Modern medicine is infinitely more advanced today than one hundred years ago, but some things are still the same.  Doctors still send their complaining patients home in the hope that their bodies will heal themselves, and who can blame them?  The body is usually up to the task.

Maybe that’s why many legislatures in states around the country, including Indiana, are taking only token steps to correct the budget imbalances that opened wide in the wake of the 2001 recession.  They are waiting for the economy to heal itself, so that rising tax revenues will close their budget gaps without the need for painful adjustments in spending and tax rates.  Will this simple prescription work?

The economy is doing its best to contribute to the effort.  The Bureau of Economic Analysis reported that in the second quarter of 2004 state personal income rose at the fastest pace in almost three years.  Adding all the states together, personal income was 1.5 percent higher during the April-June period than in the previous three months.  That’s considerably faster than the 1.1 percent quarterly growth rate posted during the same quarter in 2003, and the best single quarter performance since 2001.

After correcting for inflation, the data now say that even the states hit hardest by the 2001 recession have now grown back to surpass their pre-recession income levels.  That’s significant for at least two reasons.  As an economic indicator, personal income is the most comprehensive measure available at the state and regional level.  But more concretely, it is a base for one of the most important, and lately the most erratic, revenue sources available to states like Indiana, namely, the personal income tax.

But the details in the BEA income report take a little luster off for Indiana, and especially for our state’s tax revenue collectors.  The Midwest, along with New England, enjoys the dubious distinction of dragging the tail on the horse riding to recovery.  Indiana’s 1.2 percent growth in personal income in the second quarter, coming on the heels of an anemic 0.3 percent quarterly gain in the first three months of the year, puts us ahead of only five other states in growth thus far in 2004.

Three of those states are also in the Midwest – Wisconsin, Ohio, and Michigan.  Indeed, income growth in the entire Midwest region has lagged the nation in general for the last four years.  Twenty years ago, the region could count on stronger growth coming out of a recession, led by rebounding consumer durable purchases, especially of automobiles.  But this is a recession in which consumers never stopped spending, and the boom-bust cycle has muffled the boom and emphasized the bust.

Still, the rising economic tide is lifting our boats.  Indiana’s economic base is growing, thanks especially to an increase inproprietor’s income, and in earnings gains in industries like durable goods manufacturing,real estate, and management holding companies.  Interest income, rent, and earnings in retail trade, non-durable goods manufacturing, and entertainment and recreation industries have not kept pace with the rest of the economy in the last four quarters.

One of the fastest growing components of Indiana personal income, unfortunately, actually hurts the Treasury’s bottom line.  Growth in transfer payments, which include reimbursements for Medicare and Medicaid, accounted for about 0.3 percentage points of the 1.2 percent growth in total income statewide.

Rising income will make the legislature’s task of getting spending and revenue back in line a little easier.  But our state’s sub-par performance thus far in the recovery means that the budget isn’t likely to heal itself.