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January 8, 2024 Economic Forecast

Fred Carstensen: Will CT revive its comatose economy?

Fred Carstensen

Congratulations to Gov. Ned Lamont and the legislature: They have put Connecticut’s fiscal house in order.

But fiscal health is unlikely to be sustainable when the state has a sickly economy. Now they must tackle the challenge of restoring Connecticut’s economic vitality, competitiveness and growth.

Since 2017, Connecticut’s economy has seen only 1% real (inflation-adjusted) growth; the nation’s economy grew 38% through 2022.

There has been no growth in jobs: payroll employment is now where it was in June 2017.

Taking a longer perspective, the performance is worse.

Payroll employment in 2023 is merely 20,000 above where it was in February 1989, and 22,000 below where it was in March 2008. That’s 35 years of essentially no net job creation.

The story is the same for gross state product (GSP) during the last 15 years: essentially no growth.

The result of this economic stagnation is that Connecticut’s economy as a share of the national economy has shrunk markedly since 2008, by nearly 30% (from 1.6% of the U.S. gross domestic product to 1.14%).

With the fiscal house in order, it is clearly time to prioritize the economy.

Growth opportunities

There are positive developments on which to build.

Yale and UConn have transitioned into modern research universities, bringing millions of dollars into the state to support their research programs. They are also engaging in sustained efforts to generate economic development from this research through intellectual property transfer — facilitating creation and growth of spinoff businesses.

Moreover, Dan O’Keefe, the new commissioner of the Department of Economic and Community Development, is supporting efforts to build strong collaborations between Yale and UConn to drive innovation, business creation and economic growth.

The $200-million and 1,000-new employee expansion in Wilton by ASML — a leading maker of extreme ultraviolet lithography machines used to make computer microchips — should drive both growth in the supply chain (hopefully in Connecticut) and perhaps colocation by related businesses.

Electric Boat is projecting the addition of 9,000 new employees as it ramps up production of a new generation of nuclear submarines to restore America’s military capacity.

IT growth

Perhaps most important to future growth, for both keeping companies in Connecticut and attracting new businesses, is the millions of square feet of proposed hyperscale cloud data centers that could bring the state into the internet age.

The projects in Waterford and Killingly are already town-approved and moving through the permitting process.

Connecticut was singularly inattentive to the IT revolution that began with Congress giving the private sector access to the internet in 1992.

While other states quickly grasped the singular importance of this new technology, Connecticut did little; the state became a virtual black hole in IT, with small data centers and limited connectivity.

Conversely, New York made a major investment in what is a very successful nanotechnology research center at SUNY Albany; the Massachusetts Institute of Technology and partners, with strong support from their state government, built the transformative, high-performance computer center in Holyoke.

The new investments in the hyperscale data centers — which can handle the massive requirements of artificial intelligence and the tidal wave of real-time data now at the heart of many businesses — will position Connecticut to become the locus of data processing for businesses in the Boston and New York metros.

It is hard to see how Connecticut fully restores its competitiveness and builds its economy without the strong IT infrastructure these data centers create.

The question now on the table is whether Gov. Lamont and lawmakers will adopt policies and invest the resources to permanently abandon the sad economic trajectory of the last decades.

Most visibly, cutting investment in higher education would send a truly negative message to the private sector.

Failing to make other critical investments or adopt aggressive pro-growth policies (e.g., permitting the use of stranded tax credits to offset the cost of major capital projects, similar to the 2014 Pratt & Whitney deal) would undermine, if not defeat, the opportunity to change Connecticut’s economic trajectory.

State policymakers must prioritize growth.

Fred Carstensen is the director of the Connecticut Center for Economic Analysis and a professor of finance and economics at UConn’s School of Business.

Check out the rest of HBJ's 2024 economic forecast issue

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