HOW RHODE ISLAND'S INCOME OUTGREW THE NATION'S

The Providence Journal Business Viewpoint Page, October, 1996

Rhode Island, like the rest of the nation, finds itself trying to catch up to where it should be after more than four years of economic recovery. Apparently, we have already taken a major step in that direction, as Rhode Island’s per-capita personal income growth for 1995 led the nation. There is a statistical oddity in this number that might not be apparent to most people, though. Per-capita income growth is the difference between the rate of growth in total personal income and the rate of population change. Since Rhode Island’s population declined by 0.7 percent in 1995, the second term in the formula, minus the rate of population change, added 0.7 percent to our per-capita growth value.

How rapidly, then, did Rhode Island’s total personal income grow? Unlike previous years, where favorable per-capita income growth was accompanied by a below-average rate of growth in total personal income, Rhode Island’s 6.6 percent growth in total income for 1995 placed it comfortably above the national average of 6.2 percent for that statistic. Further examination of the 1995 personal income data reveals that the category "Dividends, Interest and Rent" rose by 10.1 percent in Rhode Island, well above the national average. Thus, much of our 1995 personal income gains occurred in the areas of transfer payments and dividends, interest and rent. As for labor earnings, Rhode Island equaled or exceeded the national averages for workplace earnings in the areas of Wholesale Trade (9.1% vs 7.8%), Government (4.7% vs 3.5%), Farming (17.1% vs -23%) and Non-Durable Goods (3.6% vs 3.6%).

But, behind every silver lining lies a gray cloud. Personal income growth the year before we attained our number one ranking was adversely affected by the slowest growth rate for transfer payments of any state (other than Michigan) that year, 1.3 percent. This resulted from the termination of Emergency Unemployment Compensation, which cost Rhode Island approximately $85 million, and revenue problems with Medicare. Adding multiplier effects to the over $100 million loss in transfer payments for 1994, it is not difficult to see why our growth rates for personal income (1.8 percent for total personal income and 2.1 percent for per-capita personal income) were so low. The restoration of more "typical" transfer payment growth in 1995 thus provided us with more positive momentum than would normally have been the case. Because of this, Rhode Island’s 1994 income growth figure should be viewed as underestimating our economic strength that year, while the value for 1995 should be considered an overstatement. A reasonable "guesstimate" of undistorted income growth over the 1994-1995 period can be obtained by averaging the rates for these two years. This results in a value of 4.2 percent for total personal income growth and 4.7 percent for per-capita personal income growth over this period. Calculated this way, our per-capita income growth was slightly above the national average while total personal income growth lagged the nation by 1.4 percentage points.

When I was asked by someone in the media to discuss this income statistic, the initial question posed to me was: "Is this bad?" Where else but Rhode Island would anyone even think to ask this question in response to such positive news? The preferable question is how good this news is. Rhode Island certainly has its economic problems. Whether we like it or not, things are about as good now as they are likely to be for a long time. Personally, I would rather see per-capita personal income rise then fall.

by Leonard Lardaro