Table of Contents

Introduction

The Population Pattern
Age Composition of the Population

The Employment Picture
Employment/Population Ratios
The Industrial Composition of Employment

Personal Income
Income Inequality

State Economies

Federal Taxation

Federal Spending
The Defense Dollars Deficit

Conclusion

State Profiles
Connecticut
Delaware
Illinois
Indiana
Iowa
Maine
Maryland
Massachusetts
Michigan
Minnesota
New Hampshire
New Jersey
New York
Ohio
Pennsylvania
Rhode Island
Vermont
Wisconsin

Figures
Figure 1. Population Growth by Rank and Percent: 1970-1997
Figure 2. Population and Employment by Region: 1975-1995
Figure 3. More of the State's Employment in Services than in Manufacturing
Figure 4. Changes in the Ratio of Earnings of the Top Tenth to the Bottom Tenth of Wage Earners: 1970-1980
Figure 5. Changes in the Ratio of Earnings of the Top Tenth to the Bottom Tenth of Wage Earners: 1980-1990
Figure 6. Percent Change in GSP by Population: 1977-1996
Figure 7. Percent of U.S. Federal Spending and Percent of U.S. Tax Burden for
18 Northeast-Midwest States: 1981 - 1997
Figure 8. Northeast-Midwest Shares of Defense and Non-Defense Spending: 1981-1997
Figure 9. Percent Change in State Shares of Defense Expenditures, 1981-1997

Tables (all in one pdf file)
Table 1. State Shares of U.S. Population 1970, 1980, 1990,and 1997
Table 2. Population by State 1970, 1980, 1990, and 1997 and Change Between Years
Table 3. Population by State for 0-18 Age Group: 1970, 1980, 1990, and 1997 Change between Selected Years
Table 4. Population by State for 65 and Older Age Group: 1970, 1980, 1990, and 1997 Change Between Selected Years
Table 5. Rate of Growth In Population Cohorts 1970-1997, by State in Rank Order
Table 6. State Shares of Total Nonfarm Employment, 1975-1995
Table 7. Employment/Population Ratios: 1975-1995
Table 8. Employment/Population Ratios, Using 18-65-Year-Old Population, for 1980 and 1997 By State in Rank Order
Table 9. Rate of Change in Total, Manufacturing, and Service Employment, 1975-1995
Table 10. Manufacturing and Service Shares of Total State Employment, 1975-1995
Table 11. State Shares of U.S. Total Personal Income: 1977-1996
Table 12. State Per-Capita Personal Income (PCPI) as a Percent of National PCPI: 1977-1996
Table 13. Per-Capita Personal Income by State in Rank Order: 1977 and 1996
Table 14. Change in Per-Capita Personal Income: 1977-1996
Table 15. Ratio of Wages, Top Tenth to Bottom Tenth (90-10 Ratio) Wage Earners, in Rank Order by State, 1970, 1980, and 1990
Table 16. Changes in Inequality: Percent Increases in Not-accounted-for Differential between Tenth and Bottom Tenth (90-10 Ratio) of Wage Earners, 1970-1990
Table 17. State Shares of Total Gross State Product: 1977-1996
Table 18. Rates of Change in Gross State Product, 1977-1996
Table 19. Growth in Gross State Product, 1977-1996, States in Rank Order
Table 20. State Shares of Federal Tax Burden, 1977, 1987, and 1997
Table 21. State Per-Capita Federal Tax Burden, 1977, 1987, and 1997
Table 22. State Per-Capita Federal Tax Burden as Percent of US Average, 1977 and 1997
Table 23. State Shares of Total Federal Spending: 1981-1997
Table 24. State Shares of Federal Expenditures for Defense: 1981-1997
Table 25. Percentage Change in State Shares of Defense Expenditures, 1981-1997

Introduction

The approach of the 25^th anniversary of the Northeast-Midwest Institute, not to mention of a new millennium, naturally suggests itself as an appropriate occasion for reviewing where the region has come from since the Institute's founding and where it now stands. In the mid-1970s, when members of Congress from New England, the Mid-Atlantic, and the Midwest decided to form bipartisan coalitions, their region was being less-than-affectionately referred to as the "Rust Belt." At the time, many commentators virtually wrote off northeastern and midwestern states and predicted declining economies and incomes. Having identified an initial rallying point for the region in the issue of falling employment, those Northeast-Midwest congressional founders sought to address an assortment of issues including plant downsizings and military base closings. The founders also drew attention to a sensitive spot in the federal policy landscape: its differential treatment of regions and the inequities this caused. For the research and legislative initiatives undertaken over the years by the Northeast-Midwest groups, those biases in federal taxing and spending practices showed themselves to be endemic, widespread, and intransigent.

This review of the demographic and economic trends of the past few decades paints a picture of a growing imbalance in the age distribution of population, with the Northeast-Midwest becoming older as well as smaller. Yet it also shows that in the Northeast-Midwest region, despite sluggish population numbers, residents have been able to continue growing the economy and maintain relatively high incomes, but at the price of working harder. In the past quarter century, the shift to a services economy has swept from the East Coast to the Great Lakes, leaving the coastal areas richer, the Midwest poorer, and people generally further apart from each other on the income scale than they were previously. Rising inequality is engendering higher federal tax burdens in the old northern centers of wealth even as federal spending policies continue to return less to these places. In the face of these changes and of unconducive federal actions, residents of the Northeast-Midwest are working harder to stay in place.

The pages that follow explore regional demographic, economic, and federal spending trends for approximately the past 25 years. They summarize the data presented later in the tables, which have as their source publicly available data drawn mainly from the U.S. Bureau of the Census, the Bureau of Labor Statistics, and the Bureau of Economic Affairs. Although less detailed than the Northeast-Midwest Institute's annual Flow of Federal Funds Report and our 18 state-specific reports on federal spending, this review places the problem of federal spending in a larger social and economic context and presents it as one among many factors that have changed the region irrevocably over these decades. Although some of the trends, such as increases in income inequality, have been discussed previously, this report provides the first state-by-state review of several phenomena. Among the report's highlights are the following points:

• The Northeast-Midwest region lost 29 seats in Congress from 1971 to 1991, or 14 percent of its representation. It is expected to lose another nine seats after the 2000 census, resulting in an historic reduction in political representation in the course of three decades.
• Proportionally, employment growth in the Northeast-Midwest far outperformed that in other regions. The Northeast-Midwest achieved a 31 percent increase in employment with a population growth rate of only 6 percent from 1975 to 1995. Put simply, a growing and disproportionately large share of the Northeast-Midwest's population is working.
• Although Northeast-Midwest states in 1970 had the lowest differentials between the earnings of the top and bottom tenths of wage earners, by the 1990s states with the greatest growth in income inequality tended to be located in the Midwest.
• The Northeast-Midwest region's share of the nation's personal income, while lower now than two decades ago, rose in relation to its population, yielding high per-capita incomes and higher federal tax burdens.
• Per-capita incomes in New England, the Mid-Atlantic, and the Midwest remained above the national average over this 25-year period, with rates in 1996 at 118.9 percent, 115.5 percent, and 100.3 percent respectively. Per-capita income in the West was 98.5 percent of the national average, while that in the South was only 90.3 percent.
• Growth rates of per-capita income between 1977 and 1996 exceeded the national rate in every New England and Mid-Atlantic state. In the Midwest, however, only Minnesota bested the national rate.
• Although the Northeast-Midwest's share of the nation's Gross State Product (GSP) fell to 43.2 percent by 1996, its growth in GSP outstripped its population growth.
• Despite healthy employment growth in the region, manufacturing employment actually fell 15 percent from 1975 to 1995. However, the real loss was not region-wide but came in New England and the Mid-Atlantic states; manufacturing continued to hang on in much of the Midwest except for Illinois and Ohio.
• Despite the image of retirees flocking to warm weather destinations, the elderly population of the Northeast-Midwest increased at a greater rate than the region's general population and exceeded the growth rate among over-65-year-olds in other parts of the country.
• Population trends reveal not so much a population shifting from the Northeast and Midwest to the South and West as a "hollowing out" of the vast middle of the country both North and South, with a counterbalance of exceptional growth occurring along the southeastern, southern, and western shorelines and borders.
• In 1970, the nation's population was fairly evenly divided among the regions, with the Northeast-Midwest having 49.4 percent of the total and the South and West having 50.6 percent. By 1997, the percentages were 40.7 and 59.3 respectively.
• The societies and economies of the South and West, once underdeveloped and dependent, are growing rapidly and soundly -- they no longer need to be subsidized by the Northeast-Midwest.
• The Northeast-Midwest share of defense spending, disproportionately low to begin with, deteriorated dramatically over the past two decades.

The Northeast-Midwest region as a whole enjoys a well-educated workforce, an entrepreneurial culture, world-class financial and research centers, and abundant natural resources. Yet, it also lacks traditional energy supplies and is burdened by a disproportionately large share of toxic contamination. After 25 years, northeastern and midwestern states, despite differences, continue to share attributes and challenges.

The Population Pattern

One clear political fact of the past quarter century has been decline of the Northeast-Midwest region in its relative share of the nation's population. From the congressional reapportionment following the 1970 census to that in 1991, the Northeast-Midwest region lost 29 seats in Congress, or 14 percent of its representation; it is expected to lose another nine seats after the 2000 census.

In 1970, the nation's population was fairly evenly divided among the regions, with the Northeast-Midwest having 49.4 percent of the national total and the South and West having 50.6 percent. By 1997, the percentages were 40.7 and 59.3 respectively. Two notable facts about this regional shift stand out: first, a large part of the Northeast-Midwest decline (2.2 percent) occurred in just one state -- New York, which was the only state (along with the District of Columbia) to suffer a decline in its absolute number of inhabitants over this period; and second, every state in the Midwest lost in terms of its relative share of population during this period.

While there is a tendency to think of the South as experiencing unbridled growth in recent decades, the state numbers show otherwise. Population growth in the South occurred largely in Florida and Texas and to a lesser extent in Georgia and the Carolinas. Many southern states shared the fate of their northern neighbors in suffering declining population share, including Alabama, Arkansas, Kentucky, Louisiana, Mississippi, and West Virginia. Further west, the heartland states of Nebraska, Kansas, Missouri, and the Dakotas also declined in population share. The picture that thus emerges is not so much one of population shifting from the Northeast-Midwest to the South and West as of the "hollowing out" of the vast middle of the country both North and South, with a counterbalance of exceptional growth occurring along the southeastern, southern, and western shorelines and borders. Of the 22 states with above-average growth from 1970 to 1997, only five did not have a coastline or border -- Nevada, Utah, Colorado, Wyoming, and Tennessee. (Both Idaho and Vermont also experienced above-average growth, and would be included in this list except for their Canadian borders.)

Recessions account for at least some of the pattern in population change. Drops in the absolute numbers of state inhabitants started in 1971 in New York, in 1972 in Pennsylvania, and in 1973 in Massachusetts and Rhode Island, coincident with economic recession. This pattern petered out in New England by the second half of the 1970s, but continued in the Mid-Atlantic area until 1980. New York's population stabilized during the 1980s, although Pennsylvania's went on to share in the recessionary and population trends that hit the Midwest starting around 1980. Between 1982 and 1983, every midwestern state except Minnesota suffered an absolute decline in population numbers. By 1984, this pattern had pretty much abated for all states except Illinois and Iowa. Population was again on a growth trend for all Midwest states by 1987.

A recession-induced decline in absolute population numbers began again around 1990 in New England. Although New England started back on a growth track by 1992, individual states, particularly Rhode Island, continued to have years in which population numbers dropped. By 1997, of the ten states with the slowest growing populations (not taking into account New York and the District of Columbia, which experienced negative growth), eight were in the Northeast-Midwest: Iowa (0.010 growth rate from 1970 to 1997), Pennsylvania (0.019), Rhode Island (0.040), Ohio (0.050), Illinois (0.071), Massachusetts (0.075), Connecticut (0.078), and Michigan (0.100). In comparison, the average rate of growth in population for the country as a whole was 0.316, and the rate for the fastest growing state -- Nevada -- was 2.431.

Age Composition of the Population

The population story for this quarter century was not confined merely to growth and decline in numbers, both relative and absolute, but also encompassed shifts in the composition of those numbers. The continued growth of the elderly population and the ups and downs of the under-18 population have policy implications that set the regions apart from one another.

The Over-65 Boom:

While the total population of the United States grew by 32 percent between 1970 and 1997, the over-65-year-old population grew by more than 70 percent. In 1970, the population of persons 65 years of age and older was distributed with 50.4 percent in the Northeast-Midwest and 49.6 percent in the South and West, almost the exact reverse of the percentages for the population at large (49.4 percent in the Northeast-Midwest, 50.6 percent in the South and West). By 1997, the percentage of over-65s residing in the Northeast-Midwest had dropped to 42.9 percent, compared with a figure of 40.7 percent for the population at large. The comparable numbers for the South and West were 57.1 percent of the over-65s and 59.3 percent of the total population. In short, despite the image of retirees flocking to warm weather destinations, the elderly population of the Northeast-Midwest increased at a greater rate than its general population, while in both the South and West the over-65 segments increased at lesser rates than their overall populations.

Growth rates for the over-65 population ranged from 23 percent in Iowa to 526 percent in Nevada. They exceeded growth rates for the overall population in every state, with the magnitude of the difference varying widely. For example, while the over-65 growth rate for the nation was 2.23 times larger than the rate for the population generally, the rate for Pennsylvania was 27.1 times larger. In only four Northeast-Midwest states did the growth rate for the over-65-year-old population fall below the national multiple of 2.23 -- in Maine (2.07), Minnesota (1.81), Vermont (1.62), and New Hampshire (1.38). Of the 15 states with the highest multiples of over-65 growth to general population growth, only four were outside the Northeast-Midwest region -- North Dakota, West Virginia, Hawaii, and Alaska. Interestingly, Florida had the sixth lowest multiple in the country (1.51).

The Baby Boom Echo:

The 18-year-old-and-under population tells a different story. In 1970, the Northeast-Midwest contained 49.0 percent of the 0-18 age group, as compared with 49.4 percent of the general population and 50.4 percent of the over-65s. The South and West accounted for 51 percent of the youth population, 50.6 percent of the general, and 49.6 percent of the over-65s. By 1997, the share of 18-and-unders for the Northeast-Midwest had dropped to 39.4 percent of the national total (compared to 40.9 percent of the general population and 42.8 percent of the over-65s). The South and West contained 60.6 percent of the youth population.

Between 1970 and 1997, the rate of growth in the 18-and-under population for the nation was actually negative at -0.004 percent. The 1970 figure, of course, would still include substantial numbers from the baby boom generation, the last of whom would have been only eight years old in 1970. Thus, the negative figure for the 1970-1997 period reflects the passage of the remaining members of this cohort over the 18-year-old threshold, as well as including the smaller youth cohorts that followed. The decline in the youth population was not evenly distributed around the country, however. From 1970 to 1980, every state in the Northeast-Midwest except New Hampshire had a negative rate of growth in its under-18 population, resulting in a minus-15.6 percent rate for the decade. The same pattern holds for the following decade, 1980-1990, where growth was minus-9 percent. In contrast, in the South as a whole the youth population grew 1.2 percent in the 1970s and 1.7 percent in the 1980s. The bulk of this growth, however, is attributable to three states -- Florida (most especially), Georgia, and Texas -- with most other southern states experiencing declining numbers in both decades. In the West, a slight decline of barely 1 percent in the 1970s was followed by a growth rate of 12 percent in the 1980s. As with the overall population numbers, however, the West's heartland states tended to suffer negative growth rates in both decades.

By the 1990s, growth in the youth population was the norm nationally. From 1990 to 1997, the 18-and-under population grew 8.3 percent nationally, compared with 7.6 percent growth for the population at large. Growth in New England and the Midwest lagged at 3.3 percent, while that for the Mid-Atlantic equaled 5.1 percent. The South's 9.5 percent and the West's 13.4 percent exceeded the national average. In all cases, except in the Midwest, the growth rates for the youth population exceed the rates in growth of the overall population of the regions. However, the regional numbers hide a considerable amount of variation. In half of the Northeast-Midwest states, the rate of growth in the youth population was less than that for the total population. The same was true for 11 of 15 southern states and 13 of 18 western states. Indeed, the overwhelming bulk of the growth in the youth population in this quarter century has been concentrated in Nevada, Arizona, Florida, Utah, Texas, and California. On the list of the 20 states that experienced any growth in their 18-and-under population from 1970 to 1997, the only state representing the Northeast-Midwest is New Hampshire, with a growth rate of 15.8 percent.

Clearly, then, growth in the youth population is far from being a national phenomenon, and, despite the regional aggregate numbers, it is not really a regional event either. Instead, it is a development closely tied to Hispanic immigration. States with growing youth populations also are the ones in which Hispanic immigration has been most pronounced. Among the 20 states with a positive youth growth rate in the period from 1970 to 1997, only Alaska, Georgia, New Hampshire, Hawaii, North Carolina, and Virginia have been largely unaffected by immigration.

The Employment Picture

In the two decades from 1975 to 1995, employment in the United States grew by over 50 percent, outstripping growth in the population at large by a margin of 30 percent. Looking back to 1975, the employment numbers for the Northeast-Midwest, on the one hand, and the South and West, on the other, were roughly equal, even though more people lived in the South and West than in the Northeast-Midwest (the South and West accounted for 53 percent of the national population total, the Northeast-Midwest for 47 percent). By 1995, however, there were more than 15 million more jobs in the South and West than in the Northeast-Midwest. The rate of growth in employment from 1975 to 1995 in the South and West stood at 73 percent; that for the Northeast-Midwest was 31 percent. And yet, the performance of the Northeast-Midwest economy is striking -- its 31 percent rate of growth was achieved with a population growth rate of only 6 percent during this period, while the comparable population growth rate for the South and West was 36 percent.

Looking at subregions, the numbers are similarly striking. Population in New England grew by 9 percent from 1975 to 1995, while employment grew by 35 percent; in the Mid-Atlantic, population was up by just 5 percent, employment by 24 percent; in the Midwest, population grew by 6 percent, employment by 37 percent. In certain states, the numbers are dramatic: Maine, with a 15 percent growth in population, experienced employment growth of 51 percent; Vermont's population was up 21 percent, its employment up 69 percent; New York, with less than 1 percent population growth, grew its employment by 16 percent; Pennsylvania, with just over 1 percent population growth, saw employment rise by 19 percent. Comparably dramatic numbers in the Midwest include: Indiana, 8 and 44 percent; Iowa, -1 and 37 percent; Ohio, 3 and 30 percent; and Wisconsin, 12 and 53 percent.

In comparison, population in the South grew by 33 percent and employment by 75 percent; in the West, population grew by 41 percent, employment by 70 percent. Thus, proportionally, employment growth in the Northeast-Midwest far outperformed that in other regions.

Figure 2. Population and Employment by Region: 1975-1995

Employment/Population Ratios

An increase in the proportion of the population working accounts, at least in part, for the growth of the national economy in the last quarter of the twentieth century. In 1980 the employment/population ratio for the nation (using the 18-to-65-year-old working age population as the denominator) was 0.682. By 1997, it was 0.765. The national numbers, however, obscure a great deal of variation among the states. In 1980, employment/population ratios ranged from a high (discounting the anomalous District of Columbia, where employment exceeds population) of 0.790 in Nevada to a low of 0.577 in Kentucky. In 1980, ten of the Northeast-Midwest states were above the national ratio, including those ranking second, third, and fourth -- Massachusetts at 0.777, Connecticut at 0.764, and Minnesota at 0.755. By 1997, 13 of the region's states exceeded the national ratio. Minnesota ranked second (again discounting DC) at 0.891, meaning that nine of every ten persons between 18 and 65 years of age were in the labor force.

Some states experienced quite dramatic rises in employment/population ratios in this period, including Nebraska (from 0.711 to 0.892), Wisconsin (from 0.723 to 0.866), Delaware (from 0.725 to 0.862), South Dakota (from 0.623 to 0.836), Indiana (from 0.672 to 0.806), and Ohio (from 0.688 to 0.804). Other states had different experiences: New York, which stood above the national ratio at 0.693 in 1980, was below the national norm at 0.735 in 1997. The ratio for California -- 0.682 -- was the same in 1997 as in 1980.

The employment/population ratio must be treated gingerly, because it is possible to read different interpretations into it. A high ratio may be seen as positive, signifying a booming economy in which vacant jobs lure extra people into the labor market. It also may be viewed in a negative light, hinting at wages declining relative to the cost of living, which pushes additional family members out of the home and into the factory or office. Sluggish ratios may suggest generally stagnant economies and disappointed jobseekers or they may suggest general satisfaction and stability. Probably many factors have been at work in propelling the employment/population ratio upward nationally, and both the economic pull of vacant jobs and the push of cost of living likely played roles within the same communities. Also, although high ratios generally are greeted as positive, the data for 1997 suggest that some states may be "maxed out" and will be able to maintain growth only if their population growth accelerates. This warning may well apply to some Northeast-Midwest states.

Throughout the 1975-1997 period, the aggregated data for the Northeast-Midwest region shows higher employment/population ratios than for the nation as a whole, but the state-by-state data seem to deny a regional pattern, with high-ratio states widely scattered geographically. By 1997, for example, both of the Dakotas, below the national average in 1980, had moved into the top ten; Utah and Nevada also continued to have high ratios.

The Industrial Composition of Employment

In addition to the fact of greater proportions of people working, another widely reported economic development of the past quarter-century has been the decline of manufacturing employment and the rise of service industries. While overall employment growth in the U.S. between 1975 and 1995 stood at 52 percent, the growth in manufacturing employment was just 2 percent, while that in services was 136 percent.

The magnitude of the change from manufacturing to services in the Northeast-Midwest is dramatic. Overall employment growth in the region from 1975 to 1995 was 31 percent, but manufacturing employment actually fell 15 percent. Thus, the bulk of the employment growth in the region as a whole is attributable to service industries. This story deserves further disaggregation, however, for the real loss in manufacturing was not region-wide but came in New England and the Mid-Atlantic regions, while manufacturing continued to hang on in much of the Midwest except for Illinois and Ohio.

It is instructive to examine this shift over time. In 1975, manufacturing accounted for 24 percent of employment nationwide, and 56 percent of it was located in the Northeast-Midwest. Service employment counted for 18 percent nationally, 50 percent of it in the region. New England had 28 percent of its employment in manufacturing, accounting of just over 7 percent of the national total. All states in New England were above the national average in the proportion of their economies devoted to manufacturing. At the same time, services took up 20 percent of New England's employment total, with all states in the region except Maine being above the national average in the proportion of their economies devoted to services. The Mid-Atlantic at this time had 24 percent of its employment in manufacturing, accounting for 21 percent of the national total, and 20 percent in services -- 22 percent of the national total. Manufacturing employment was big in Pennsylvania (over 30 percent of the state's jobs), while service employment had already edged out manufacturing in Maryland (20 percent) and New York (21 percent). The Midwest led the nation in manufacturing with 29 percent of its employment in this sector, accounting for 28 percent of the nation's manufacturing employment, and 17 percent in services -- 22 percent of the nation's total. In the Northeast-Midwest region as a whole, Indiana had the highest concentration of its economy in manufacturing (33 percent) and the lowest (14 percent) in services.

Despite the image of the Midwest as the industrial heartland, by 1975 two states in the South surpassed all Northeast-Midwest states in the proportion of their economies devoted to manufacturing -- North Carolina at 37 percent and South Carolina at 34 percent. Tennessee matched Pennsylvania in its concentration on manufacturing. The West, meanwhile, already had more of its economy in services (19 percent) than in manufacturing (18 percent); in 12 of the 18 western states, service employment made up a larger proportion of the state's economy than did manufacturing even as early as 1975.

By 1995, major changes had taken place. Manufacturing now accounted for a scant 16 percent of employment nationally, while services claimed 28 percent. Of manufacturing employment, 47 percent was located in the Northeast-Midwest (down from 56 percent), 32 percent in the South (up from 27 percent) and 21 percent in the West (up from 17 percent). The real drop in Northeast-Midwest manufacturing employment occurred in the Mid-Atlantic states, where it fell from 24 percent to 14 percent of states' employment, with Pennsylvania suffering a drop from 30 percent to 18 percent and Maryland, which never had a large manufacturing sector, now claiming only a scant 8 percent.

Figure 3. More of the State's Employment
in Services than in Manufacturing by:

In 1995, manufacturing accounted for 17 percent of employment in New England (down from 28 percent), versus services with 32 percent (up from 20 percent). The changeover to a services concentration in New England occurred in the early 1980s. By 1985, services dominated manufacturing in Massachusetts and by 1990 this held true for all New England states. In 1995, Massachusetts had the third highest rate of service employment in the nation, trailing only Nevada and the District of Columbia.

Even in 1975, service employment was important in the Mid-Atlantic region, which already accounted for a greater percentage of the nation's service employment (22 percent) than its manufacturing employment (21 percent). By 1985, the changeover to services had occurred for all Mid-Atlantic states except Delaware. By 1995, services accounted for 31 percent of Mid-Atlantic employment (up from 1975's 20 percent). In twenty years, both Maryland and Pennsylvania experienced huge jumps in the proportion of their economies devoted to services: Maryland from 20 to 32 percent and Pennsylvania from 18 to 31 percent.

In the Midwest, service employment did not eclipse manufacturing employment region-wide until the late 1980s. Even in 1990, Indiana, Michigan, and Wisconsin continued to have more of their states' employment in manufacturing than in services. By 1995, this was true only for Indiana. Regionwide, services accounted for 26 percent of employment in 1995 (up from 17 percent in 1975), while manufacturing accounted for 21 percent (down from 29 percent).

The South and West differ from the Northeast-Midwest and from each other in that the shift from manufacturing to service employment occurred considerably later in the South and noticeably earlier in the West. In 1975, 22 percent of the employment in the South was in manufacturing, which dropped to 16 percent by 1995. Only the West had a smaller share of its employment in manufacturing, beginning with 18 percent in 1975 and dropping to 13 percent in 1995. The relative decline in manufacturing as a proportion of state employment was thus less severe in the South and West in this twenty year period than it was in the Northeast-Midwest. At the same time, however, the growth in service employment was just as pronounced, moving from 16 percent of employment to 27 percent in the South and from 19 percent to 29 percent in the West. By 1995, the South had 32 percent of the nation's manufacturing employment and 31 percent of the nation's service employment; the comparable figures for the West are 21 percent and 25 percent.

In the South overall, service employment began to account for a larger share of employment by 1985, but much of the aggregate result for that year was due to service employment growth in Florida and Virginia. As late as 1995, four southern states -- Arkansas, Mississippi, North and South Carolina -- still had more manufacturing than service jobs. In the West, services already had a larger share of employment than manufacturing in 1975 for the region as a whole and for 12 of its 18 states. By 1980, manufacturing still predominated only in Kansas, Missouri, and Oregon and came in second to services by 1985 even in those states.

The growth of service-sector employment and the relative decline of manufacturing are encapsulated in the political debate about "good jobs" and "bad jobs." In simplest terms, manufacturing jobs are characterized as "good' because traditionally they have paid wages capable of supporting a three- or four-person family for work that does not demand much in the way of educational qualifications, and they have tended to carry fringe benefits such as health insurance and pensions. At least this has been the case in the more unionized states in the Northeast-Midwest. In contrast, the services sector is often represented in debate by its least appealing employment -- jobs such as fast-food worker and chambermaid -- where pay is low, benefits nonexistent, and turnover high. Just as this juxtaposition overstates the positive aspects of manufacturing employment, it ignores simple facts about the services sector: that it is an extremely large sector with a very wide range of jobs, from the least well-paid and least educationally demanding, to the most remunerative and most demanding occupations such as lawyers, doctors, brokers, and so on. This raises the essential question: what has the shift from manufacturing to service employment done to the national distribution of personal income?

Personal Income

Shifting demographics and changes in the industrial structure of regional economies produced changes in the wealth of the nation's regions as well. In 1977, the Northeast-Midwest, with 46.6 percent of the nation's population, accounted for 49.3 percent of its personal income; in 1996, the region's share of population had fallen to 40.9 percent and its share of income was 44.5 percent. In short, its share of income, while lower, had risen in relation to its population.

The subregions within the Northeast-Midwest fared somewhat differently during this period. In the two decades between 1977 and 1996, New England saw its population share decline while its share of income rose -- not only in relation to its population share but in relation to the nation at large. In 1977, New England accounted for 5.6 percent of the nation's population and 5.8 percent of personal income. By 1996, the population figure had dropped to 5 percent, while the personal income figure had risen to 6 percent, which was actually its lowest figure since 1982. In the Mid-Atlantic also, income improved relative to population numbers. The Mid-Atlantic states, with a 1977 figure of 19 percent of population, had 20.6 percent of the nation's personal income. By 1996, those figures stood at 16.6 percent and 19.1 percent respectively, in both cases the lowest numbers in the whole two decades. In the Midwest, however, the relationship between population decline and income has been more linear. The Midwest, with 22 percent of the nation's population in 1977, had 22.9 percent of its personal income; by 1996, population share had dropped to 19.3 percent, personal income to 19.4 percent. Thus, contrary to happenings in New England and the Mid-Atlantic, not only did the Midwest's share of income fall, but it fell more precipitously than population. Meanwhile, in the South, the region's share of personal income had risen from 26.6 percent to 29.7 percent (in comparison with population shares of 30.5 percent and 32.9 percent); in the West, however, the share of personal income rose from 24 percent to only 25.8 percent on population shares of 22.9 percent and 26.2 percent, indicating, as in the Midwest, actual income declines.

These relationships can be seen by examining the trends in per-capita income for this period. The per-capita numbers also make it possible to examine more easily the within-region variations among states. In 1977, with national per-capita income at $7,334, New England, the Mid-Atlantic, the Midwest, and the West all had, on a regional basis, per-capita incomes above the national average. Specifically, New England stood at 103.9 percent of the average, the Mid-Atlantic at 108.2 percent, the Midwest at 104.4 percent, and the West at 105 percent. While all Mid-Atlantic states enjoyed per-capita incomes above the national figure, only Connecticut and Massachusetts did so in New England. In the Midwest, Indiana, Iowa, and Wisconsin were below the national average; in the West, only eight of 18 states were above the average, including Alaska (157 percent), which, by the magnitude of its variation, pulled up the per-capita number for the whole region. Meanwhile, per-capita income for the South stood at 87.2 percent of the national figure, with only the District of Columbia above the national average, and Florida, Texas, and Virginia hovering around 95 percent.

By 1996, per-capita income for the nation stood at $24,436. Again, New England, the Mid-Atlantic, and the Midwest were above the national average at 118.9 percent, 115.5 percent, and 100.3 percent respectively. Per-capita income in the West had fallen to 98.5 percent of the national average, while that in the South had risen to 90.3 percent. Again, all Mid-Atlantic states, led by New Jersey at 128 percent, were above the national average. Within New England, only Maine and Vermont continued below par. In the Midwest, Ohio had joined Indiana, Iowa, and Wisconsin below the national norm. In the West, now only 6 states were above the national average and Alaska had fallen to 100.2 percent, pulling down the figure for the region. In the South, Texas had slipped (91.4 percent) and Virginia had surged ahead (103.3 percent); of the remaining southern states, only Kentucky, Louisiana, Oklahoma, and West Virginia had lost ground.

Looked at another way, national per-capita income grew by 233 percent between 1977 and 1996. Growth rates in every New England and Mid-Atlantic state exceeded this percentage. In fact, Connecticut (293 percent), Massachusetts (288 percent), and New Hampshire (285 percent) held the first three places in a rank ordering of states on rate of change in per-capita income from 1977 to 1996 (followed by North Carolina and Georgia). In the Midwest only Minnesota, at 246 percent, bested the national rate. In the South, only five states grew at less than the national rate -- the four mentioned above, plus Texas. In the West, however, only Colorado (243 percent) and South Dakota (238 percent) increased their per-capita incomes at better than the national average rate.

Three cautions are necessary regarding the examination of income changes. First, comparisons such as the ones above can be distorted by the selection of start and end points. In assessing developments in the national economy over time, for example, economists always are careful to make comparisons from peak to peak or from trough to trough of business cycles. The selection of 1977 and 1996 for the foregoing comparisons adheres to this rule. However, when numbers are broken down below the national level, it is possible that the comparisons in individual states may violate it. Thus, for example, the income effects of the oil boom of the 1970s and bust of the 1990s are very obvious in the Texas and Alaska numbers, which compare peak to trough and which distort to some degree the regional picture as well. Second, the use of per-capita data can create the misleading impression that all people in a particular state are experiencing rising or falling income. Indeed, per-capita data disguises what is emerging as a particularly difficult issue in the services economy -- growing disparity of incomes. Thus, some states that have seen their per-capita income rise considerably in the past two decades may actually be experiencing large income jumps for the few combined with income declines for the many. Therefore, while rising per-capita income would seem to be a cause for cheers, it may not be an accurate measure of economic and social health. Third, the data show nothing about the rise in prices, which would put rising income in perspective. Some states at the top of the list in rate of change in per-capita income also are states with relatively high costs of living. Keeping cost of living in mind when examining these data adds a necessary corrective. For example, all regions of the country experienced the greatest growth in per-capita income in the period from 1977 to 1981; each subsequent five-year period has seen a lesser rise in income than the preceding one. This fact testifies to the relatively high inflation in the second half of the 1970s and to its gradual reduction over time, reinforcing the necessity of considering income rises in relation to costs.

Because of the problem of starting and ending points, it is useful to examine the trends in per-capita income during the intervening years of the 1977-1996 decades. As with employment, trends in income were not on a steady track during this period but were subject to rises and falls in the economy. In New England, per-capita income rose fairly steadily until 1989, when recession hit the Northeast. New England's numbers fell through 1993, but started to rise again in 1994. However, even by 1996, the region had not regained its high point in per-capita income, which occurred in 1988 at 122.2 percent of the national average. The course in the Mid-Atlantic was more even, although income dipped slightly in the years from 1993 to 1996. The Mid-Atlantic's high point in per-capita income came in 1992 at 116.5 percent of the national rate. While the Mid-Atlantic began and ended the two decades with all of its states above the national average in per-capita income, Pennsylvania actually experienced a decade -- from 1978 to 1988 -- when its figures were slightly below the national number. For the Midwest, a decline below the national per-capita rate began in 1981. The region did not surpass the national average again until 1994 and ended the two decades a full four points lower than where it began.

In the South, per-capita rose from 1977 to 1983, fell until 1988, and then began to rise again. Its high point came in 1994 at 90.6 percent of the national average. In the West, income rose until 1981, when it began a downward slide, interrupted only by a brief, small rise in 1990. Per-capita income dipped below the national average for the first time in 1993 and has remained there. During the two decades, California's per-capita income dropped from 4^th to 14^th place in the nation and the state experienced the smallest growth in income of any of the large industrial states.

Income Inequality

Consideration of what has been happening to per-capita income can mask important questions about the distribution of income among persons, as noted above. The image of the manufacturing sector as composed of "good" jobs and of the services sector as composed of the extremes of "good" and "bad" jobs is mirrored in recent research on the rise of income inequality in the United States. Economists of all manner of political persuasions have reached a consensus that income inequality has grown in the past twenty years, although they disagree on causes. Possible explanations include technological change that puts a premium on skills, increasing international trade, more immigration, the decline of unions, and the lag in the minimum wage. While not agreeing on causes, researchers also disagree on remedies, and indeed, on whether any public policies are needed or wanted. Some economists, for example, decry the growth in income inequality as evidence of the emergence of a two-tiered society in which a permanent underclass will be cut off from the mainstream of society and the polity; only government intervention to boost wages in the lower tier will head off this eventuality, they claim. Others see in inequality positive proof of the returns to education and a forceful argument for greater investments (whether personal or government-led) in education and skill development.

Data show that nationally, from 1970 to 1980, wage earners in the bottom half of the wage distribution lost ground relative to those in the top half. This pattern intensified in the 1980s: earners in the bottom two-thirds of the distribution lost ground as wages rose sharply for those above them. But, new work that looks at income inequality on a state-by-state basis adds an important regional angle to this discussion with the finding that, over the past two decades, variations in inequality among states were much greater than changes in inequality nationally and that inequality has been growing in the Northeast-Midwest region. ⁽¹⁾

In 1970, states with the lowest differentials between the top 10 percent of wage earners and the bottom tenth (the 90-10 ratio) were clustered in the Northeast-Midwest. New Hampshire had the lowest ratio in the nation, with the top tenth earning only 3.819 times the bottom tenth. In contrast, the multiple for Louisiana was 6.488. Among the 18 states with the lowest differentials, only Oregon, Washington, North Carolina, and West Virginia were not part of the Northeast-Midwest. The only state in the region with a fairly high differential was Vermont at 5.155, which ranked 15^th. By 1990, Vermont had the lowest differential in the nation, but in the intervening 20 years, seven states from outside the region were included in the lowest 18. Although many Northeast-Midwest states continued to have low differentials between the top and bottom tenths of wage earners, changes had occurred. States with the greatest growth in inequality tended to be located in the Midwest, whereas states with low rises or decreases in inequality were clustered in the Southeast.

Maps of the rise in inequality bear close correspondence to the time line of the changeover from manufacturing to services as the dominant source of employment among the states. The states with the largest increases in inequality in the 1980s -- New York, Illinois, Pennsylvania, Michigan, Ohio, and Minnesota -- were all large industrialized states that suffered disproportionately from the recession of the early 1980s and lost large numbers of manufacturing jobs. The six states that saw the least rise in inequality -- Delaware, Mississippi, Alabama, Maryland, Virginia, and Georgia -- added jobs in durable goods manufacturing during that decade. The rise of the service economy also suggests a possible explanation for the phenomenon of continued above-average per-capita income in much of the Northeast-Midwest even as the poverty numbers for the region have been increasing.

Figure 4. Changes in the Ratio of Earnings of the Top
Tenth to the Bottom Tenth of Wage Earners: 1970-1980

Figure 5. Changes in the Ratio of Earnings of the Top
Tenth to the Bottom Tenth of Wage Earners: 1980-1990

Tables adapted from Andrew B. Bernard and J. Bradford Jensen, "Understanding Increasing and Decreasing Wage Inequality," Working Paper 6571, National Bureau of Economic Research, May 1998.

Of the ten states with the greatest increases in inequality in the period from 1970 to 1990, only two -- Oregon (ranked first) and Wyoming (ranked second) -- were not located in the Northeast-Midwest. The other top eight were Michigan (where the differential between the top tenth and the bottom tenth not-accounted-for by education and experience was up 22 percent), New York (21 percent), Pennsylvania (20 percent), Indiana (19 percent), Illinois (19 percent), Ohio (18 percent), Wisconsin (17 percent), and Minnesota (16 percent). Six states in the region fell below the national average of an approximately 11 percent increase in the not-accounted-for differential: Iowa (6 percent), Maryland (4 percent), Rhode Island (3 percent), New Hampshire (3 percent), Vermont (2 percent), and Delaware (less than 1 percent). Of the ten lowest ranking states (i.e., those where inequality was decreasing), only 3 were not in the South -- North Dakota, Hawaii, and Delaware.

State Economies

In the two decades from 1977 to 1996, Gross State Product (GSP) in the United States rose from nearly $2 trillion to $7.5 trillion. At the start of this period, the Northeast-Midwest accounted for 47.8 percent of this worth, the South for 27.7 percent, and the West for 24.5 percent. Both the Northeast-Midwest and the West accounted for greater shares of GSP than of population. By 1996, the share of GSP for the Northeast-Midwest had fallen to 43.2 percent, while shares for both the South and the West rose -- to 30.3 percent and 26.4 percent respectively. GSP share for the South still trailed its share of population by approximately 3 percent, while the West's share of GSP actually declined relative to its population growth. In the Northeast-Midwest, however, GSP growth outstripped population growth, a phenomenon in line with the high and fast-growing employment/population ratios that pertained in the region during these decades.

At the beginning of the period, New England accounted for 5.3 percent of GSP (5.6 percent population). It ended the period with 5.8 percent of GSP (5 percent of population). In the six-state region, only Rhode Island failed to experience dramatic growth in its economy (with Maine undergoing growth at the national average rate). In the Mid-Atlantic, GSP share went from 19.5 percent of the nation (19 percent of population) to 18.3 percent (16.6 percent of population). While Delaware, Maryland, and New Jersey enjoyed growing economies, New York especially and also Pennsylvania suffered decline, with New York's share of national GSP going from 8.9 percent to 8.1 percent, and Pennsylvania's moving from 5.1 percent to 4.3 percent. In the Midwest, the share of GSP fell almost 4 percentage points from 23 percent in 1977 to 19.1 percent in 1996 (compared with a smaller drop in population share from 22 percent to 19.3 percent). Only Minnesota had a larger share of GSP at the end of the two decades than at their beginning (not so for its population). The decline in shares of GSP was most dramatic in Iowa, Michigan, Ohio, and Illinois, which ranked 49^th, 45^th, 42^nd, and 41^st among the 50 states in growth in GSP from 1977 to 1996.

However, another way of looking at these numbers -- comparing the rate of GSP growth with the rate of population growth -- yields a very different picture. Overall, in the years from 1977 to 1996, the rate of growth in GSP nationwide was approximately 14 times the rate of growth in population. Of the states with the highest multiples of GSP growth to population growth, eight of the top ten were in the Northeast-Midwest, including: Pennsylvania -- 186 (meaning that the rate of growth in GSP was 186 times the rate of growth in population); New York -- 138; Iowa -- 84; Rhode Island -- 63; Ohio -- 58; Illinois -- 55; Connecticut -- 55; and Massachusetts -- 53. All Northeast-Midwest states, with only one exception, exceeded the national multiple of 14 -- New Hampshire, at 13, where the multiple is small only because both population growth and GSP growth were high over the course of the two decades.

Figure 6. Percent Change in GSP by Population: 1977-1996

Although the South as a whole experienced growth in GSP during these decades, not all southern states shared in the good fortune. West Virginia had the lowest rate of growth among the 50 states, and Oklahoma, Louisiana, Kentucky, Mississippi, Alabama, and Arkansas all grew at less than the national rate. The same story of spotty growth occurred in the West with seven of the 18 states growing at less than the national rate -- Montana, North Dakota, Wyoming, Alaska, Kansas, Nebraska, and Missouri. As with population, then, growth in GSP also follows to some extent the pattern of the "hollowing out" of the central part of the country.

The timing of growth in GSP is instructive. In the decade from 1977-86, the only region of the country where the rate of growth was below the national average was the Midwest; in the subsequent decade, all parts of the Northeast-Midwest had rates of growth below the national average. Growth in New England, which was generally around 10 percent annually, took a dive between 1988 and 1989 and fell further until 1993-94 when it stabilized around 6 percent. New Hampshire experienced a drop in Gross State Product in 1989-90 and Vermont in 1990-91. A slowing of growth rates also began in the Mid-Atlantic between 1988 and 1989, ushering in a new lower plateau in the 1990s. New York's growth rate almost went negative in 1990-91. In the Midwest, there was a large slowdown in the growth rate between 1979 and 1980, during which period Michigan's GSP actually dropped from one year to the next. After an improvement from 1980 to 1981, the year 1981-82 saw three midwestern states with negative numbers -- Michigan, Indiana, and Iowa.

Relative stability, at a lower growth rate, began in the Midwest in 1982-83 and has continued to the present. In the South, positive growth numbers were interrupted by slippage in 1985-86, a year in which Louisiana, Texas, and Oklahoma all saw declining GSP, corresponding with declines in the oil industry. In the West, the course of growth declined sharply in the period 1981-82, with four states -- Idaho, North Dakota, Oregon, and Wyoming -- experiencing reduced GSP that year. The year 1984-85 saw negative numbers in Montana and North Dakota (again). As in other oil-producing states, change in Alaska was sharply negative in 1985-86. Over the course of the two decades, Wyoming actually experienced decline in Gross State Product in five different years.

In ranking the 50 states in growth in Gross State Product over the course of these two decades, only two Northeast-Midwest states appear in the top 10 -- New Hampshire and Delaware -- whereas four appear in the bottom 10 -- Iowa, Michigan, Ohio, and Illinois. The only midwestern state with a growth rate above the national average was Minnesota.

Federal Taxation

Increases in income over the last two decades have resulted in higher revenues for the federal treasury, and the differing income experiences of the regions during this period are reflected in the differences in their federal tax burdens. In 1977, federal taxes averaged $1,582 per person; by 1997 that figure had jumped to $5,791, an almost three-fold increase in twenty years' time. One near-constant in the period, however, was the above-average federal tax burden in the Northeast-Midwest region. In 1977, with 46.6 percent of the nation's population, the Northeast-Midwest was responsible for 50 percent of the federal government's tax revenue; by 1997, the region's share of population had declined to 40.7 percent of the national total, but its share of federal taxes stood just above 45 percent. The pattern of federal tax burden parallels the region's increasing income during these decades and also underscores the region's growing disparity between rich and poor, with income growth concentrated disproportionately at the top end of the distribution, where tax rates are higher.

In 1977, New England, with 5.57 percent of the nation's population, shouldered 5.85 percent of the nation's tax burden. In comparison, New England's share of the nation's personal income amounted to 5.78 percent. The greatest disparity in tax burden to personal income existed in Connecticut with 1.65 percent of income and 1.80 percent of tax burden, indicating a relatively large proportion of high -- and highly taxed -- incomes. For New England as a whole, per-capita tax burden exceeded 105 percent of the national average, but this situation was true in only two states -- Massachusetts at 103.4 percent and Connecticut at 128.3 percent, with the latter responsible for skewing the six-state total upwards. By 1997, the colors on the New England canvas had intensified: with 5 percent of the nation's population, the region generated 6.3 percent of federal taxes, on personal income of just under 6 percent of the nation's total. Per-capita tax burden had risen to 126.3 percent of the national average, with all states except Maine (81 percent) and Vermont (89 percent) above the national number. Per-capita tax burden in Massachusetts (129.3 percent) and Connecticut (157 percent) indicate a strengthening of the pattern of growing incomes in the upper-income population.

In the Mid-Atlantic, federal taxes in 1977 amounted to 20.6 percent of the nation's total, approximately the same as the region's share of personal income. Its population at the time represented 19 percent of the national total. The region as a whole experienced a tax burden equal to 108.4 percent of the nation's per-capita average, with New Jersey significantly above the average at 121 percent. Pennsylvania was the only state among the five to rank below the national average and then only slightly at 99 percent. By 1997, tax revenues in the Mid-Atlantic had fallen to 19.2 percent of the nation's total, with personal income maintaining the same relationship to taxation as it had in 1977 and population having declined to 16.5 percent of the nation's total. Most of the proportionate drop in share of tax revenue occurred in New York and Pennsylvania. As share dropped, however, per-capita tax burden generally rose -- it registered 116.7 percent of the national average in 1997, with all states in the region above the average. As New York and Pennsylvania saw their shares of tax burden and personal income drop, their per-capita tax burdens were higher than in 1977.

For the Midwest, federal taxes amounted to 23.5 percent of the national total in 1977, while income represented 23 percent of the total and population 22 percent. Per-capita tax burden for the region overall stood at 106.7 percent of the national average, with Illinois being particularly high at 120.3 percent of the national norm. Three states -- Indiana (98.6 percent), Minnesota (99.2 percent), and Wisconsin (96.4 percent) fell slightly below the national average. By 1997, the Midwest's share of the nation's tax burden had fallen to 19.7 percent, while its share of income stood at 19.4 percent and its population at 19.2 percent. At the end of the period, per-capita tax burden for the Midwest as a whole stood at 102.3 percent of the national average, with four states below the average. All states in the region, with the exception of Minnesota, saw their per-capita tax burden fall from 1977 to 1997. Minnesota's rise from 99.2 percent to 106.9 percent of the national average put it second to Illinois in per-capita tax burden in the Midwest.

The effects of the 1980s' recession on the relative wealth of the Midwest is clearly reflected in the tax burden figures. The time of lowest per-capita tax burden in the Midwest was not at the start or end of the twenty-year period, but in its middle. In 1987, per-capita tax burden for the Midwest as a whole stood at 98.8 percent of the national average. Every state except Minnesota experienced a lower per-capita tax burden in 1987 than in either 1977 or 1997.

Turning to other regions, the South, with 30.5 percent of the nation's population in 1977, shouldered 25.8 percent of the tax burden while enjoying 26.6 percent of personal income. The West's share of tax burden in 1977 was 24.2 percent, while its income share was 24 percent and its population share 22.9 percent. The picture was quite different in 1997. Tax burden on the 33 percent of the nation's population living in the South had jumped to 29 percent on close to 30 percent of the nation's personal income. The West's share of tax burden had risen modestly to 25.8 percent, although its population share was up to 26.3 percent and its share of national personal income had risen to close to 26 percent.

Overall, both the South and the West seem to have experienced a slight narrowing of income disparity between rich and poor, although the individual state numbers tell quite varying and different stories. Per-capita tax burden in the South rose from 84.7 percent of the national average to 88 percent. Tax burden rose appreciably in Florida (from 96.6 percent to 102 percent, although its share of personal income rose more steeply, from 3.8 percent to 5.4 percent of the national total) and Virginia (from 96.7 percent to 102.4 percent), but it fell in Texas (from 98.9 percent to 90 percent) and Louisiana (from 83 percent to 75.2 percent). In the West, tax burden began the period at 105.7 percent of the national average but fell to 97.9 percent by 1997. Large shifts, engendered by both income and population changes, took place in Alaska (from 181.5 percent to 105.1 percent), California (from 114.6 percent to 102.9 percent), and Hawaii (from 107.7 percent to 92.1 percent), among other states. In fact, all western states except Colorado and South Dakota has lower rates of per-capita tax burden vis-a-vis the national average in 1997 than in 1977.

Looking at a rank ordering of the states on their tax burden compared to the national average, all but two states in 1997's top ten were located in the Northeast-Midwest, the exceptions being Nevada and Washington. Massachusetts had jumped from 15^th place in 1977 to 3^rd in 1997; New Hampshire from 28^th to 7^th; Minnesota from 20^th to 11^th; Rhode Island from 29^th to 19^th . The lowest ranking Northeast-Midwest state in 1997 was Maine at 37^th, up from 45^th in 1977. Among states that changed in the opposite direction, standouts include Wyoming from 6^th to 24^th, California from 7^th to 15^th, Hawaii from 13^th to 27^th, Oklahoma from 34^th to 48^th, and West Virginia from 38^th to 49^th.

Figure 7. Percent of U.S. Federal Spending and Percent of
U.S. Tax Burden for 18 Northeast-Midwest States: 1981 - 1997

Federal Spending

The Northeast-Midwest region began the 1980s as the recipient of 41.1 percent of federal spending, substantially below the region's 44.8 percent of national population and its 47.3 percent of federal taxation. Of the three subregions, New England did the best in the race for federal funds, garnering 6.3 percent of the total on its 5.9 percent share of federal taxation. Connecticut at 1.85 percent of federal spending and Massachusetts at 2.9 percent accounted for the superior performance, although 1981 would be one of Connecticut's last years of generous federal spending. In that same year, the Mid-Atlantic states received 18 percent of federal expenditures, slightly below their population share but considerably less than their 19.8 percent share of federal tax burden. New Jersey and Pennsylvania both experienced federal spending below their population shares: New Jersey receiving 2.8 percent of spending for its 3.2 percent of population, Pennsylvania receiving 4.8 percent for it 5.2 percent population share. The 1981 figures demonstrate the pattern, consistent in the whole period under review here, in which Maryland's large federal spending numbers, fueled by federal salaries and wages, made the regional totals look better than they actually were in the experience of the individual states.

As in the Mid-Atlantic, the 1981 federal spending numbers for the Midwest also adumbrated the pattern for succeeding years. The Midwest received 16.7 percent of federal expenditures, while its population share topped 21 percent and its share of federal taxation stood at 21.5 percent of the national total. In 1981, no state in the Midwest enjoyed a share of federal spending anywhere near its population share. Likewise, every midwestern state contributed a higher percent of federal taxes than it received back in federal spending.

In 1981, the South received a fairly equitable 32.3 recent of federal spending for its 31.4 percent of population, who had, however, paid only 27.8 percent of the nation's taxes. It was the West that appeared to be the real winner in the federal spending sweepstakes with 26.6 percent of spending for its 23.8 percent of population and 24.9 percent of taxation. As in the case of the Mid-Atlantic, however, the general picture for the region was deceptive, with a large part of the "regional" advantage attributable to one state -- California -- which received 12.3 percent of funding for its 10.6 percent of population and 12 percent of tax burden.

By 1987, the Northeast-Midwest share of federal spending stood at 41.3 percent of the national total, compared to its 47.3 percent of federal tax burden and 43 percent of population. New England accounted for 6.4 percent of federal spending but paid 6.8 percent of federal taxes. Rhode Island essentially broke even, and Massachusetts did slightly better. Only Maine among the New England states had a really favorable ratio of spending to taxation, with 0.51 percent of federal spending and 0.42 percent of taxation. Connecticut fared particularly poorly, with taxes running at over 2 percent of the national take, while federal returns to the state amounted to just over 1.7 percent.

The Mid-Atlantic accounted for nearly 21 percent of federal taxes, but received back only 18.2 percent of spending. The situation would have been even worse were it not for Maryland's positive return caused by the large number of federal offices and employees located close to Washington but within Maryland's borders. In contrast, New Jersey and New York both had large mismatches between the amounts paid into the federal government and the amounts received back. New York contributed 8.8 percent of federal taxes, but received only 7.5 percent of federal spending. New Jersey fared even worse, with 4.6 percent of the nation's tax burden and only 2.9 percent of federal aid.

Of the three subregions within the Northeast-Midwest, the Midwest continued to have the poorest experience with federal spending. After paying nearly 20 percent of the nation's taxes in 1987, the Midwest received back only 16.7 percent of federal spending, a situation due in large part to the low levels of federal procurement among these states. Only Iowa had a positive balance of payments with the federal government, at 0.98 percent of tax burden and 1.1 percent of spending. Among Midwest states, Illinois had the greatest imbalance in 1987, with 5.3 percent of tax burden and 3.8 percent of spending.

In the South, federal spending far outstripped federal taxation, 31 percent to 27.6 percent. The West also had a positive balance with 27.8 percent of spending on 25.1 percent of tax burden. In neither region did all states share in the federal government's largesse, although in both they came close. In the South, only North Carolina and Texas paid more in federal taxes than they received back -- North Carolina paying 2.2 percent and receiving 2.1 percent, Texas paying 6.2 percent and receiving 5.9 percent. In the West, California, Oregon, and Nevada were the only states to have an unfavorable balance with the federal government: California paying 13 percent and receiving 12.5 percent, Oregon paying 0.97 percent and receiving 0.94 percent, and Nevada paying 0.46 percent and receiving 0.43 percent.

A perspective that takes into account the return on federal tax dollar gives a more complete picture of the imbalance in federal spending than do the per-capita spending numbers. For example, in 1987 Massachusetts ranked 7^th in the nation in per-capita federal spending with $4,299, while Connecticut ranked 8^th with $4,188. However, Massachusetts had a positive return on tax dollar while Connecticut had a negative balance. Still, given the overall negative balance for the Midwest, it is instructive to note that four Midwest states -- Michigan, Wisconsin, Indiana, and Illinois -- ranked 50^th, 49^th, 47^th, and 46^th in per-capita federal spending respectively. With the national average per-capita spending in 1987 at $3,321, Michigan received only $2,541 per capita.

Figure 8. Northeast-Midwest Shares of
Defense and Non-Defense Spending: 1981-1997
(in percent of U.S. total)

In 1997, the pattern of Northeast-Midwest subsidization of the rest of the country continued. Federal spending in the region amounted to 39.6 percent of the total, while tax burden stood at 45.2 percent and population at 40.7 percent. In New England, spending dropped to 5.5 percent of the total, while tax burden was 6.3 percent. Massachusetts and New Hampshire joined Connecticut in having a negative balance of spending to taxation. The situation was particularly bad for the latter state where 1.9 percent of the nation's tax burden drew a return of only 1.3 percent of its spending. At $5,463 per person, the state still had per-capita federal spending above the national average of $5,123, but it had dropped from 8^th place to 18^th in the ranking of states on per-capita federal expenditures.

The Mid-Atlantic region's share of federal spending dropped to 17.7 percent, while its share of tax burden declined to 19.2 percent of the total. As was the case a decade earlier, Maryland continued to have a positive return on its federal taxes, with spending at 2.9 percent of the national total while taxation stood at 2.2 percent. Again, federal payroll made the difference for the state. By 1997, Pennsylvania also had a positive return, with spending at 4.8 percent and taxes at 4.6 percent of the national total.

The experience of the Midwest in its relation with federal spending continued to be negative, as its share of federal funding declined from 16.7 percent to 16.3 percent while tax burden dropped only slightly from 19.8 percent to 19.7 percent of the total. In 1997, Iowa again was the only Midwest state to have a positive balance of payments in its relation with the federal government. Even more than in 1987, Midwest states dominated the lower ranks of the states on measures of federal expenditures. Of the ten bottom states ranked on federal per-capita spending, six were in the Midwest. Only Iowa, which ranked 34^th, escaped this distinction.

For the South, the decade from 1987 to 1997 made a good situation even better. The region's share of federal spending increased from 31 percent to 34 percent of the total, while its share of tax burden went from 27.6 percent to 29 percent. At the same time, the South's population increased only a small amount from 32.2 percent to 33 percent of the nation. All states in the South, with the exception of Texas, had a positive balance of federal spending over taxation in 1997. In the West, federal spending declined from 27.8 percent to 26.4 percent of the total while tax burden increased slightly to 25.8 percent. The number of states with negative balances of spending to taxes increased to six, with Colorado, Nebraska, and Washington joining California, Nevada, and Oregon. California's tax burden amounted to 12.4 percent of the national total while its share of federal spending stood at 11.7 percent.

The Defense Dollars Deficit

Much of the story of the Northeast-Midwest region's fiscal relationship with the federal government is encapsulated in the data on defense spending. In general, in the years from 1981 to 1997, federal funding to the region for non-defense purposes ran slightly above the region's share of the nation's population: it began the period at 46 percent of the national total of non-defense expenditures in 1981 and diminished proportionally over the course of these years in keeping with the region's overall decreasing share of population to 42.1 percent of spending in 1997. In sharp contrast, the region's share of defense expenditures has been far below its share of population and declining. In 1981, the region received only 31.4 percent of defense spending, compared with its 44.8 percent share of population. By 1997, however, the region's share of defense dollars was reduced to 25 percent of the total.

Figure 9. Percent Change in State Shares
of Defense Expenditures, 1981-1997

New England started the two-decade period with 8.5 percent of defense expenditures, led by large federal investments in Massachusetts (3.6 percent of the total) and Connecticut (3.4 percent). By 1997, the 6-state region captured just over 6 percent of national defense expenditures. During this period, defense spending in Connecticut was cut by more than half, while Massachusetts suffered a 20 percent reduction. The Mid-Atlantic states began the period with 13.5 percent of defense expenditures and ended with 11.1 percent. All Mid-Atlantic states with the exception of Maryland saw reduced shares of national defense expenditures, with New York's share, like Connecticut's, cut by more than half.

The Midwest, however, has been the Defense Department's orphan when it comes to spending money. With 21.2 percent of the nation's population in 1981, the Midwest received only 9.4 percent of defense spending. By 1997, its situation had worsened to the point where it received only 7.9 percent (for 19.2 percent of the nation's population). In 1981, no state in the Midwest even approached its population share in its share of defense money, and the same was true in 1997. In addition, every state in the Midwest with the exception of Iowa saw its share of defense expenditures reduced over the two decades, with the largest cutback -- 42.6 percent -- coming in Michigan.

In contrast, the South began the 1980s with 34.6 percent of defense spending, greater than its 31.4 percent of population, and increased its share to 42.4 percent by 1997, at which time its population share stood at 33 percent. Of the ten states with the largest percentage increases in share of defense spending from 1981 to 1997, seven were in the South. All Southern states except Louisiana, Mississippi, and Texas increased their share of defense spending during this period.

In the West, meanwhile, the share of defense expenditures in 1981 stood at 34 percent of the total, very well above the region's 23.8 percent of the nation's population. Though the West's population share had increased to 26.3 percent by 1997, its share of defense money had declined to 32.6 percent. However, 12 of the 18 western states saw their shares of defense money increase, with Nevada leading the nation with a close to 70 percent jump in defense spending during this period. California experienced at 12.3 percent reduction during the same time frame.

In short, the Northeast-Midwest region began and ended the 1981-1997 period with defense spending numbers that were far from equitable. Over the course of this period, the region's share of national defense expenditures actually deteriorated further. Of the ten states that suffered the greatest percentage losses in defense money during these years, only two -- Louisiana and Kansas -- were outside the Northeast-Midwest. New York and Connecticut tied for the greatest percentage reductions at -53.4 percent each. In the defense-poor Midwest, Michigan (-42.6 percent), Minnesota (-20.7 percent), and Indiana (-20.6 percent) also placed in the bottom ten in terms of percentage reductions.

The defense spending numbers make it clear that the Midwest, in particular, is not going to overcome its poor return on federal tax dollar very soon simply because a substantial part of defense spending is dictated by sunk investments in installations that were sited in their present positions many decades ago and cannot easily be changed. That reality, however, spurs further thoughts about the nature of defense dollars in general and their benefits to the states. The already-made investments in physical plant in turn drive the location of Department of Defense wage and salary spending, which makes up a large portion of the agency's budget. This money, going to servicemen and women, obviously is not in the same league, from a state's perspective, as grant-in-aid funds that states can use directly for the benefit of their citizens. In a sense, then, a dollar of spending on defense wages may not be worth as much to a state as a dollar in highway funds, for example, or a dollar of defense procurement. Still, Defense Department wage and salary spending does have indirect and multiplier effects that benefit the states and localities in which facilities are located. In the past two decades, the South clearly has been the main beneficiary of these advantages.

Conclusion

Demography may not be destiny, as evidenced by the experience of many states in making sizable gains in personal income and Gross State Product even as their populations grew only sluggishly. However, these gains have come with suggestions that, in the absence of population growth, there are prices to pay, such as intensified work and increased inequality. Some states with particularly high employment/population ratios may not be able to sustain their growth unless their population numbers accelerate as well. States with increasing inequality may find further growth in this pattern very costly in the long run.

It is clear that the service economy is yesterday's wave of the future already arrived, but how to capture the jobs at the crest rather than those at the trough is one challenge states will continue to face in the years ahead. Some states in New England and the Mid-Atlantic already have a couple of decades' experience with that test. Despite the continuation of a manufacturing base in the Midwest, states there will be facing the service economy's challenge too. While policymakers devote attention to how to sustain and improve American manufacturing, they also should consider how to embed its "good job" aspects into the larger and increasingly powerful service sector.

It is remarkable that the Northeast-Midwest region has done as well as it has in the past decades given the inequity in federal taxing and spending policies. One wonders how much longer the region can be expected to subsidize the remainder of the country. The numbers make it obvious, however, that the inequity problem, while regional, is most pronounced in the Midwest. Given the expected continuation of the pattern of declining population shares in the region, the inequity problem cannot be solved through numbers-based allocation formulas The key to its solution lies in increased federal procurement -- both defense and non-defense -- in midwestern states. That will be one new task for the next century.

1. Andrew B. Bernard and J. Bradford Jensen, "Understanding Increasing and Decreasing Wage Inequality," Working Paper 6571, National Bureau of Economic Research, May 1998.

Connecticut

Over the past quarter-century, Connecticut's share of the nation's population fell, largely because of a dramatic decline in the number of children and youth in the state; its employment/population ratio rose as more people entered the workforce; its economy shifted from manufacturing to services; and its per-capita income experienced the highest rate of growth of any state.

Between 1970 and 1997, Connecticut, like most Northeast-Midwest states, saw its share of the nation's population decline. Beginning with 1.49 percent of the national total, by 1997 Connecticut accounted for only 1.22 percent. In the 1970s and 1980s, the state's population grew, albeit at slower rates than the country as a whole. From 1990 to 1997, however, Connecticut's population actually declined in absolute numbers as well as in share, putting the Nutmeg State in the company of Rhode Island and the District of Columbia as the only places to experience absolute decline in population in the 1990s. Between 1970 and 1997, Connecticut's numbers of children and youth aged 0-to-18 years-of-age dropped by 22.6 percent, compared to a national decline of 0.4 percent, earning the state a ranking of 42^nd among the states in growth of the youth population. At the other end of the age spectrum, the state's over-65-year-old population grew at close to the national rate throughout the 1970s and 1980s, slowing somewhat in the 1990s to give the state an overall growth rate in this population of 63.3 percent between 1970 and 1997, shy of the national rate of 70.6 percent, and a ranking of 25^th among the states.

Accompanying the decline in population share has been a less precipitous decline in employment share. Employment in Connecticut amounted to 1.59 percent of the national total in 1975 and 1.33 percent in 1995. The state's share was bucked up by an increase in the employment/population ratio, which jumped from 40 percent in 1975 to 47.5 percent in 1995, signifying a larger proportion of the population in the workforce. Interestingly, however, Connecticut's employment/population ratio surpassed the national ratio by a wider margin in 1975 than it did in 1995. Using only working age population in the calculation of the ratio, Connecticut dropped from 4^th-ranked to 14^th-ranked among the states between 1980 and 1997, despite a rise in the ratio.

During this period also, the industrial base of employment in Connecticut shifted dramatically. From 1975 to 1995, the number of people employed in manufacturing declined by 28 percent, while service employment more than doubled. The changeover from manufacturing to services as the dominant employment sector was completed by 1990. Even so, in 1995 the state still had a larger percentage of its workforce employed in manufacturing, 17.87 percent, than was the case nationally.

Despite population lag and industrial change, total personal income in Connecticut remained high throughout the period. In 1977, the state accounted for 1.65 percent of personal income nationally; by 1996, this share had increased to 1.71 percent. Per-capita personal income in the state was well above the national average throughout these two decades, moving up from 117.7 percent of the national figure in 1977 to 138.9 percent in 1996 and from 3^rd- to 2^nd-ranked. In rate of growth in per-capita income over this period, Connecticut ranked 1^st among the states. Whether because of, or in spite of, this growth, Connecticut ranked quite low (43^rd among the states) in both 1970 and 1990 on the differential between its top tenth and bottom tenth of wage earners, indicating that the state had less inequality than many other states, although this distinction diminished somewhat over the period, with the state ranking 12^th among states in growth in inequality from 1970 to 1990.

Accompanying its income growth, Connecticut's share of Gross State Product also increased from 1.50 percent of the national total in 1977 to 1.64 percent in 1996. With a growth rate of 322 percent for the period, Connecticut was well ahead of the national rate of 286 percent and ranked 14^th among the states. Also paralleling its income growth, the state's share of the nation's federal tax burden rose from 1.80 percent in 1977 to 1.92 percent in 1997. Its per-capita tax burden increased from 128.3 percent of the national average to 157 percent by 1997, ranking it 1^st among the states.

In contrast to the state's rising share of tax burden, its share of federal expenditures declined from 1.85 percent in 1981 to 1.3 percent in 1997. Much of the drop can be attributed to the state's loss of defense dollars, shares of which dropped from 3.36 percent to 1.57 percent. This represents the second largest percentage decline in defense spending among the states, exceeded only by New York.

Delaware

Over the past quarter-century, Delaware's population rose both in absolute numbers and as a share of the national total; its share of jobs rose and more of its population was in the workforce than was the case nationally; its industrial base shifted from manufacturing to services; and rates of growth in both per-capita income and Gross State Product exceeded national rates.

Delaware was one of the very few Northeast-Midwest states to see its share of the nation's population rise from 1970, when it accounted for 0.270 percent, to 1997, when it scored 0.273 percent. Despite a dip in the middle part of this interval, the state's population growth generally exceeded that of the nation, with a rate of 33.5 percent for the whole period of 1970 to 1997, compared to a national rate of 31.6 percent. As with most states, the growth in the state's population aged 0-to-18 years-of-age was negative between 1970 and 1997, with a decline of nearly 10 percent in the numbers, earning the state a ranking of 29^th among the states on this measure. During the same period, the number of persons aged 65-and-over more than doubled, exceeding the growth rate in this population nationally. With its ocean beaches beckoning to retirees, Delaware ranked 10^th in the nation in growth of its over-65 population.

Delaware's share of the nation's jobs also rose during this period, from 0.295 percent in 1975 to 0.313 percent of the total in 1995. As elsewhere, an increasing employment/population ratio accompanied the expanding employment as more people entered the workforce. Delaware's ratio rose from 38.6 percent in 1975 to 55 percent in 1995, substantially above the national ratio of 47.1 percent. Among 18-to-65-year-olds, Delaware had the 7^th highest employment/population ratio among the states in 1997.

The period from 1975 to 1995 witnessed a substantial change in Delaware's industrial base. While manufacturing employment declined by 8 percent, the service sector nearly tripled, with its growth surpassing the national average. By 1990, the services sector had overtaken the manufacturing sector as a source of jobs. By 1995, the percentages of workers employed in the two sectors had nearly reversed from what they had been in 1975.

Delaware's share of the nation's personal income declined from 1977 to 1986, but increased in the following ten years to achieve a share of 0.31 percent of the nation's income by 1996. The state's per-capita income was consistently above the national average throughout these decades, ending in 1996 at a high point of 113.67 percent of the national figure. From ranking 13^th among the states in per-capita personal income in 1977, Delaware rose to 6^th place in 1996. It ranked 12^th among the states in its rate of growth in per-capita personal income over the 20 year period. Comparing 1970 and 1990, the differential in Delaware between the top ten percent of wage earners and the bottom ten percent narrowed, with the state dropping from 21^st to 35^th place among the states, indicating that income gains were more fairly spread across the board than in some other states.

Somewhat paralleling the state's experience with shares of personal income, Delaware's share of Gross State Product also began this period on a downward track, but revived by the mid-1980s and ended in 1996 at 0.374 percent of the national total. Delaware's growth rate of 374 percent in Gross State Product well exceeded the national rate of 286 percent, earning it a ranking of 7^th among the states. The state's share of federal tax burden stayed constant at 0.3 percent, with per-capita tax burden running at approximately 110 percent of the national average for the whole period. In both 1977 and 1997, Delaware ranked 9^th among the states in per-capita tax burden.

With regard to federal spending, the years 1981 and 1997 were both among Delaware's better years, accounting for 0.266 percent and 0.252 percent shares of federal expenditures. Between these two points, the state experienced many years with lower shares, with the nadir in 1987 at 0.226 percent. Its share of defense expenditures has been low since 1981-1982, representing 0.21 percent of the national total in 1997, for a 26 percent decline from 1981.

Illinois

In the past quarter-century, Illinois' population grew only slowly; it share of the nation's jobs and of its personal income declined; its share of Gross State Product shrank; and income inequality among wage earners increased. By the end of the period, Illinois had less of its employment in manufacturing and more in services than any other Midwest state.

In the past three decades, Illinois experienced a marked decline in its share of the nation's population, dropping over a full percent from 5.47 percent in 1970 to 4.45 percent in 1997. During this period, the state's population grew by only 7 percent, compared to national growth of nearly 32 percent. The hard years for Illinois came in the 1980s, with essentially no increase in population between 1980 and 1990; the 1990s saw a return to modest growth, at a rate just over 4 percent. The state's population 0-to-18 years-of-age declined by 16.5 percent over the 1970-1997 period, compared to a 0.4 percent drop nationally. Among people aged 65-and-over, population grew by 36 percent, again far below the national rate of 70.6 percent. Illinois ranked 44^th among the states in growth of the over-65 population between 1970 and 1997; it actually enjoyed a higher ranking, 37^th, in rate of growth in its youth numbers.

Along with the decline in population share came a decline, although not so precipitous, in employment share. In 1975, Illinois accounted for 5.76 percent of the nation's employment; by 1995, that share had dropped to 4.78 percent. Except for the employment slump in the early-to-mid-1980s, the state's employment/population ratio rose, from approximately 40 percent in 1975 to 49 percent in 1995 as more people entered the workforce. This increase, however, was less than that in other states, causing Illinois's ranking on employment/population ratios for prime age workers to fall from 7^th place among the states to 15^th.

Like many other states, Illinois experienced substantial changes in its employment base in the 1975-1995 decades. Manufacturing employment in the state declined by 21 percent, compared to a national rise of 2 percent; services employment, while growing, increased at less than the national rate. Still, by the end of this period, Illinois had less of its employment in manufacturing and more of its employment in services than any other Midwest state.

The rocky road of Illinois' population and employment trends is reflected in the numbers on personal income. The state's share of total personal income fell consistently from 5.91 percent of the national total in 1977 to 4.91 percent in 1996. However, despite the declining share, the state's per-capita personal income was above the national average throughout these decades -- declining in the 1980s from its high of 114 percent in 1977, but inching back up to approximately 110 percent in 1996. Illinois ranked 33^rd among the states in rate of change in per-capita personal income from 1977 to 1996, with a rate of 221 percent, slightly behind the national rate of 233 percent. One effect of these changes has been increasing income inequality between the top ten percent of wage earners and the bottom ten percent. In 1970, Illinois ranked 35^th among the states on this differential; by 1990, it ranked 15^th. In fact, Illinois ranked 7^th among the states in growth in inequality over these decades.

In two decades, the overall economy of Illinois shrank in relation to the national economy. In 1977, Illinois accounted for 5.87 percent of the nation's total of Gross State Product. By 1996, the state's share had dropped to 4.89 percent. At a growth rate of 211 percent, Illinois' performance was well behind the national growth rate of 286 percent, giving the state a ranking of 41^st among the states on this measure.

As a result of these income trends, Illinois' share of federal tax burden declined from 6.23 percent of the national total in 1977 to 5.2 percent in 1997. On a per-capita basis, however, the state still paid well above the national average -- in 1977, per-capita tax burden in Illinois stood at 120.3 percent of the national figure and in 1997 it stood at 117 percent, maintaining the state's rank of 5^th among the states in per-capita federal tax burden. Meanwhile, federal spending in Illinois remained well below the state's share of either population or taxes. Throughout the years from 1981 to 1997, Illinois' share of federal expenditures hovered around 3.8 or 3.9 percent of the total. Its share of federal defense expenditures was even less, going from its highest point of 1.76 percent in 1981 to another among its higher points -- 1.65 percent -- in 1997. Shares of defense expenditures fell by 6.5 percent.

Indiana

Over the past quarter-century, Indiana's share of the nation's population and its employment declined; its share of the nation's personal income fell; its per-capita income, below the national average to start, declined even further. However, the state hit its low point in the 1980s; in the 1990s, conditions have been improving. Employment in the service sector has been growing faster than in any other Midwest state, and Indiana still has more of its workforce in manufacturing than its neighbors.

Like all other Midwest states, Indiana experienced a substantial decline in its share of the nation's population between 1970 and 1997. In 1970, Indiana accounted for 2.56 percent of the nation's people; by 1997, the share had fallen to 2.19 percent. Between those two years, the state's population grew at a rate of 12.9 percent, well behind the national rate of 31.6 percent. Among persons 0-to-18 years-of-age, the number of Hoosiers dropped by 18.5 percent, compared with a nationwide decline of 0.4 percent. At the other end of the age spectrum, Indiana experienced an almost 50 percent increase in the number of persons aged 65-and-over, still behind the national increase of 70.6 percent. Indiana ranked 36^th among the states in growth of the older population and 40^th in growth of 18-and-unders.

On the employment front, the story is rather different. Indiana's peak share of the nation's employment came at the beginning of the period, with a 2.51 percent share in 1975; the state's shares for 1980 and 1985 showed consistent slippage, but by 1990 a turnaround had occurred. In 1995, Indiana's share of jobs was 2.38 percent of the national total, above its population share. The explanation lies in a greatly increased employment/population ratio, which moved from 36 percent in 1975 to 50.3 percent in 1995 as more people entered the workforce. By 1997, Indiana ranked 18^th among the states in its employment/population ratio for 18-to-65 year-olds, above the national rate and up from 24^th place in 1980, when it was below the national average.

During this period, the industrial base of employment in Indiana changed. While employment grew by 44 percent from 1975 to 1995, manufacturing employment grew by only 6 percent, whereas employment in service industries bounded up by 134 percent, the largest rise in the Midwest. By 1995, Indiana still had a larger share of its employment in manufacturing than in services -- and the largest share in manufacturing of any Northeast-Midwest state. But, instead of a better than 2-to-1 ratio, manufacturing's edge was now less than 2 percent.

Changes in population and employment brought changes in personal fortunes as well. Indiana's share of the nation's personal income dropped from 2.39 percent in 1977 to 2.04 percent in 1996, with even worse years from 1986 to 1992. Per-capita income was consistently below the national average, starting with 96.9 percent of the national figure in 1977 and ending with 92.6 percent in 1996, with numbers in the 1980s all lower than this last figure. The state's per-capita personal income rose at a rate of 219 percent over the twenty years, below the national rate of 233 percent, earned it a ranking of 38^th among the states on this measure. Changing fortunes in the area of personal income also brought an increase in the differential between the top ten percent of wage earners in the state and the bottom tenth. In 1970, Indiana ranked 37^th among states on this differential; by 1990, it ranked 23^rd. It also ranked 6^th among the states on growth of inequality between these two years.

Accompanying these changes in the economy has been a reduction in Indiana's share of the nation's total of Gross State Product. In 1977, the state's share amounted to 2.41 percent of the total; by 1996, it was 2.06 percent. Again, however, the latter figure represents an improvement over the state's experience in the 1980s. Over the entire period, Indiana's economy grew at a rate of 229 percent, below the national rate of 286 percent, giving it a ranking of 38^th among the states.

As would be expected from the trends in personal income, Indiana's share of the nation's tax burden fell from 2.44 percent in 1977 to 2.01 percent in 1997. In per-capita terms, its burden has been considerably below the national average, ranging from 98.64 percent of the national figure in 1977 to 91.89 percent in 1997, with lower figures in the 1980s. In 1997, it ranked 29^th among the states in federal tax burden. On the spending side of the equation, Indiana's share has increased from 1.795 percent of the total in 1981 to 1.832 percent in 1997. Its even smaller share of defense expenditures declined by nearly 21 percent -- a drop more substantial than that experienced by 40 other states.

Iowa

Over the past quarter-century, Iowa ranked next to the bottom among the states in the rate of growth of its population and the growth of its Gross State Product. Its share of the nation's employment and of its personal income declined. The last couple of years may be the beginning of a turnaround for Iowa, however, as several indices of success have started to rise again.

Iowa, even more than other Midwest states, experienced a substantial decline in its share of the nation's population between 1970 and 1997. In 1970, the state's share stood at 1.39 percent; by 1997, it was only slightly over 1 percent, with the heaviest impact coming in the decade between 1980 and 1990 when the state's population numbers declined by almost 5 percent. Over the 27-year span, Iowa's population grew by only 1 percent, compared to a national rate of growth of 31.6 percent. Among persons 0-to-18 years-of-age, the absolute numbers declined by 25.5 percent, while the national numbers were down by 0.4 percent. The population 65 years-of-age-and-older grew by almost 23 percent, although nationally it increased by almost 71 percent. In overall comparison with other states, Iowa ranked 49^th in rate of growth in its total population, 47^th in growth of its youth population, and 50^th in growth of elderly persons.

Along with its decline in population share, Iowa also experienced a decline in its share of the nation's nonfarm employment, from 1.29 percent in 1975 to 1.16 percent in 1995. The latter year actually represents somewhat of a comeback for the state, from its low point of 1.10 percent in 1985. Growth in employment paralleled an increase in the employment/population ratio, which moved from 34.5 percent in 1975 to almost 49 percent in 1995, slightly above the national rate of 47 percent, as more people entered the workforce. On the labor force participation rate among persons of prime working age, Iowa moved from 28^th among the states in 1980 to 8^th in 1997, with 85 percent of its population in the labor force.

During these decades, the economy of Iowa changed, but the changes were less profound than those experienced in other Northeast-Midwest states. Manufacturing employment, which declined almost universally in the region, actually grew in Iowa by 9 percent between 1975 and 1995. Service employment in the state doubled, but this increase was smaller than that in any other state in the region except New York, which had a much larger service sector than Iowa to begin with. Iowa, which began the period with a smaller percentage of its workforce in manufacturing than the national average, ended with a larger percent than nationally.

As with population, Iowa's share of the nation's personal income fell fairly consistently over the period, from a 1.3 percent share in 1977 to 1 percent in 1996. Per-capita income in the state was below the national average every year except 1978, falling from 97.8 percent of the national average in 1977 to 91.4 percent in 1996, its highest point since 1984. Iowa ranked 43^rd among the states in its rate of increase in per-capita personal income from 1977 to 1996, the lowest rank of any Northeast-Midwest state. The slow increase in personal income, however, appears to have helped narrow the differential between the top tenth and bottom tenth of wage earners in the state. Iowa ranked 22^nd among the states on this measure in 1970, but 40^th in 1990. It also ranked fairly low -- 28^th -- on the rate of increase in inequality between these two years.

As with personal income, Iowa's share of the total Gross State Product declined from a 1.34 percent share in 1977 to a 1.01 percent share in 1996. Save for 1994, the 1996 share was the largest in a decade. Over the entire period, Iowa's Gross State Product grew by 1.89 percent, well behind the national rate of 286 percent. In fact, Iowa ranked 49^th among the states on this measure. The state's share of federal tax burden also fell from 1.33 percent in 1977 to 0.92 percent in 1997, with the per-capita rate dipping substantially below the national average. Iowa dropped from 19^th to 35^th among the state on this indicator between 1977 and 1997.

In contrast to its experience with tax burden, the state's share of federal spending rose considerably over the past two decades, from a low of 0.87 percent in 1981 to 0.99 in 1997, which was actually one of the lowest rates in the period. The state's share of defense spending, always quite low, was erratic from one year to the next, but it ended at 0.355, its third highest point in the period.

Maine

Over the past quarter-century, Maine has seen its fortunes rise and fall. In general, high points in growth of population, employment, and income occurred for the state in the late 1980s; the 1990s have witnessed a slowing trend. However, the state has seemingly escaped one of the emerging issues of the late 1990s -- growing wage inequality. Maine's wage differentials have been and remain among the nation's lowest.

In recent decades, Maine has followed its own distinctive course. Its share of the national population, always quite small, grew in the late 1970s and 1980s, but then declined in the buoyant 1990s. In 1970, Maine contained 0.49 percent of the nation's people; by 1997, its share had declined to 0.46 percent. Between these start- and end-points of comparison, Maine's population grew by 25 percent, one of the stronger growth rates in the Northeast-Midwest. Among the population aged 0-to-18 years-of-age, the state experienced declines in absolute numbers throughout the period, for an overall drop of 13.4 percent. At the other end of the continuum, its population aged 65-and-over grew by almost 52 percent -- a large increase but still below the national rate of 70.6 percent. Whereas the state ranked 28^th among the states in growth of its total population from 1970 to 1997, it ranked 33^rd on growth of its youth population and 31^st in growth of its elderly population.

The curving line of Maine's population trend is reflected in developments in employment. In 1975, Maine accounted for 0.463 percent of total nonfarm employment. Its 1985 and 1990 shares were slightly larger, but by 1995, its share was back to 0.460 percent. Likewise, the state's employment/ population ratio rose from 33 percent in 1975 to its high point of 46 percent in 1990 as more people entered the workforce. By 1995, the ratio had slipped a bit to 44 percent. Among the population of prime working age, Maine's employment/population ratio gave it a rank of 32^nd among the states in 1980 and 38^th in 1997.

During these decades, Maine's economy underwent large changes. While growth in total employment in the state stood at 51 percent between 1975 and 1995, the industrial composition of employment shifted. The number of persons employed in manufacturing dropped by 5 percent, in comparison with growth of 2 percent nationally. Meanwhile, service employment rose by 149 percent, ahead of the national rise of 136 percent. Even so, Maine ended these two decades with a larger share of its employment still in manufacturing and a smaller portion in services than the national norm.

The state also saw its share of personal income rise and fall during these years. In 1977, Maine accounted for 0.42 percent of the nation's personal income. After reaching its high point of 0.45 percent in 1989, the state's share declined to 0.40 percent in 1996, its lowest point in the two decades. Per-capita personal income also peaked in 1989 at 91.56 percent of the national average. It ended the period at 86.31 percent of the U.S. figure, a small increase from the figures of the late 1970s and early 1980s. Although small, the rate of change in per-capita personal income was sufficient to give the state a ranking of 18^th among the states on this measure. Relatively low incomes overall has meant that Maine historically and now has one of the lowest differentials among the states between its top tenth of wage earners and its bottom tenth.

In 1977, Maine's share of total Gross State Product amounted to 0.384 percent of the national total; in 1996, it was 0.381 percent. As with income, the high point for Maine's economy came in 1989 with a 0.429 share. Still, growth in GSP of 283 percent from 1977 to 1996 kept up (almost) with the national average of 286 percent. Likewise, the state began and ended the period with its share of federal tax burden just under 0.4 percent, although its per-capita tax burden rose from 77 percent of the U.S. average in 1977 to 81 percent in 1997. In rankings among the states, Maine rose from 45^th to 37^th over this period in per-capita tax burden.

Maine's share of federal spending also rose -- from 0.485 percent in 1981 to 0.524 percent in 1997. Its share of defense spending went from approximately 0.5 percent to 0.74 percent of the national total, although, at its high point in 1992, it stood at 0. 94 percent. Maine ranks 6^th in the nation in the magnitude of its change in defense expenditures from 1981 to 1997, a positive growth that belies the negative experience of much of the Northeast-Midwest region during these years.

Maryland

Over the past quarter-century, Maryland's shares of the nation's population, employment, and income rose in the 1980s and then fell back in the 1990s to end pretty much where they had begun. Through it all, the state's employment base changed substantially, giving Maryland one of the smallest manufacturing sectors and largest service sectors, proportional to its employment size, of any state.

From 1970 to 1997, Maryland's share of the nation's population fell, rose, and fell again in an erratic pattern. The state began the period with 1.93 percent of the population and, despite ups and downs, ended pretty much where it started at 1.90 percent. In absolute terms, the number of persons in the state rose by almost 30 percent, just shy of the national increase of 31.6 percent. With most of the rest of the country, Maryland experienced a decrease in number of persons aged 0-to-18 years-of-age -- here, the decline amounted to 8.3 percent. In contrast, the population aged 65-and-over nearly doubled, putting Maryland well ahead of the national increase of 70.6 percent for this population. While Maryland's overall population growth and youth population trend merited the state rankings of 24^th and 25^th among the states, the rate of increase in the state's elderly population ranked 18^th in the country.

Maryland's shares of the nation's employment tracked closely with its shares of population in these years. In 1975, the state claimed 1.85 percent of the nation's employment. Through declines and rises, it ended in 1995 with a 1.86 percent share. As more people entered the workforce, the state's employment/population ratio rose from 34.4 percent in 1975 to 45.7 percent in 1995, slightly below the national ratio both times, although it surpassed the national rate in the mid-years of the period. Maryland's employment/population ratio for persons of prime working age earned the state rankings o