Wednesday, August 26, 2009

Big State, Little State: Is North Dakota Really Great?

North Dakota is one of the four US states that I have not visited (along with Maine, Vermont and Alaska) but I'm sure it's lovely. However, this past week I've spent an inordinate amount of time reviewing the demographics and economics of the 39th State (and it is 39th no matter what they say in South Dakota). So what brought on my obsession with the Roughrider State?

Somebody recently sent me a story from the Triangle Business Journal (North Carolina) by G. Scott Thomas entitled "Small States Fare the Best in A Recession" that piqued my interest because it named North Dakota as one of America's most prosperous states, at least at the moment.

Quoting the story:

"High-profile states that led the charge to prosperity earlier in the decade are now among the biggest drags on economic progress. Nevada, Arizona, Florida, California and Georgia rank among the seven weakest states today, according to a new Bizjournals analysis.

"Small, underpublicized states, on the other hand, are faring remarkably well in these tough times. North Dakota, Louisiana, Oklahoma, South Dakota, Alaska and West Virginia are among the seven strongest states economically."

"The population gap between America’s strongest and weakest states is striking. Four of the 10 strongholds have fewer than a million residents, but each of the 10 weaklings has more than 2.7 million people."

As Homer Simpson would say, "DOH!" Talk about using statistics to draw the wrong conclusions!

Those small states look good in terms of unemployment because they have no net migration and are generally losing population. Nobody moves there and the young people mostly move away, so their unemployment is quite low. But that doesn't mean there's economic opportunity there, as the author implies.

For example, let's take a closer look at North Dakota. North Dakota is the 3rd least populated state in the USA with only 640,000 people. By comparison, the Asheville, North Carolina metro area has 408,000 people.

North Dakota's population has been more or less constant for almost 70 years. The population in 1940 was 640,000 and it's been at that level plus or minus 2% since then. Here's a population density map. The areas in green have a population density of less than one person per square mile.

It's sort of like if you took a survey of people in a prisoner-of-war camp. The people who came in fat might have lost 50% of their body weight and the skinny people might only have lost 5%. But it doesn't follow from that that the skinny people are "healthier." They were just thin to begin with. That's exactly the same situation with the small (population) states today. They never had many jobs to begin with so they haven't lost many jobs.

The author’s argument is akin to claiming that, during the economic collapse of the last year, the local panhandlers have lost less of their total net asset value than the local cardiologists so therefore they must be doing "better" and that we all might want to consider a career in panhandling. While the statistic itself is "true," (i.e., panhandlers have in fact lost less of their net worth proportionately than cardiologists) it's also irrelevant and misleading. More importantly, it totally misses the point of what's going on with the economy.

Here's a chart from Wiki showing the Gross State Product, by state. Note that North Carolina's economic output is greater than the bottom 10 states put together (West Virginia, New Hampshire, Idaho, Maine, Rhode Island, Alaska, Montana, South Dakota, Wyoming, North Dakota, Vermont).

List of U.S. States by GDP

The top 5 US states (California, Texas, New York, Florida and Illinois) produce 42% of total US economic output. In contrast, North Dakota produces 2/1000ths or 1/5th of 1% of total output.

What's really going on with these statistics is a perfect illustration of the Pareto Principle, the economic principle first noticed and elaborated upon by Italian economist Vilfredo Pareto, that when looking at large numbers of anything, they tend to clump into unequal but predictable distributions.

This is more commonly known as the 80/20 rule and is familiar to most business people. The idea as it is commonly understood in business is that 80% of your sales come from 20% of your clients. Or 80% of your sales come from 20% of your salespeople. It's not only true in economics but in other disciplines such as biology and seismology. It generally applies to any group of large numbers, whether you're talking about earthquakes, caribou populations or epidemics. The Pareto Principle is a "Power Law" that can be used as a rule of thumb in almost anything quantifiable in life. The Pareto distribution is also characterized by a "long tail," such as in the following graph.

There are of course a few caveats about Pareto Distributions, such as the fact that they are often more like 80/10 or 80/30(the numbers don't need to add up to 100 because they measure different things), that I think I'll leave for a separate post at a later time.

The real point that the author seems to miss is this: it's not that the small states are doing well. It's that the large states are doing really, really badly. If the only good news you can find in the economy is that a state that produces 2/1000ths of America's economic output is holding steady, you've missed the story.

So the bottom line is, who cares how things are going in North Dakota? The population is so small it’s statistically irrelevant. Hopefully, there aren't a stream of U-Hauls heading to North Dakota from Chapel Hill as a result of Mr. Thomas's article.

Here's a link to the original article:

Two books that deal with Pareto Distributions and their real life applications are Chris Anderson's "The Long Tail" and Nassim Taleb's "The Black Swan," both of which I highly recommend.

And no hate mail from Fargo please!

The dogs bark, but the caravan moves on...

Or so goes the old Arab proverb. I've been reminded of that saying a lot lately watching "the debate" over the President's birth certificate (although debate is elevating that conversation to a level it doesn't deserve) so I decided to give my blog that name as well.

Of course, it's also an homage to Truman Capote, whose 1973 book bore the same title. Before he succumbed to the bottle and all the rest of it, Capote was as fine a writer as could be found in America and an awesome social commentator, with an astounding ability to notice tiny details that revealed everything about topic he was writing about. "In Cold Blood" was one of the first grown-up books that I read and I still think it is one of the best pieces of American writing from the 60's. Moreover, Capote virtually single-handedly created the genre of literary journalism. I'll do my best to live up to that very high standard.

So what's this blog about? Politics. Economics. History. Foreign Policy. And general observations on American culture as well. I read a lot, particularly in history and I tend to see things in a longer term historical framework, so I'll be blogging about that.

I'm hoping to have an active conversation going on in the comments as well, but I would like to keep it civil, so please bear that in mind when commenting.