Hawaii and Alaska Statehood: Lessons for Congress on Puerto Rico

on March 8, 2021

The Hawaii and Alaska statehood transition confirm that economic convergence of territories into the national economy is even more dramatic in the modern era than the same economic benefit of statehood for 30 territories previously admitted as states between 1796 (Tennessee) and 1912 (Arizona).

What the economic date shows is this:

All territories were underperforming and/or in arrested development compared to economic performance after admission to statehood with equal footing among states and competition on level playing field.
Territories unable to pay their way in the union became more able to pay their own way after admission and full economic integration.
In the decade after admission Hawaii and Alaska averaged growth at over twice the U.S. national rate of growth.
Alaska and Hawaii averaged growth in the first decade after admission more than twice the rate of first decade statehood growth for Montana, Washington, Idaho, Wyoming, Utah, Oklahoma, New Mexico and Arizona.
Alaska experienced some years of double digit growth in the 10% to 25% range, and like Hawaii averaged growth nearly twice the national average.
The status quo under the “Commonwealth” is preventing Puerto Rico from converging with the national economy and creating a failed client state arrested development syndrome under the American flag for 3.2 million Americans who are citizens without equal rights that come only with statehood.

Exhibits:

Alaska Statehood and Economic Growth: See, Page 2
“In 1959, Hawaii became the fiftieth state. The transition from territorial to statehood status was one factor behind the 1958-1973 boom, in which real per capita personal income increased at an annual rate of 4 percent.” The Economic History of Hawaii: A Short Introduction, by Sumner J. La Croix
From the Regional Economic Analysis Project:

Hawaii Per Capita Personal Income, 1959-2019, Current vs. Constant Dollars (Figure 1)

Hawaii Per Capita Personal Income as a Percent of the U.S. Average: 1958-2019 (Figure 3)

Figure 3 displays the trends for per capita personal income relative to the national average by tracing Hawaii per capita personal income as a percent of the national average over 1958-2019.

In 1958, Hawaii’s per capita personal income amounted to 98.2% of the national average; in 2019, it approximated 100.9%.

Hawaii Real Per Capita Personal Income: Annual Percent Change, 1959-2019 (Figure 4)

Figure 4 highlights the short-run pattern of Hawaii’s real per capita personal income growth by tracking the year-to-year percent change over 1959-2019. The average annual percent change for the entire 61-year period is also traced on this chart to provide a benchmark for gauging periods of relative high–and relative low–growth against the backdrop of the long-term average.

On average, Hawaii’s real per capita personal income grew at an annual rate of 2.29% over 1959-2019. The state recorded its highest growth in 1969 (8.17%) and posted its lowest growth in 1996 (-2.56%). In 2019, Hawaii’s real per capita personal income grew by 1.75%.

Hawaii Real Per Capita Personal Income: Annual Percent Change and Decade Averages Over 1959-2019 (Figure 5)

Over the past six decades some states have experienced extreme swings in growth, and often such swings have tended to coincide with the decades themselves. Figure 5 again shows the annual percent change in Hawaii’s real per capita personal income since 1959, but this time they are displayed with average growth rates for the decade of the 1960s, 1970s, 1980s, 1990s, 2000s, and 2010-2019.

During the 1960s, Hawaii’s annual real per capita personal income growth rate averaged 5.67%. It averaged 1.51% during the 1970s, 1.98% in the 1980s, 0.58% during the 1990s, 1.90% in the 2000s, and 1.69% thus far this decade (2010 to 2019).

Real Per Capita Personal Income Growth: Average Annual Percent Change by Decade (Figure 6)

Figure 6 compares the decade average growth rates for Hawaii noted in the previous graph with the corresponding decade averages for the nation.

Relative to nationwide real per capita personal income growth trends, Hawaii outperformed the nation during the 1960s (5.67% vs. 3.49%).

Fernando LaFort

Here are excerpts from Fernando LaFort’s paper published by Harvard International Tax Program, as published on the now inactive but still accessible “Puerto Rico Herald” website: Puerto Rico: Divergence not Convergence by Fernando Lefort

” In 1994, the average Puerto Rican would have been making $6000 more per year, if Puerto Rico had been converging to the per capita income level of Mississippi (the poorest state in the Union)…In fifty years Mississippi, presently the poorest state, has been able to reduce by half the distance that separates its per capita income level from that of Connecticut, the wealthiest state…Data from 1880 to 1940 for the territories of Montana, Washington, Idaho, Wyoming, Utah, Oklahoma, New Mexico, and Arizona shows that these economies experienced a growth rate of 2% after making the transition from territory to state…Since the 1970’s Puerto Rico’s per capita level is lagging further and further behind the fifty states, with less than half the per capita income of Mississippi…Historically, one would have expected Puerto Rico to catch up to the US…Although Puerto Rico had a good economic performance after World War II, it has experienced relative stagnation and high unemployment since 1973…Without statehood, Puerto Rico will never evolve sufficient economic strength to converge with the mainland economy…What would be the cost of statehood? The opposite question should have been asked: What has been the cost of commonwealth?…Puerto Rico should be compared to and converging to the US, and not to countries south of the Rio Grande…Conventional wisdom is that Puerto Rico needs to strengthen itself economically in order to be “ready” for statehood… This expectation of a gradual economic strengthening will never be fulfilled. From an economic perspective…Puerto Rico will only qualify for statehood by being made a state.”

Commentary on La Fort’s convergence theory and “cost of commonwealth” analysis:

Puerto Rico: Quantifying the Cost of Being a Commonwealth

In 1994, per capita income in Puerto Rico was $7,000. If Puerto Rico had entered the Union in the middle of the 20^th century then 1994 per capita income on the island would have been $13,000—$6,000 higher than it actually was. This is the estimate provided by Fernando Lefort in a 1997 examination of the income convergence of states during the 20^th century.[1]

Yet, Puerto Rico remains a “commonwealth,” a U.S. territory. In recent decades, income in Puerto Rico has not converged with incomes in the states. Quite the contrary: there has been increasing divergence. The cost of being a commonwealth has been getting higher and higher.

Over roughly the last century, economic growth in low-income states was generally more rapid than in high-income states. The experience of Mississippi in the 20^th century illustrates the phenomenon of income convergence. In 1940, Mississippi was the lowest-income state and had a level of per capita income 22 percent of that of Delaware, which was then the highest income state. By 1990, though Mississippi was still the poorest state, its per capita income was 50% as high as that of Connecticut, which had become the highest income state. Thus, in 50 years, the percentage difference in per capita incomes between the lowest-income and highest income state had been reduced by more than one-third.[2]

Beyond particular examples, the general income convergence among the states was demonstrated in a 1992 study by Robert J. Barro and Xavier Sali-i-Martin. Barro and Sali-i-Martin showed a strong negative correlation between states’ per capita personal income growth rate in the 1880 to 1988 period and their level of per capita personal income at the beginning of this era.[3] The findings of Barro and Sali-i-Martin establish that during this roughly 100 year period the low-income states tended to grow more rapidly than the high-income states, with the result that the divergence of per capita income among the states was substantially reduced.

Building on Barro and Sali-i-Martin’s work, Lefort gave attention to the relevance of the convergence argument to Puerto Rico. Lefort’s major contribution was to estimate the average rate of income convergence among the states and then pose the question: If Puerto Rico had been a state in the 20^th century, what would be the expectation of its income growth over this period? Lefort, using a conservative estimate of the rate of convergence, arrived at the $6,000 increase of per capita income by 1994.

Economic convergence among the states has been based on several factors, including: free mobility of goods, capital, and labor among the states; access to common technology; a shared legal system; a shared set of federal regulations; a shared political stability; a common federal tax system; and, not least important, a transfer of resources through federal expenditures and the tax system, shaped by states’ power in the federal government.

There is formally free movement of goods, capital, labor between Puerto Rico and the states. Yet several other factors that generate convergence among the states are absent in the case of Puerto Rico: the tax system, the regulations, practical access to technology, and a fully common legal system. And two most important factors: the political uncertainty (lack of stability) that necessarily accompanies Puerto Rico’s territorial status; and the lack of power within the federal government to affect the flow of federally determined intra-national resources.

There are of course many factors that affect the economic growth of a region, including everything from local economic policy to fortuitous events such as a new discovery of natural resources. Yet it is clear that one factor that can have a powerful influence is whether the region is a state or a territory of the United States. Were Puerto Rico to move from the latter status to the former, the evidence strongly indicates that economic conditions on the island would greatly improve.

[1] Fernando Lefort, Is Puerto Rico Converging to the United States? Working Paper 1003, International Tax Program, Harvard Law School, October 1997, p. 17. In examining convergence among the states and estimating the rate of convergence due to statehood, Lefort controls for the influence of other possible causes of differences in states’ rates of growth of income.

[2] Lefort, as cited in the previous note, p. 7.

[3] Robert J. Barro and Xavier Sali-i-Martin, “Convergence,” Journal of Political Economy, Vol. 100, No. 2, April 1992, pp. 223-251. Their correlation is between the growth rate of personal income and the log of per capita personal income.