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Income convergence: Massachusetts vs. the U.S. and the U.S. vs. the world

Massachusetts has historically been one of the richest U.S. states, at least in per capita personal income; it was indeed the richest state as of the second quarter of 2021. And the U.S. has been one of the richest countries in the world, at least in terms of per capita GDP. So, in this post, we use data from the Bureau of Economic Analysis and World Bank to show some relationships in per capita income and GDP.

The blue line plots the ratio of per capita personal income for the United States as a whole to that of Massachusetts. From the 1930s until 1980, the United States as a whole was catching up, or converging, to Massachusetts: from about 75% of the per capita income of Massachusetts to nearly 100%. Since 1980, that trend has reversed and U.S. per capita income has decreased relative to that of Massachusetts. As of 2020, the ratio is back to its 1930s level. Even though per capita income grew in the United States during the 1980-2020 period, it did so at a slower pace than in Massachusetts.

The lesson here is that states poorer than Massachusetts were tending to grow faster than Massachusetts until 1980, implying that the United States as a whole was growing faster. Since 1980, states poorer than Massachusetts have grown at a slower pace and are not converging to the richer states anymore.

The red line shows a similar relationship at the world level, plotting the ratio of real per capita GDP for the world as a whole to that of the United States. Interestingly, the pattern is similar: What appears to be true within the United States (i.e., the absence of convergence of poor states to rich ones) also appears to be true at the world level (i.e., the absence of convergence of poor countries to rich ones).

How this graph was created: Search for and select “Per Capita Personal Income in Massachusetts.” From the “Edit Graph” panel, use “Edit Line 1” to add a series, searching for “Personal Income Per Capita” and applying formula b/a*100. From the “Add Line” tab, search for and select “Constant GDP Per Capita for the United States” and apply the same process as above by adding “Constant GDP Per Capita for the World.” Finally, use the “Format” tab to ensure the second line uses the right axis.

Suggested by Guillaume Vandenbroucke.

Higher public debt, but a lower cost to service it

The federal government passed the CARES Act in March 2020 to provide support for individuals and businesses affected by the pandemic. The spending associated with it was financed through the issuance of Treasury securities. And, over the course of the second quarter of 2020, the total public debt grew by $3 trillion, or 14%.

Despite this large increase in the public debt, interest payments by the federal government actually declined from $375 billion in 2019 to $345 billion in 2020.

The FRED graph above plots total public debt and federal interest payments as percentages of GDP beginning in 1970. Despite the increase in the debt-to-GDP ratio since 1970, interest payments as a percentage of GDP have not increased in tandem. In fact, from the mid-1980s to mid-1990s, interest payments as a percentage of GDP were nearly twice current levels.

The reason for this discrepancy is simply that the cost of servicing the outstanding stock of Treasury securities has declined. The FRED graph below shows the 10-year constant maturity Treasury yield (in blue), plotted alongside the federal funds rate (in red) and year-over-year CPI inflation (in green). To combat inflation during the mid-1970s and early 1980s, the Federal Reserve increased the federal funds rate, which in turn increased the interest expense of the debt. In early 2020, the Federal Reserve lowered its target for the federal funds rate and purchased substantial quantities of Treasury securities, which had the effect of lowering the interest expense of the debt.

As the Federal Reserve curbs its purchases of Treasury securities and contemplates increases in its policy rate to combat inflationary pressures, the cost of servicing the national debt is likely to rise. The macroeconomic consequences of such a development are difficult to forecast, since they depend on a variety of factors. The political consequences, however, are likely to manifest themselves as heated debates over the need for fiscal austerity measures.

For detailed discussions of the national debt, see Does the National Debt Matter? and How Much Debt Is Too Much?

How these graphs were created: First graph: Search FRED for “federal debt” and select “Federal Debt: Total Public Debt as a Percent of Gross Domestic Product.” From the “Edit Graph” panel, use the “Add Line” tab to search for “federal outlays interest” and select the appropriate series. From the “Format” tab, select “Right” for the y-axis position for Line 2. Second graph: Search for “10 year constant maturity” and select the monthly version of the “Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity” series. From here, as with the first chart, use the “Add Line” tab to search for the remaining series.

Suggested by David Andolfatto and Joel Steinberg.

Taking the pulse of business applications

Census Bureau data track the regularities and irregularities in new businesses

We have a good idea about the number of new businesses being created because an essential part of that process is to apply for an EIN (Employer Identification Number) for tax purposes. The Census Bureau uses this information to publish weekly data on business applications. The FRED Blog used this data pre-pandemic to map new businesses by state.

The FRED graph above shows business applications over the past 15 years, and two aspects of the data are striking:

  1. The regularity of seasonal variations through each year is impressive. In fact, one could confuse the graph with a cardiogram of a steady heartbeat.
  2. Business formation becomes febrile after the pandemic-related recession. This erratic behavior is natural as an economy recovers, shedding weak businesses during the recession and regaining new ones in the recovery.

This second phenomenon may be stronger than usual this time around, as it appears that there’s some reorganization happening in the labor market. But the data are too recent to allow us to compare magnitudes across recessions at this point.

How this graph was created: Search FRED for “Business applications,” click on the link, and you’re in business.

Suggested by Christian Zimmermann.

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