation, and technology are embedded in all sectors of the economy. 6 They identify 17 indicators, which are then aggregated using weights that vary from 0.33 to 1.0. The index is scaled to average 6.0, and ranges from 2.56 (West Virginia) to (Massachusetts). Although we include a number of technology-related variables in our own index, we also believe that there is much more to competitiveness and hence to achieving and maintaining affluence than technology alone. This is why our index is based on almost three times as many variables, and so has greater breadth. To make it easier to identify the strengths and weaknesses of each state and metropolitan area, a subsequent section of this report sets out the relevant details for each area, along with brief state-specific commentaries. Other studies We are not the first to develop a set of statewide indexes, but we are the first to create a broad-based index of competitiveness, to design and present it in a way that policy makers will find useful, and to re-estimate the indexes annually. States The Economic Policy Institute has created a State New Economy Index, which aims to measure the New Economy. The authors define the new economy as a knowledge and idea-based economy where the keys to Conceived in a similar spirit is the Index of the Massachusetts Innovation Economy, published by the Massachusetts Technology Collaborative in November The report compares Massachusetts with six other leading technology states (CA, CO, CT, MN, NJ and NY), as well as presenting a wealth of information on the state itself. Most of the emphasis is on the state s knowledge-based innovation economy. To do this it focuses on 9 key industry clusters, which together cover 25% of nongovernment jobs in Massachusetts. Interestingly enough, these key sectors are growing no faster than the rest of the state economy. In our view it is preferable to consider the economy as a whole which is what our index does rather than just a fashionable quarter of it. John Byars, Robert McCormick and Bruce Yandle of Clemson University have created Metro Area and State Competitiveness Report / Page 11

12 an Index of Economic Freedom for the states of the U.S. They define economic freedom as the right of individuals to pursue their own interests through voluntary exchange under a rule of law. 8 They sift through 145 indicators, assigning them to deciles from 1 (most free) to 10 (least free). After experimenting with 47 different indexes, they choose the one that best explains state growth in income per capita, net in-migration, and growth in manufacturing value added. After creating five sub-indexes, they assign weights to these using the technique of principal components, and apply these weights to create the overall index. By this measure, Idaho has the greatest amount of economic freedom (an index of 3.9) while New York has the least (index = 7.9). Their report argues that greater economic freedom should be associated with faster economic growth, and their econometric results suggest that this is probably the case, 9 although their index may be more valuable as a summary measure of freedoms that have value in their own right, rather than as a predictor of growth or well being. We do agree that economic freedom is important, and our index of competitiveness includes some indicators, such as the share of state tax collections in Gross State Product, that measure the weight of government quite well. However, we believe that other factors are also important to competitiveness, even if they are not easy to place on a scale of economic freedom; these include such variables as the time that is required to travel to work, the availability of venture capital, and the importance to the economy of high-tech firms. The Heritage Foundation has also created an influential and widely-cited Index of Economic Freedom, but it is constructed for the countries of the world rather than for the states of the U.S. 10 Metropolitan areas Robert Atkinson of the Progressive Policy Institute and Paul Gottlieb of the Center for Regional Economic Issues have created a Metropolitan New Economy Index, which uses sixteen economic indicators to assess the 50 largest metropolitan areas progress as they adapt to the new economic order (p.3). 11 They view the characteristics of the New Economy as an altered industrial and occupational order, greater globalization, and unprecedented levels of entrepreneurial dynamism and competition. Their measures emphasize education, information flows, the growth of new firms, and technology. We include many similar variables in our 51 series, which helps explain why eight of the top ten metropolitan areas are the same for the two studies (although there is more disagreement at the bottom end). However, we also believe that there are other important dimensions to competitiveness and hence to achieving and maintaining affluence such as the tax burden, public safety, and environmental issues. This is Metro Area and State Competitiveness Report / Page 12

13 why our index is based on almost a wider set of variables. than it does to consider Pennsylvania as a single entity. In a somewhat different spirit, Money magazine publishes an annual survey of the best places to live in the United States. Using 31 variables (including seven related to climate!), the magazine s Web site allows readers to express their preferences and then find the places that best suit their needs, from a list of over 400 towns and cities. The survey is not, however, designed to measure competitiveness per se. Why metropolitan areas? In addition to reporting competitiveness indexes for all 50 states, this study gives the results for the 50 largest metropolitan statistical areas (MSAs). Collectively they include 58% of the U.S. population, and reflect the fact that the country is overwhelmingly urban and suburban rather than rural. Metropolitan statistical areas are very coherent economic units they have common labor markets, commuter pools, and newspaper readership, indeed all the features that make up a natural geographical hinterland. In many respects it makes more sense to consider Philadelphia and Pittsburgh as separate economic units, One alternative would have been to focus only on the central cities in each urban area. The disadvantage of this is that the central cities are often quite small, and unrepresentative of the greater urban area. For instance, the population of the city of Boston, at 555,000, is less than one tenth of the population of the MSA, which came to 6.1 million in It is not clear how helpful it would be to compare the city of Boston, dense and highly urbanized, with the city of Houston, which constitutes 89% of its metropolitan area and includes extensive suburbs. What next? May we invite you to pore over the detailed results on the following pages. For each metropolitan area we set out the main competitive strengths and weaknesses with a brief commentary. We welcome suggestions for ways in which we might improve our search for answers to that deceptively simple question: how competitive is the Boston area (or Massachusetts, or the Bay area, or greater New York, or Houston, or )? Metro Area and State Competitiveness Report / Page 13

14 Table A1 Components of sub-indexes for states Sub-index Government and fiscal policy Competitiveness indicators index State tax revenue/gross State Product (-) Workers Compensation Collections/Employment (-) Bond rating (composite of S&P s and Moody s, scale 1-25) (+) Budget deficit as % of Gross State Product (-) Security Reported crime per 100,000 inhabitants (-) % Change in crime index, (-) Murders per 100,000 inhabitants (-) Infrastructure % of households with computers (+) % of households with installed phones (+) % of households with internet access (+) Air passengers per capita (+) Travel time to work (-) Human resources % of population without health insurance (-) % of population aged 25 and over that graduated from high school (+) Average benefit per first payment, for unemployed (-) % of labor force represented by unions (-) Unemployment rate (-) % of population enrolled in degree-granting institutions (+) % of adults in the labor force (+) % of population born abroad (+) Infant mortality rate in deaths per 1,000 live births (-) Non-federal physicians per 100,000 inhabitants (+) Technology NSF funding for R&D per capita (+) NIH support to institutions in the state, per capita (+) Patents per 100,000 inhabitants (+) Science and engineering graduate students per 100,000 inhabitants (+) Science and engineering degrees awarded per 100,000 inhabitants (+) Scientists and engineers as % of labor force (+) High tech companies as % of companies in the state (+) Finance Deposits in commercial banks and savings institutions, per capita (+) Rental costs for 2-bedroom apartment (-) Venture capital available per capita (+) Openness Exports per capita, $ (+) Incoming foreign direct investment per capita, $ (+) Domestic Employer firm births per 100,000 inhabitants (+) competition Employer firm terminations per 100,000 inhabitants (+) Environmental Electricity prices, $/mbtu (-) policy Toxic release inventory, on- and off-site, lbs per capita (-) Note: + if positive effect on competitiveness, - if negative effect expected. Metro Area and State Competitiveness Report / Page 14

15 Table A2 Components of sub-indexes for metropolitan areas Sub-index Government and fiscal policy Competitiveness indicators index State tax revenue/gross State Product (-) Workers Compensation Collections/Employment, state level (-) Bond rating of main cities/counties, composite of S&P s and Moody s, scale 1 (worst) to 25 (best) (+) Bond rating of state (composite of S*P s and Moody s, scale 1 (worst) to 25 (best) (+) Unemployment payments per unemployed worker (-) Security % Change in crimes per 100,000 inhabitants (-) Violent crimes (rapes, assaults) per 100,000 inhabitants (-) Thefts per 100,000 inhabitants (-) Murders per 100,000 inhabitants (-) Infrastructure Mass transit availability (+) % of households with computers, state level (+) % of adults online (+) Travel time to work (-) Median household gross rent (-) Human resources % of population without health insurance, state level (-) High school finishers as % of 18-year-olds (+) % of population aged 25 and over that graduated from high school (+) Unemployment benefits per unemployed worker, state level (-) % of labor force represented by unions, state level (-) Unemployment rate (-) % of population enrolled in degree-granting institutions, state level (+) % of adults aged in the labor force(+) % of population born abroad (+) Infant mortality rate in deaths per 1,000 live births (-) Non-federal physicians per 100,000 inhabitants (+) Technology Academic research and development funding per job, $ (+) NIH support to institutions in the state, $ per capita (+) Patents per 100,000 inhabitants (+) Science and engineering graduate students per 100,000 inhabitants, state level (+) Scientists and engineers as % of labor force, state level (+) Payroll of high tech companies as % of total payroll, state level (+) Finance & prices Deposits in commercial banks and savings institutions, $ per capita (+) Venture capital as % of gross metropolitan product (+) Consumer price index relative to national average of 100 (-) Openness Exports per capita, $ (+) Air passengers per capita (+) Domestic competition Environmental policy Net number of new firms created per 100,000 inhabitants (+) Cognetics index of entrepreneurial hot spots (+) Progressive Policy Institute index of initial public offerings (+) Electricity prices, state level, $/mbtu (-) Toxic release inventory, on- and off-site, lbs per capita (-) Pollution standards index (-) Serious pollution days per year (-) Note: + if positive effect on competitiveness, - if negative effect expected. ENDNOTES 1 Michael Porter, The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity, in World Economic Forum, The Global Competitiveness Report 2000, Oxford University Press, New York, By dividing across by the population, this equation may also be expressed in per capita terms; output per capita is a standard measure of affluence. 3 Michael E. Porter, The Competitive Advantage of Nations, Free Press, New York, Prices vary from state to state. We deflate personal income using the state-level price indexes developed by Herman Leonard and his colleagues at the Kennedy School of Government, Harvard University. 5 Higher values of the state competitive index are strongly correlated with lower poverty rates (R2=0.30); if the competitiveness index is one unit higher, the proportion of people in poverty is 1.8 percentage points Metro Area and State Competitiveness Report / Page 15

16 lower. Poverty data at the metropolitan area are harder to get, but a similar relationship is likely. 6 Robert Atkinson, Randolph Court and Joseph Ward, The State New Economy Index, Progressive Policy Institute, July 1999, p.3. 7 Patricia Flynn et al., Index of the Massachusetts Innovation Economy 2001, Massachusetts Technology Collaborative, Westborough, Massachusetts, November John Byars, Robert McCormick and Bruce Yandle, Economic Freedom in America s 50 States: A 1999 Analysis, Clemson University, March However, a regression of average annual growth in personal income against the index (and some additional variables) finds that the index does not have a statistically significant effect. 10 See William Beach and Gerald O Driscoll Jr., Methodology: Factors of the Index of Economic Freedom, in 2001 Index of Economic Freedom, Heritage Foundation, Washington DC, Robert Atkinson and Paul Gottlieb, The Metropolitan New Economy Index, Progressive Policy Institute and Center for Regional Economic Issues, April Metro Area and State Competitiveness Report / Page 16