Assessing Arizona's Economy: Boom or Bust?

Posted on June 06, 2002 | Type: Policy Report
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Executive Summary

From 1990 to 2000 Arizona's population increased by 1.5 million residents, making it the second fastest-growing state in the nation. Of the state's 5 million inhabitants, 3.3 million, or 65 percent, came from another state or from outside the United States. Despite this overwhelming evidence that Arizona is a desirable place to live and work, the state's growth has generated a great deal of worry.

According to a 2001 study by the Morrison Institute, Arizona's economy is too dependent on low-tech businesses and does not attract enough workers with college and advanced degrees. Tom Rex, manager of research support at Arizona State University's Center for Business Research, asserts that governments in the state are not spending enough across the board. Other critics suggest that rapid population growth will destroy the quality of life in Arizona. To address these alleged problems, proponents of activist government have proposed various programs: money for business subsidies, money for schools and universities, money to create urban amenities, and more aggressive regulation of growth.

Advocates of a greater government role have proposed a grab bag of policies to deal with the state's real and imagined economic woes. The movement's drivers recommend "ambitious quality of life upgrades" that apparently include planting trees, providing universal early childhood programs, guaranteeing college financial aid, professionalizing the legislature, and-in general-more government spending. One big government supporter in the press offers "funding of universities with an emphasis on tech transfer and research, state seeding of venture capital to lure private investment, and building infrastructure." Of course, supporters of those policies often see tax increases as necessary to fund them. This sweeping and ambitious agenda for activist government has been cloaked in the mantle of economic development.

In order to assess the nature and impact of Arizona's growth and shed light on the policy proposals of growth critics, this report answers seven basic questions about Arizona's economic growth in the past decade:

  • How fast has Arizona's population grown?
  • How fast has Arizona's economy grown?
  • How does Arizona's economic growth compare to growth in other states?
  • What factors explain the difference between personal income in Arizona and in the average state?
  • Is Arizona suffering a "brain drought"?
  • Is Arizona's economy balanced?
  • Can government policy boost growth in Arizona?

In conclusion, this report finds:

  • Inflation-adjusted gross state product per person hit a trough in 1991 due to the recession. Since then, however, gross state product per person has grown at an average annual rate of 4 percent-initially faster than the nation as a whole, and afterward keeping pace.
  • Gross state product per employee has recovered to the levels it achieved before the recession of the early 1990s. Gross state product per person, however, has not-the reasons for this have yet to be determined.
  • Personal income per person in Arizona is 89 percent of that in the average state. The difference is largely due, in roughly equal parts, to the following factors: (1) Arizona's relatively unskilled labor force, (2) workers' willingness to sacrifice some pay to live in a warm climate, and (3) the relatively smaller accumulation of human and physical capital compared to that in other states.
  • Arizona exceeds the nation in the growth rate of residents with college and advanced degrees. The state also exceeds the nation in the growth rate of residents who have not finished high school. It has yet to be determined if this is due to our school system, our labor market, or our large immigrant population.
  • The construction industry's share of state output is larger in Arizona than in the nation as a whole; manufacturing's share is smaller. Still, Arizona's economy is not dramatically unbalanced compared to entire nation.
  • Arizona's economy varies by region, with personal income in the fastest- growing county expanding nearly three times as fast of that of the slowest- growing county. Some Arizona counties are highly dependent on certain sectors of the economy-often the government.
  • Finally, the only proven way for government to promote long-term, sustainable economic growth is to keep its tax and regulatory burdens at a modest level.

Read Assessing Arizona's Economy here.

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