The 1999 State New Economy Index

The inaugural State New Economy Index uses 17 indicators to measure the extent to which state economies are knowledge-based, globalized, entrepreneurial, IT-driven, and innovation-oriented.

In the last 15 years, a “New Economy” has emerged in the United States. Among its defining characteristics are a fundamentally altered industrial and occupational order, unprecedented levels of entrepreneurial dynamism and competition, and a dramatic trend toward globalization—all of which have been spurred to one degree or another by revolutionary advances in information technologies (IT). As these developments have swept through our national economy, they have also been restructuring and reshaping the 50 state economies. States differ, however, in the degree to which their economies are structured and operate in accordance with the tenets of the New Economy. This report uses a set of 17 economic indicators to measure these differences and assess states’ progress as they adapt to the new economic order. With these indicators as a frame of reference, the report then outlines a state-level public policy framework aimed at promoting fast and widely shared economic growth.

The Transformation to the New Economy

The previous economic order lasted from approximately 1938 to1974. It was built on a manufacturing base that was geared toward standardized production and run by stable, hierarchical organizations that were preoccupied with incremental cost reductions and focused primarily on a national marketplace. Those factors were the bases for prosperity in most states.

As the foundations of that economic order broke down between the mid-1970s and the early 1990s, state economies underwent a series of seismic shocks that shook many to their very foundations. As industries restructured, states had to react to rolling regional recessions based in large part on sectoral crises—autos and steel in the Midwest, textiles in the South, minicomputers and defense in New England, farming in the Plains states, oil and gas in places like Texas and Oklahoma, lumber and wood products in the Pacific Northwest, and defense in California, to name a few. Moreover, within states, some urban and rural areas were particularly hard hit with higher rates of unemployment and outward migration. And during this period all states faced a dramatic slowdown in productivity and wage growth—from near 3 percent productivity growth nationwide in the 1950s and 1960s, to less than 1.25 percent through the first half of the 1990s. But these crises were more than episodic or random. They represented a turbulent period of transition from an old economic order to a new one.

Some of the most obvious signs of change in the New Economy are in fact among the root causes of it: revolutionary technological advances, including powerful personal computers, high-speed telecommunications, and the Internet. But the New Economy is about more than high technology and the Internet. Most firms, not just those producing technology, are organizing work around it. The New Economy is a metal casting firm in Pittsburgh that uses computer-aided manufacturing technology to cut costs, save energy, and reduce waste. It is a farmer in South Dakota who sows genetically altered seeds and drives a tractor with a global satellite positioning system. It is an insurance company in Iowa that uses soft- ware to flatten managerial hierarchies and give its workers broader responsibilities and autonomy. It’s a textile firm in Georgia that uses the Internet to take orders from customers around the world.

The New Economy is as much about new organizational models as it is about new technologies. It is the Miller Brewing Company’s brewery in Trenton, Ohio, which produces 50 percent more beer per worker than the company’s next-most-productive facility, in part because a lean, 13-member crew has been trained to work in teams to handle the overnight shift with no oversight.

One of the most striking structural changes in the New Economy is the degree to which dynamism, constant innovation, and speed have become the norm. Autos that took 6 years from concept to production in 1990 now take 2 years. The Minnesota Mining & Manufacturing Company, which markets everything from pressure-sensitive adhesive tapes and abrasives to medical devices, now receives 30 percent of its revenues from products less than four years old. In the frenetic Internet economy, people now talk about technological evolution in “Web years” (which amounts to roughly one fiscal quarter) because the rules of the game seem to change that quickly. In this market environment, a new generation of fast-growing firms has become the key to economic growth. Nearly three quarters of all net new jobs are being created by 350,000 of these “gazelle” firms (firms that have increased annual sales revenue by 20 percent for four straight years).

With entrepreneurial growth, however, comes risk. Almost a third of all jobs are in flux every year (meaning they have either recently been added, or will soon be eliminated from the economy). This “churn” effect is being spurred by new technology, but also by increasing competition—a trend that is, in turn, partly a product of increasing globalization. (Between 1960 and 1997, U.S. imports and exports grew one-and-a-half times faster than GDP.)

Amid this constant economic churning, new jobs and industries have replaced older ones. States’ economic bases have evolved beyond traditional manufacturing to include high-tech manufacturing, traded services, and increasingly globally oriented e-businesses. The trend is strikingly apparent in the changing occupational mix of the New Economy: Between 1969 and 1995, virtually all the jobs lost in the production or distribution of goods have been replaced by office jobs.4 Today, almost 93 million American workers (holding approximately 80 percent of all jobs) do not spend their days making things—instead, they move things, process or generate information, or provide services to people.

As these changes have swept through the U.S. economy as a whole, they have also begun restructuring and reshaping the 50 state economies, though some more than others. The purpose of this report is to examine each state’s economy in the context of the underlying structural foundations of the New Economy. It is not intended to rank state business climates, economic performance, or economic development capacities or policies in the traditional sense. Nor is it intended to crown “winners” or stigmatize “losers.” Rather, our intent is to highlight differences among the structural foundations of state economies and to focus attention on a policy framework to promote economic development in the New Economy.

New State Economies, New Economic Strategies

A state’s economic structure is in no small part determined by historical factors. Some states that did well in the old economy have been slow to adapt to the New Economy. For example, states that have relied on natural resources and older manufacturing industries (like West Virginia, Wyoming, or Missouri), along with states that have relied on their ability to use low costs to attract firm s (such as Mississippi, Alabama, or Louisiana), tend to score poorly on New Economy indicators. In contrast, states that industrialized later (such as California, Colorado, Utah, Arizona, New Mexico, and Washington) tend to have high New Economy indicator scores. States that underwent industrial transformation in the 1950s and 1960s and have since rebounded on a new high-tech and advanced services economic base (such as Massachusetts, Connecticut, New Jersey, and Delaware) also tend to score well.

Yet, while history shapes the hand a state is dealt, public policy determines how that hand is played. For example, policies that promote technological innovation and improve education can boost a state’s innovative capacity and create a more dynamic and productive workforce. Some of the states with rankings in the middle of the pack in this report (such as Kansas, Maine, and Rhode Island) could see improvements over the next decade as recently enacted forward-looking economic policies begin to bear fruit. In contrast, some higher ranking states may be resting on their laurels and not making the kinds of investments and policy changes needed to maintain strong economic foundations. (California’s relative decline in K-12 education performance is a leading case in point.) Just as New Economy businesses constantly scramble to embrace new practices and innovations, states must continually improve their policies and governmental operations.

For most states, the factors that drive growth today are very different than they were 25 years ago. In the old economy, the preconditions for states’ economic success were things like low costs; abundant, basically skilled labor; and good transportation and other physical infrastructures. And the standard bag of state-level economic policy tricks included things like giveaways, tax holidays, and other business incentives. But both the playing field and the rules of the game have changed in the New Economy. Some conditions no longer ensure success (for example, low costs), while others are nearly ubiquitous in all states (like good transportation). So now economic policy must change, too.

After ranking the states according to the 17 economic indicators, the last section of this report outlines a progressive, innovation- oriented public policy framework designed to foster success in the New Economy. There are five key policy strategies states need to follow:

  1. Co-invest in the skills of the workforce.
  2. Co-invest in an infrastructure for innovation.
  3. Promote innovation- and customer-oriented government.
  4. Foster the transformation to a digital economy.
  5. Foster civic collaboration.

States that focus their policy efforts in these areas will be well positioned to experience strong growth, particularly in the incomes of residents across all socioeconomic strata. And that is the true objective. Developing a vibrant New Economy is not an end in itself; it is the means to advance larger progressive goals: new economic opportunities and higher living standards, more individual choice and freedom, greater dignity and autonomy for working Americans, stronger communities, and wider citizen participation in public life.