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from NewsLink, Vol. 3, No. 2, Winter 1999
The Massachusetts economy is sizzling. The annual average unemployment rate for 1998 was 3.3%, the lowest annual rate since 1988. Unemployment has declined for seven consecutive years.
Employment has grown by almost 2% over the last year; a record 3.2 million people are working. Today, residents in the Bay State enjoy the third highest level of personal income per capita, more than 23% higher than the rest of the nation. Business confidence is positive. Inc. magazine has declared Massachusetts the East Coast leader for hosting the fastest-growing companies. Venture capitalists love Massachusetts, investing one-seventh of the nation’s VC financing in Bay State companies during the third quarter of 1998.
The reasonable question is, can this last? Given past episodes of vanquished Massachusetts miracles, jitters about Asia and Latin America and concerns about how to sustain projects like the Big Dig, just how well will the Commonwealth fare? In an effort to gauge the economic outlook for 1999, a panel of experts peered into the future at a BHI forum for approximately 100 people gathered at the Newton Marriott Hotel in December.
Sizing up the gains of the current expansion were Richard DeKaser, Senior Economist, BankBoston; Bruce Holbein, Vice President, Massachusetts Software Council; Frederick Laskey, Secretary, Executive Office of Administration and Finance for the Commonwealth; and Michael Reuttgers, President and CEO, EMC Corporation. Blending optimism with caution, the group pointed to the state’s strengths, the triumphs of its policies, and the importance of innovation to making it in Massachusetts. As a package this bodes well for Massachusetts in 1999, a slowdown notwithstanding.
Prompted by moderator Caleb Solomon of the Wall Street Journal and guest interviewer Ted Bunker of the Boston Herald, panelists offered strategies the state might take to smooth a path amid an amount of uncertainty.
Here are excerpts from the forum:
On the Economic Outlook
Richard DeKaser: “We’ve already seen very compelling evidence that the slowdown is underway. Over the course of this year, we have seen gradual declines in help wanted advertising to fill new positions. We have seen a slight escalation in additional claims for unemployment insurance for (recent) layoffs, suggesting that layoffs are a legitimate story. In this state they’ve been contributing to the bona fide slowdown. And that will be affecting manufacturing industries, largely outside the 495 beltway. I think we are going to see an extension of that story unfolding through the balance of next year.
“There will (also) be a slowdown in the manufacturing sector due to the greater impact of the high value of the dollar. This affects us in two ways: the experience of diminished sales overseas and the layoffs at high-tech companies that explicitly identified with the Asian market. We’re seeing a downturn there. “
Bruce Holbein: “I think one area we all have to worry about is the labor shortage. You can’t pick up the newspapers these days without seeing articles about it. This will have a real drag on growth in Massachusetts. We are losing population. Right now, unfortunately, one of the key ways to attract skilled workers is through the immigration of foreign workers. Federal legislation has helped this by increasing the cap on visas. But that’s not going to be a solution.
“The solution is to look to ourselves and find better ways to retrain our existing workforce. Millions of dollars come into Massachusetts each year for training but we don’t have a good inventory of who’s receiving those dollars and for what purpose. I think that is tops on everyone’s list from a public policy perspective: How do we improve the existing skills of our workforce to meet the demands of an innovation economy?”
Frederick Laskey: “As we sit here everything would appear to be rosy from the Commonwealth’s point of view. The unemployment rate is the lowest among industrial states. The employment levels in the Commonwealth set a record for the third or fourth straight month as we came through the fall.
“Right now with $230 million over the midpoint of the estimate in revenue collections, you might say, ‘We don’t need to worry.’ I think that would be a mistake. The models that the Revenue Department uses (it subscribes to three different economic models) are showing a slowing of growth. Often times what happens is that the revenue slowdown will lag behind what’s actually going on in the economy. It takes a while for the withholding to drop off and people continue to spend, thinking that things are going to continue as they are. So, the models are providing a sobering and cautious effect for us. I have to add that 4-5% revenue growth is not a recession, by any means. It’s fairly steady and is kind of moderating the boom that we have had. The question is: What can the Commonwealth do to maintain that boom? In my opinion, there is little we can do to overcome worldwide economic trends including the situation in Asia. But what we can do here is position the Commonwealth so that we are competitive with other states.”
Tax Policy
Frederick Laskey: “We are well positioned and have managed the economic boom effectively. A good example of this is that we have cut taxes 28 times. [The executive and legislative bodies] have worked to craft targeted tax cuts for various industries including the financial industry, the banking industry and the manufacturing industry. These are too big to be called ‘boutique tax cuts.’ They really are targeted tax cuts when you see them in conjunction with personal income tax cuts like the capital gains tax cut. We have $1 billion in tax cuts this year alone, as a result of the increase in the exemption for personal income and the dropping of the rate of the so-called ‘unearned income’ tax from 12% to 5.95%.”
Michael Ruettgers: “I think some of the changes have been useful to us, particularly moving away from the higher unearned income tax. Part of the attraction for people who come to work for high-tech companies is the expectation that as an equity participant they can increase their wealth.
“At the federal level, we have had reductions in capital gains. At the state level, the cut in the unearned income tax rate has been helpful to us. Still, even though the Legislature and the Governor have done a lot, there is a stigma of taxes in this state. In getting skilled employees, it’s not a silver bullet but it’s part of the equation.”
Bruce Holbein: “Tax policy matters a lot to the availability of risk capital. Two key areas are areas where key reforms have been made: (a) the ending of the distinction between earned and unearned income and (b) the interest in maintaining the capital gains phase-out. These are two very important changes at the margin in tax policies for the formation of risk capital. I don’t know if you want to call this industrial policy or just good smart tax policy. It’s an example in which the state, the business community and the press come together to see that this makes good sense.”
Finding skilled workers in the state’s labor market
Michael Ruettgers: “I think the primary challenge here in Massachusetts relates to the ability to find skilled people. Another problem has to do with infrastructure. First, there is the physical infrastructure, by which I mean mundane things like transportation and sewers; and then there’s intellectual infrastructure, which relates to the quality of the products of people coming out of the high schools and the college classrooms. Those products don’t meet the standard that we need for a workforce – even on the manufacturing side. Indeed, not all the people we are getting are even literate.”
Richard DeKaser: “[Massachusetts] used to be largely endowed by virtue of our local university system. This gave us tremendous advantage. But other people have caught on, whether through supporting venture capital, either directly or indirectly, or by better funding of higher education. People have come to a greater understanding of the nexus of technology transfer between higher education and finance and a rapidly growing wealth-generating economy. So what we’ve come to experience over the past decade is that the state’s eminent position in many of these regards has been eroded … Ten or 15 years ago, for example, Florida was worried about becoming a hamburger-flipper economy. It has not. One of the things it did was to direct the state’s investment in certain areas to replicate some of the assets of Massachusetts.”
On interstate competition
Michael Ruettgers :“Most of the high-tech industry today is, in fact, centered in Silicon Valley which was not the fact 25 years ago when it was centered here in Route 128 ...There are other centers appearing. And I’m concerned … that we are losing our influence here. There’s a need in fact to support the growth of companies here both on the tax side and … on the infrastructure side. There’s been only one new exit on the Mass. Pike built in the last 23 years. Workers start to look at how long a commute they have. ‘How long does it take for me to get off of 495?’ If I work in the Marlborough area, for example, that area backs up three or four miles every morning. And once you get off these highways you end up with sewage problems that restrict your ability to build plants. From that standpoint it’s very much of a hassle. I have to tell you that employees, particularly high-tech employees, have options of going to these other places. With California you won’t get a short commute, but certainly that’s the case in Raleigh-Durham and some other places. That quality of life becomes very important… States are recognizing what it takes to win. Do you know which state has had success in the last two years getting new plants located there? Ohio. It’s not even considered one of the high-tech states. So competition is important not only in the private sector, but also in the public sector. You have to be able to compete across a broad range. The playing field is very competitive.
Frederick Laskey: “It’s a very competitive situation. Various states are actually competing to lure business away from us. That’s why we have to adopt an aggressive pro-business position … We are more competitive, we have put more money back into the economy through tax cuts and we’ve also attacked some of the other costs of doing business in the Commonwealth. The unemployment tax has been reduced, workers compensation rates have dropped dramatically and the whole utility deregulation kicking in is going to provide industry with the ability to negotiate lower electrical rates. Clearly we are a high-cost state for energy. Anything that helps us on that front really is important. If you look at that side of it, we’ve done well in positioning ourselves for the future.”
Richard DeKaser: “We made a number of public policy choices in the past years. In order to clean up the harbor, the Massachusetts Water Resources Authority passed costs on to Boston residents. This is a tradeoff. We have had Title V to keep our groundwater safe. Again, it costs money to do these things. Recently, my own town took 150-plus acres out of development because people would rather have geese and hawks instead of a new housing development. This reduces the amount of housing and thus prices go up. So we have made public policy choices that give us a slightly higher cost base in Massachusetts and that in part explains why Massachusetts has historically been a relatively slow growing state just in terms of jobs. So it does become more of an issue perhaps in slowly growing markets. But this has been long a characteristic of the Massachusetts economy.”
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2003. All rights reserved.
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