September 17, 2012

Economists say regional approach, not incentives, leads to prosperity

Steven Lanza, economist, executive editor of UConn’s “The Connecticut Economy” report
Nick Perna, Yale economist, advisor to Webster Bank

Gov. Dannel P. Malloy and state lawmakers have approved hundreds of millions of dollars in tax credit and incentive programs to lure businesses to the state or get companies already here to stay or add jobs.

But do the programs really move the dial in growing Connecticut's economy?

The answer really isn't clear, but according to one Connecticut economist the state has so little control over its economic fortunes that some incentive programs are largely a waste of money.

Economist Steven Lanza, executive editor of UConn's "The Connecticut Economy" report, recently made public a provocative new analysis that shows Connecticut has control over only about 15 percent of its economy. The rest of the state's economic fortunes are driven by regional and national economic forces, making Connecticut only a back seat passenger in its race to grow jobs and industry.

"Our future isn't entirely in our own hands," Lanza said. "Even if Connecticut is doing everything it should be doing, it is always going to be located in a particular region that has a lot of influence over our economy. Our power to affect the broader economy is somewhat limited."

Lanza said his findings are based on an accounting formula that decomposes Connecticut job changes into parts driven by state, regional and national forces and pinpoints the factors that have the largest impact on Connecticut's economy. His analysis found that the state only influences about 15 percent of its own economic fortunes.

Regional factors, meaning the state's Northeast geography, impact 33 percent of Connecticut's economy.

Meanwhile, national influences drive about 50 percent of Connecticut's economy, which means America's slow economic recovery is weighing heavily on the state.

That hasn't always been the case though.

Lanza said Connecticut impacts less of its economy now than it has in the past, particularly from the time period after WWII through the Cold War, when the state impacted about 25 percent of its economic fortunes.

The larger influence back then was a result of Connecticut being a manufacturing and defense industry powerhouse, Lanza said.

"We really stood out among states," Lanza said. "But over time we've come to look more like the United States than we once did, which means broader forces are going to impact us a lot more."

While Lanza's analysis may be an academic exercise, it could have broader implications on the state's economic development policy.

Job growth in Connecticut has been anemic for a couple of decades, and the Great Recession took a considerable toll. Connecticut lost about 120,000 jobs from the recession and has gained back only about a third of those jobs.

The state's unemployment rate stands at 8.5 percent, which is higher than the national unemployment rate of 8.1 percent.

To grow jobs, states have increasingly made a cottage industry out of luring businesses by offering generous tax incentives, loans and grants.

And competition has become fierce, particularly among states in the Northeast.

Just last year, for example, pharmaceutical giant Pfizer relocated a significant number of jobs at its R&D facility in Groton to Cambridge, Mass.

But the Malloy Administration has been aggressive in trying to preserve and attract new businesses to the state.

Malloy and state lawmakers have invested hundreds of millions of taxpayer dollars to stimulate job growth and new industries, including an $864 million investment in bioscience.

Last October, lawmakers passed a $626 million jobs bill that included loans, grants and tax credit programs for businesses.

And Malloy's "First Five" program has created many splashy headlines, with the most recent deal providing hedge fund Bridgewater Associates $115 million in state assistance to move to Stamford, where the company will construct a $750 million headquarters in Harbor Point.

But if Connecticut only has a small influence over its economy, are these investments smart policy?

Lanza said he has a split opinion. He said the country would better off if all state's backed away from aggressive incentive programs that pick winners and losers in business, and invest those funds in infrastructure, education, and innovation instead.

"My preference is to make all this stuff stop," Lanza said. "A lot of what states are doing is rearranging or redistributing jobs across the country. They are not creating anything new."

But with all state's actively in the game, Lanza said Connecticut is forced to participate or risk "being taken to the cleaners."

Lanza said the Malloy Administration appears to be taking a smart approach through its economic development programs by establishing written agreements with companies that receive incentives that include claw back revisions and tough oversight.

Lanza said he especially likes the state's investment in a new $173 million technology park at UConn because it can help boost innovation by moving ideas formulated in the classroom into viable businesses and products.

Malloy spokesman Andrew Doba said the governor's economic policies are all about making Connecticut competitive.

"Connecticut is competing with 49 other states for jobs whether we like it or not," Doba said. "For too long, our state didn't compete, and as a result the state's economy failed to grow jobs, on a net basis, for more than two decades. While there are certainly limits to what any executive can accomplish, the governor's economic development initiatives are helping Connecticut's economy. "

Doba said Malloy's "First Five" program has been particularly effective, leading to the creation or retention of more than 15,000 jobs and spurring more than $1.3 billion in private investment.

"Those are good paying jobs with good benefits at a time when residents need them — jobs that would not be in our state without this program," Doba said.

Nick Perna, a Yale economist and advisor to Webster Bank, told a crowd of business leaders in Rocky Hill recently that Lanza's research raises interesting questions about state's economic development policies.

Perna said states in the Northeast insist on going their own way when it comes to economic development strategy, including competing on things like casinos and airports, which is probably detrimental to the region as a whole.

If New England states, and New York and New Jersey, worked in concert on things like regional transportation and education, it would likely be more beneficial to all states in the end.

"We ought to think regionalism with a big "R" where we get the entire northeast to realize we are all in the same boat together and we have the risk of sinking together because we have very similar education systems and industrial issues," Perna said.

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