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The New England roller coaster: lessons for the United States in the 1990s.

THE OVERALL performance of the New England economy over the past fifteen years has been extremely good. Incomes climbed well above national averages, and for most of the period unemployment rates in the region were much lower than for the nation as a whole. In fact, for virtually an entire decade the New England economy was the envy of the nation. In spite of a deep regional contraction and over two years of job losses, incomes and employment/population ratios in New England remained well ahead of national averages in 1991 (Table 1).

Nevertheless, the abrupt downturn in the regional economy in 1989 (Table 2) tainted the nation's image of New England, diminishing interest in the region. This is unfortunate, because there is much in the regional experience that is relevant to the U.S. economy over the next decade. Like the New England of the 1980s, the United States is currently in the midst of a significant export boom. Also, coming out of the 1990-91 recession the nation is faced with severe constraints on the growth of its workingage population - constraints that were central to New England's performance in the recent past.


The ride up the roller coaster for New England was quite dramatic. The boom began in the last half of the 1970s with the high-tech renaissance, and then accelerated through increases in defense spending and a construction boom. Per capita real personal income rose 28 percent between 1982 and 1988, compared to 15 percent nationally. By the end of that period, per capita incomes in New England were 21 percent above national averages. The slow growth of the labor force relative to employment demands pushed the unemployment rate down to 3.1 percent by 1988. If you owned a home, you saw its value go up (on average) 80 percent in six years.

While the Federal Reserve has revealed its desire to avoid such booms at the national level because of inflationary fears, no such constraints were operating regionally. The result was a movement up the Phillips curve. Consumer inflation in Boston reached 6 percent during 1988-89, while employment opportunities multiplied at what seemed like an exponential rate. There were some extremely beneficial effects. In 1988, at the end of the boom, the unemployment rate for African-Americans in Massachusetts was 6.5 percent, which compared favorably to the 11.7 percent rate nationally, and was below the overall rate for the civilian U.S. labor force during the first four years of economic growth in the 1980s. The job market was so advantageous for workers, and so difficult for businesses, that firteen-year olds were given the right to work.

The ride down the roller coaster has been almost as eventful as the ride up. The economy stagnated in 1989. Massachusetts lost jobs for over two-and-one-half years. The rate of two-year job loss in the state was the worst of any in the nation in thirty years (Harrington and Sum, 1991).

Now New England knows what Michigan (early 1980s) and Texas (mid-1980s) felt like. Until there is a national recession, U.S. monetary and fiscal policies do little to fight regional contractions. Moreover, most of the states in New England have experienced procyclical budget balancing, with Massachusetts running a budget surplus in the fiscal year ending June 1991. Adding to the contractionary forces were reports of significant regional credit supply restrictions due to weakened bank balance sheets. For example, in January 1991 more than half of regular borrowers in New England responding to a National Federation of Independent Business survey reported that credit was harder to get than in the prior quarter. Nationally, the percentage of regular borrowers reporting more borrowing difficulty was only 33 percent.

Without observing it first hand, it is difficult to comprehend the shock and confusion of the roller coaster ride. It was eerie how close the economy followed Massachusetts governor Mike Dukakis's political fortunes. Leading into Dukakis's nomination acceptance speech at the 1988 Democratic presidential convention, the state unemployment rate was 2.7 percent and employment had risen to 3.1 million jobs. Halfway through George Bush's first presidential term, the unemployment rate was 9 percent, and Massachusetts had lost one-tenth of its jobs.

The Conference Board's rating of consumer confidence about the present situation puts some numbers around the emotional response. The index was running over 200 in New England during the boom (1985-- 100 nationally). It bottomed out at 2 in the fourth quarter of 1991. The pessimism is palpable. Some natives believe that the beginning of the end was the ball rolling through Boston Red Sox first-baseman Bill Buckner's legs in the sixth game of the 1986 World Series. They claim that the economy will only turn around when the team celebrates its next championship season. The last World Series won by the Sox was in 1918.

In fact, the New England economy does suggest that economic downturns left to their own devices can be extremely persistent. The very steps that should help the region compete in the long run restructurings of large corporations, stable public finance, and shrinking differentials between regional and national costs for labor and housing -- are exactly those that in the short run are diminishing purchasing power and prolonging the downturn. In spite of some job growth at the end of 1991, most regional forecasts suggest that only significant and sustained growth in the national economy can create the demand that will lead to a recovery in New England.


Edward Moscovitch (1990) has provided the clearest explanation of the region's downturn. The exporting base of the economy -- high-tech and defense manufacturing, investment companies and insurance carriers, private schools and universities -- gained over a quarter-million jobs between 1975 and 1984, over 100,000 of which resulted from a gain in market share relative to other regions of the country. New England seemed to be in all of the right industries. What happened?

Two things. The first was a sharp reduction in the growth of the minicomputer and defense industries. The second was a labor shortage so severe that it drove incomes and then housing prices skyhigh. The base of the economy was weakening, while the cost structure was not attractive to either businesses or workers. Unlike the case in the South or West, New England's boom did not result in a large population in- migration, which would have moderated wages. incomes, and housing values.

Moscovitch showed that as early as 1984 the economy was not being driven by a healthy exporting base, but by a highly cyclical construction boom. Without a population inflow to support it, the real estate sector eventually collapsed of its own weight. In the two years ending in May 1991, Massachusetts lost 40 percent of its construction jobs, and median housing prices away from the city centers have dedined by 25 percent or more.


In spite of painful adjustments today, few New Englanders are calling for a return to 1975. The region is riding down the big hill, but by no means will it end up where it began. New England has achieved growth in productivity and incomes over the past fifteen years that have eluded the United States more generally. An optimist could look at New England's successes and draw some positive conclusions about the prospects for the United States during the next decade.

The first such positive connection relates to population growth. As with New England in the 1980s, the United States is projected to have a very slow expansion of its working-age population over the next decade -- less than 1 percent per year (Figure 1). The possibility of a New England-style labor shortage means that unemployment rates could drop well below current expectations. If this happens, employers will be forced to expand output with productivity improvements, not through simple hiring.

New England benefitted from strong sales out of its base into the rest of the nation and the world. If the population of the United States is growing slowly, who is going to demand U.S. products? In the retail insurance industry (to take just one example) the answer is clear: foreigners. According to SIGMA World Insurance, life insurance premiums grew 2.8 percent in North America in 1988. In Latin America growth was 8 percent; in Europe it was 13 percent; in Asia 21 percent. More generally, the consensus forecast is for the export boom to continue in the United States. DRI/McGraw-Hill, for example, projects that exports will comprise over 15 percent of GNP by the year 2000 (Figure 2).

New Englanders' productivity improved so much during the 1980s that Gross Regional Product (GRP) expanded faster than U.S. GNP, in spite of slow population growth in the region (Figure 3). It is at least plausible that slow population growth and booming exports in the United States during the 1990s will have a favorable impact on productivity. Still, the conventional forecast is for a continuation of the anemic national productivity growth we have seen for the past fifteen years (Figure 4).

While a continuation of slow productivity growth is certainly possible, there are at least five reasons to believe that U.S. productivity growth might be

higher in the 1990s than it was in the 1980s: (1) The New England workforce is older than the U.S. workforce. So some of the regional productivity improvements in the 1980s may have been attributable to worker experience -- a benefit that the United States would enjoy as the baby boom enters its most productive work years during the next two decades.

(2) The growth of high value-added exports should show up in improved overall productivity numbers for the United States.

(3) A labor shortage could push up salaries and force employers to opt for high-wage/highproductivity strategies instead of low-wage/ low-productivity strategies.

(4) The 1990-91 recession has set the stage for improvements in service-sector productivity.

(5) Finally, as Krugman (1990) points out, economists have been unable to explain why productivity growth has declined since 1973, so improved productivity growth in the 1990s is as plausible as any other scenario. (This might usefully be labeled the random walk theory of productivity growth.)

In the emerging environment, the United States could gain from a labor shortage and an export boom, while having more flexibility to manage these events than New England did. For example, given demographic and construction trends, more of the increases in productivity could be channeled into equipment, new technology, and R&D, less into residential and commercial real estate. Also, the exporting base for the nation is much more diversified than New England's is, so the chances of a sharp reversal of fortune seem more limited at the national level. And in the event of a downturn after a boom, the nation has the fiscal and monetary tools to moderate the pain.

Even if this optimistic scenario does not come to fruition, something more exciting -- or more terrifying -- than the slow-growth, more-of-the-same consensus should be forthcoming from the U.S. economy in the 1990s. If we have learned anything about the economy in the post-war period, it is to expect the unexpected.


Harrington, Paul E. and Sum, Andrew (1991). "The Economic Recession in Massachusetts: Its Impacts on Labor Markets and Workers through June 1991." Unpublished mimeo, Northeastern University Center for Labor Market Studies, July.

Krugman, Paul (1990). The Age of Dimished Expectations, Cambridge, MA: The MIT Press.

Moscovitch, Edward (1990. "The Downturn in the New England Economy: What Lies Behind It?" The New England Economic Review, July/August 1990, pp. 53-65.

* Adam D. Seitchik is Associate Economist, John Hancock Financial Services, Boston, MA. This paper is adapted from a presentation at the NABE 1991 Annual Meeting, Los Angeles, California, September 24, 1991

'See references at end of text.

In spite of the abrupt fall into a deep and persistent regional contraction in 1989, the nation could learn much from the New England experience. Incomes and employment/ population ratios in New England remain well ahead of national averages. Like the New England of the 1980s, the United States is currently in the midst of a significant export boom. Also, coming out of the 1990-91 recession the nation is faced with labor supply constraints that were central to New Englands performance in the recent past. On balance, these forces should be positive for the national outlook. A plausible scenario for the nation as it emerges from the recession is strong growth in per capita GNP, fueled by slow population growth and an export boom. Moreover, fiscal and manetary tools are available at the national level to moderate the business cycle extremes that have been the result of laissez-faire regional macroeconomic policies.
 Table 1
Economic Indicators for the U.S. and New England, 1991
New England
 United States New England as % of U.S.
Personal income $ 4,803 $ 295 6.1
(Billions of $)
Personal income $19,012 $22,396 117.8
per capita
Total nonag. employment 109,004 6,113 5.6
Population 252,638 13,200 5.2
Housing Starts 1,001 32 3.2
Source: Estimates from the New England Economic Project,
 December 1991.
 Table 2
 Economic Trends for New England
 1984 1986 1988 1989 1990 1991 Est.
Employment Growth*:
Total Non-Ag. 5.7 2.7 2.4 0.0 -3.0 -4.1
Manufacturing 4.9 -3.8 -1.9 -3.6 -6.3 -5.9
Services 6.8 4.8 5.4 4.1 0.6 -0.8
Trade 7.4 4.7 2.9 0.8 -4.7 -5.5
FIRE 5.0 8.0 1.9 -0.9 -0.8 -3.3
Other Measures:*
Personal Income Growth 10.8 8.2 9.9 7.1 3.9 0.9
Population Growth 0.8 0.7 0.9 0.7 0.2 0.0
Labor Force Growth 2.9 1.3 1.2 1.2 0.7 -0.7
Unemployment Rate 4.8 3.9 3.1 3.9 5.7 7.8
Inflation Rate 4.9 2.6 6.0 5.7 5.8 4.3
Median Home Price
(8000s) 100.0 158.1 180.7 181.5 173.8 170.0
*Growth rates are year/year percent change.
Source: New England Economic Project, December 1991
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Author:Seitchik, Adam D.
Publication:Business Economics
Date:Apr 1, 1992
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