Minnesota’s below average economic growth is not because of ‘convergence’

On Monday, I wrote about how Minnesota’s economic growth has lagged that of the US generally, whether you look at a period starting in 2000 or 2010.

One response to this is that Minnesota’s below average GDP growth is the result of an already high level of GDP. The economic theory of convergence holds that, all else being equal, poorer economies’ per capita incomes will tend to grow at faster rates than those in richer economies; they will catch up, in other words.

The evidence once supported this theory. During much of the 20th century, poorer states and regions in America caught up with richer ones at a rate of about 2% per year, a figure sometimes called the “iron law of convergence.”In 1930, for example, workers in Mississippi earned just 20% of the wages of workers in New York. By 1980, the proportion had increased to 65%. In 1991, the economist Olivier Blanchard wrote, “The convergence of income across regions in the United States is a robust fact.” And, back then, it was.

More recent research casts doubt on this. While incomes across states converged at a rate of 1.8% per year from 1880 to 1980, there has been hardly any convergence at all since then. Specifically, as the economists Peter Ganong and Daniel W. Shoag write, “The convergence rate from 1990 to 2010 was less than half the historical norm, and in the period leading up to the Great Recession there was virtually no convergence at all.” Other recent research by economist Elisa Giannone finds that convergence has declined in cities too. Between 1940 and 1980, poor cities caught up with rich ones at a rate of 1.4% a year. Since then, they have lagged behind.

In other words, the “convergence,” which is supposed to explain Minnesota’s slow rate of economic growth relative to the US average, has not been happening over the period covered in our report. Our economic growth is lagging, and “convergence” does not explain it.