Specialization is one of the tools that helped the West build its prosperity. But too much of a good thing can be destructive. Case in point: State economies put their health at risk when they are dominated by just a few industries.
The Hachman Index is calculated by the Kem C. Gardner Policy Institute, a component of the University of Utah’s David Eccles School of Business. It uses indicators such as employment and gross domestic product to measure
the mix of industries present in a particular region relative to a (well-diversified) reference region. The Hachman Index normalizes scores from 0 to 100. A higher score indicates more similarity with the reference region, while a lower score indicates less similarity. The Hachman Index is often applied at the national level using GDP, allowing for comparison between individual states. Since the well-diversified U.S. economy serves as the reference region, states with higher scores not only have economies similar to the national economy but are also economically diverse states.
Earlier this month, the institute released its data for 2021. How the eight states of the American Southwest fared might surprise you. Arizona secured the top spot, with a score of 96.4. Joining it in the nation’s top ten were Utah (95.6) and Colorado (93.8). California came next (93.0), followed by Texas (74.7), Nevada (74.5), New Mexico (63.5), and Oklahoma (58.4). (The Land of Enchantment and the Sooner State qualified for bottom-ten status.)
Drawing conclusions about policy choices from a single ranking system is always dicey. For example, the three states in the American Southwest with the lowest poverty levels are Arizona, Utah, and Oklahoma. The first two are national leaders in economic diversity. The third is a laggard.
As for government “investment,” big-spending California and profligate New Mexico find themselves at opposite ends of the Hachman Index — the former at #11, and the latter at #44.
Median household income? Arizona’s score of 96.4 is the best in the region, but in poor-performing Nevada, the typical home has similar earnings.
Purchasing power? The border states of Colorado and Oklahoma tell an interesting tale. The Centennial State enjoys stellar economic diversity, but is an expensive place to live. Oklahoma’s poor Hachman Index score doesn’t seem to keep its residents from being able to stretch a dollar.
What’s not in question is the principle that the deeper a state’s economic diversity, the better positioned it is to handle hard times. With Washington running cavernous deficits, inflation still unacceptably high, and war in Europe and/or the Pacific not unthinkable, wise policymakers in the American Southwest will focus their efforts on making their states as attractive as possible to all industries. Picking winners and losers via “economic development” is an effective method to win votes. As as means to promote the general welfare, though, it’s inefficient and costly.