Economic Growth & New England

Lynn E. Browne

Chief Economist, Federal Reserve Bank of Boston

Open Classroom Policy Series

Northeastern University

January 2009

New England Economic Adventure

• Comments based on research for Boston Fed economic education program – Exhibits, theatrical experience, investment

game, web site (www.economicadventure.org)

• Engines of Enterprise: An Economic History of New England, Peter Temin editor

Rising living standards

• For past 200 years, most countries enjoyed rising living standards– More material possessions– Greater leisure– Greater comfort– Swifter communications & transportation– Longer lives (since 1900s)– Not necessarily happier

Growth in productivity

• Higher living standards due to higher productivity

• Produce more – and more valuable – output per hour of work

• Higher productivity due to– Improvements in technology– Investments in physical capital (plant, equipment,

infrastructure)– Investments in human capital (education)– Growth of markets (specialization, economies of

scale)– Human endeavor

Growth is disruptive

• Growth means change• Change is disruptive• Technological progress means producing

more with fewer inputs– Workers are displaced; specialized capital &

other inputs decline in value

• Technological progress means new products– Old products become obsolete

Growth is disruptive

• Expanding markets create new opportunities – and exposure to new competitors

• Growth can be risky– Many innovations fail– Many investments do not payoff

• Not innovating/investing/growing is very risky– Rest of the country/world moves on

New England has re-invented its economy repeatedly

• Peter Temin– “The economic history of New England is as

dramatic as the transformation of any region on earth....New England came to lead the United States from an agricultural to an industrial nation...(And) when the rest of the country caught up ...New England reinvented itself as a leader in ..the “information economy.””

But growth is not inevitable

• New England experienced a long stagnation in the 20th century– Some New England cities have not shared in

region’s recent prosperity

• Globally, some countries have failed to prosper.– Much of Africa has seen little improvement in

past 200 years

Why was New England successful?

• High value on education and industry

• Supportive institutions– Networks that crossed industry and business

lines

• Good fortune

Early days

• Puritans established the pattern– Hardworking– Valued education– Family-oriented– Participatory government– Independent

• Ready to vote with their feet

New England’s challenge

• New England needed manufactured goods from Britain

• Britain wanted sugar & tobacco; not New England products

• Answer: – Sell fish to feed slaves on sugar plantations– Generate money to buy British goods

Economy built on maritime trade

• Trade fostered other activities– Whaling– Shipbuilding– Shipping goods for other colonies– Warehousing & insurance

• Developed complex diverse economy

Revolution brought new challenges

• Trade with Britain disrupted– But new markets in China– “Neutral” in Napoleonic Wars

• Until embargo of 1807

• New England merchants sought other opportunities– Cotton textiles

Francis Cabot Lowell

• Visited mills in Britain– Memorized technology for power loom

• Built state-of-the-art mill in Waltham• Followed by larger operation in Lowell

– Abundant water power– New technology– New financing vehicle– New labor force (young women)– Tariff

• Mills spread throughout New England

American System of Manufacturers

• Interchangeable parts & machine tools• U.S. Armory in Springfield, MA fostered

development of new metal working technologies

• Arms manufacturers & machine tool makers clustered along Connecticut River

• Range of products – watches, sewing machines, bicycles, later cars & aircraft engines

Manufacturing made New England prosperous

• Wages much higher in manufacturing than agriculture

• So incomes in industrial New England much higher than elsewhere in late 19th century – Despite difficult factory conditions

Rest of the country catches up

• Textiles began to struggle after 1900– Production standardized– Southern states had lower cost unskilled labor– Prolonged decline

• Abandoned textile mills throughout region

• Shoes & other older industries also faced competitive pressure

• Despite being a pioneer, missed out on autos• A mature, possibly declining region

From mills to high tech to life sciences & finance

• New England re-invents itself– High tech in 60s, 70s, & 80s– Information & professional services in 80s &

90s– Life sciences & asset management

• Inevitable or lucky?

Modern era

• New industries build on historic strengths– Industrial base– Elite research institutions

• Jump start from defense research & expenditures in WWII and Cold War

• Influx of baby boomer students

High tech manufacturing

• Grew out of defense research & procurement but widespread commercial applications

• Characterized by high R&D and highly educated workforce

• Mini-computer most important• Rapid high tech growth boosted incomes

– 5 percent above national average in 1975– 20 percent above in 1990

Roller-coaster since 1990

• Mini-computer loses to PC

• Software and telecommunications experience boom & bust

• Are life sciences and investment activities the future?

What is different about New England today?

• New England industry mix no longer strikingly different

• But educational level is substantially higher– More college degrees– Reflected in high productivity and high

incomes

• Is secret of success, smart people figuring out new things to do that pay well?

A concern

• Is New England’s brain power leaving?

• Supply of young college graduates is growing slowly

• Alicia Sasser of Boston Fed: slow growth is due to low birth rates 25-30 years ago– Offset by high rates of education– Offset by in-migration of college students– But many in-migrants subsequently leave

Can New England do more to retain young adults?

• New England retains 90 percent of native college graduates– But only 20 percent of non-natives

• Jobs are #1 reason why college grads move

• Many out-migrants go to high cost areas (NY, CA)

• Could we do more to keep them?

The issue

• New England’s prosperity depends upon the ingenuity & skills of its people, not specific industries

• Do a highly educated, productive workforce and a history of re-invention ensure future innovation and prosperity?