Reliance on government benefits slows Maine's income growth

We learned last week that Maine's personal income growth in 2011 was the slowest of any state in the nation. Our total income from all sources was only 3.4 percent above its 2010 level, just two-thirds the national growth of 5.1 percent.

This news was followed by a round-up of the usual suspects -- our "dying," "traditional" industries -- and repetition of the usual appeal to support more innovation and generate more new businesses.

While such appeals are certainly valid, failure to respond to them was not, in this instance, the only or even primary reason for our lowly ranking. Personal income comes from three sources -- payment for work, earnings from property (dividends, interest and rent) and redistributive transfers (everything from Social Security to Medicare to income assistance, to unemployment and veterans benefits).

To understand our slow overall growth, we must look at each component. Our growth in earnings was 67 percent of the national average. Our growth in property income was 97 percent of the national average. But our growth in transfer receipts was less than 30 percent of the national average.

In other words, a major reason for our abysmal performance in income growth relative to other states was not because we worked less, or worked in "dying" industries, or earned less from our property, but because we received so much less in transfers than we had in previous years. And this fact is more significant in Maine because we are far more dependent on transfers than the national average.

In the U.S. as a whole in 2010, $18.50 of every $100 of personal income came from transfers. In Maine, $22.50 came from transfers. So if the transfer portion of our income grows much more slowly than the national average, our total income growth is going to be disproportionately affected.

Much of this dependence on transfers can be attributed to our relatively older population. Nationally, 30 percent of transfers come from Social Security. In Maine, the figure is over 33 percent. Another reason for our above-average dependence on transfers is our extensive Medicaid coverage. The share of our total transfer receipts accounted for by this program is 10 percent above the national average.

Another reason is our history of service in the armed forces. The share of Maine's transfers accounted for by veterans' benefits is 68 percent above the national average.

It is interesting to note, in this regard, that the areas where Maine's transfers are below the national average are income maintenance programs (welfare), where we stand at 91 percent of the national average and education and training assistance, where we stand at only 66 percent of the national average.

OK, so does all this mean we should forget about replacing "dying" industries with innovative ones and focus our energies on advocating for more generous transfer programs? Just the reverse. Maine is a preview of our national future. As the fiscal consequences of our enormous public debt come crashing onto the floors of our congressional and legislative chambers, transfer programs are going to be cut.

The cuts will be reluctant and only relative -- like freezing or delaying cost of living increases in Social Security or Medicare payments to health care providers -- but they will be unavoidable. This trend will, as we have seen only too clearly during this session in Augusta, be particularly acute at the state level, where constitutional requirements for balanced budgets prevent the escape of deficit spending.

In short, the slowing growth of transfer income is the wave of the future. And, if that trend is not offset by accelerating growth of earned income, our total income growth is going to continue to slow. So the conclusion is not to take our focus off innovation and new business formation but rather to redouble our efforts in that critical task.

By Charles Lawton