July 20 (Bloomberg) -- For a century, incomes became
increasingly equal across the U.S., as poor states such as
Alabama caught up to rich places like California.
Economists have long taught this history to their
undergraduates as an illustration of the growth theory for which
Robert Solow won his Nobel Prize in economics: Poor places are
short on the capital that would make local labor more
productive. Investors move capital to those poor places, hoping
to capture some of the increased productivity as higher returns.
Productivity gradually equalizes across the country, and wages
follow. When capital can move freely, the poorer a place is to
start with, the faster it grows.