November 24, 2003

The ranking of the states has interested economists for some time. The most common way to rank states is to calculate the changes in the states' fiscal policy projected in their budgets. The ranking is then used as a ranking of expected economic performance. While this is a proper first step, the ranking of the states' changes in fiscal policy is not enough. First, there is no reason to expect that the states will have the same response coefficient. The history of previous tax actions may affect the state's economic responses. Similarly, it is possible that the state's current pace of economic activity may be in part affected by the recent past. In other words, the state's momentum may matter.

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